In the competitive realm of contract manufacturing, there is nothing more important for an EMS provider than earning, developing, and maintaining a rapport with their OEM partners.
But due to the nature of the business, where EMS providers are often required to operate on profit margins as thin as 5-6 percent, maintaining such a close-knit relationship usually means offering something that goes beyond simple dollars and cents. When options to offer long-standing OEM partners significant discounts for manufacturing services are limited, such companies need to prove their value in other ways. A commitment to supply chain transparency, as well as in-place procedures to help inform OEMs of potential disruptions, are just a couple of qualities that can help turn a short-term contract into something much more substantial.
But as long as it takes to forge trust between an EMS provider and OEM partner, the wrong set of circumstances can incinerate that trust in an instant. In our experience as a supply chain partner, one of the most common sources of tension between these two parties is the issue of inventory carrying costs.
Although many contracts specify a minimum fulfillment schedule that EMS providers must abide by per quarter, there are far too many variables in place to predict precisely how much inventory will be assembled when. In the event production runs ahead of schedule, for example, who is responsible for holding them? According to the contract, the OEM only has to take the minimum quantity; if they do not currently have the warehousing infrastructure to accommodate such an unexpected influx of inventory, they have no obligation to receive it, thus putting the EMS provider in a costly bind.
It’s somewhat ironic that a company can be financially punished for being too efficient. Average annual carrying costs for inventory throughout all industries currently hover between 25 and 30 percent of the product’s value — and with profit margins for EMS providers already pushed to the limit (keep in mind, EMS providers are designed to manufacture products, not store them), they often have no choice but to charge their valued OEM partners at least a portion of this total cost. Commonly called a WACC (weighted average cost of capital) adder, this holding fee can be as high as 20 percent annually. Naturally, this scenario does not make for a satisfied customer. It’s only until recently, however, that a supply chain solution has been available to avoid excessive inventory costs on both sides of the supply chain. We call it our Last Time Buy Solution.
While not a last time buy in the traditional sense, the mechanics of this solution are uniquely suited to benefit both EMS providers and their OEM partners significantly.
Here’s how it works: EDX has the ability to purchase all of the assembled product directly, up to 10 years’ worth, from the EMS provider using our own working capital. From there, we then store the inventory using our industry-leading warehousing infrastructure, as well as fulfill it anywhere in the world on a schedule personalized to fit the OEM’s needs. The OEM receives additional supply chain flexibility with no pressure to accept unexpected inventory as soon as possible, and nobody has to charge anybody excessive holding fees. In fact, our Last Time Buy Solution has been proven to save OEMs an average of 42 percent in annual carrying costs.
The benefits are so numerous and substantial, many EMS providers around the world have started to refer our Last Time Buy Solution to their OEM partners. A Last Time Buy Solution represents real tangible value to OEMs right off the bat, and history has shown us that it makes a wonderful starting point for long, prosperous supply chain relations. If you are an EMS provider who is looking to make a first impression, this solution may be exactly what your pitch has been missing.