Should an RFQ for PCBAs Include a Target Price?

Do you include target prices when quoting PCBAs? Should you? This consideration has big implications for how EMS suppliers formulate their quotes and can substantially affect your procurement outcomes. Let’s explore the key aspects and best practices for including (or excluding) target prices with your EMS quotes.

Understanding the Role of a Should-Cost Model

Before addressing the question of whether to include a target price in your EMS quote, do you have a should-cost model?

A should-cost model is a detailed estimate that breaks down the expected costs of a PCBA into categories such as labor, materials, and profit margin. Conducting a should-cost analysis can seem daunting but is very achievable for most OEMs outsourcing electronic assemblies. Start with this quick and easy guide to benchmarking an individual PCBA.

Quick and Easy Should-Cost Analysis

Step 1: Get Your Material Cost

• From Your Supplier:

If you already know the material cost, move to Step 2. Otherwise, if this assembly is currently in production request the total Bill of Materials (BOM) cost from your EMS, including the PCB (bare fab). Suppliers may resist providing line-by-line costs, but the total BOM cost should be accessible.

• Estimate Yourself:

If the supplier is uncooperative, estimate the material cost using Octopart or the Octopart BOM Tool. Use the price column closest to your estimated annual usage. Online prices are typically higher than production volume prices, so reduce these prices by 20% to estimate the total BOM cost for production.

Step 2: Estimate Labor Cost

• SMT Placements: 

Count the number of Surface-Mount Technology (SMT) placements by summing the "quantity per" column on your BOM. Multiply your SMT placements by $0.10 for mid-volume (less than $5 million annually). It’s typical for labor costs to be between 8-10% of your material cost. 

• Through Hole Components: 

Add $0.05 for each through hole component if there are 1 to 15 components (typically connectors). If there are more than 15, use $0.03.

Step 3: Calculate Price

A reasonable starting point is a 20% gross profit. To calculate a 20% gross profit, divide the sum of costs (Materials + Labor) by 1 - Profit Margin. For example, to calculate a resale based on a 20% profit margin, divide the total cost by 0.80 (1 - 0.20).

Example Calculation

Material cost $900, 230 SMT placements, and a 20% profit margin: 

Total Cost = $900 +( 230× $0.10) = $923

Final Price = $923 / .80 = $1153.75

This will give you a reasonable starting point for understanding the should-cost. The labor cost and profit margin will certainly vary based on your company and volume.

Should-Cost Analysis vs. Strategic Sourcing

Strategic sourcing is a label for determining cost through price discovery by requesting and comparing quotes. The buyer is hoping to discover the best price through supplier competition. However, for contract manufacturing this method has limitations.

Strategic Sourcing

• Basic Approach: Simple collection of price quotations.
• Advanced Approach: Gathering total spend data and using it to drive price discovery, which can become complex in mid-sized or larger companies.
• Success and Limitations: Strategic sourcing assumes you have quoted a diverse enough set of suppliers to discover the best price. In reality, this is very impractical for PCBAs since you likely have a limited roster of EMS companies you work with.

Should-Cost Analysis

• Basic Approach: Understanding underlying labor and material cost drivers to simulate expected prices using a simplified model.
• Hybrid Approach: Use price discovery to calibrate your should-cost model. Your material cost will be relatively stable across suppliers, so adjust your model’s placement cost and profit margin until they match your best price quotes (excluding obvious outliers). 
• Advanced Approach: Conduct detailed cost studies on every step of the process.

Example Comparison of Strategic to Should-Cost

Let’s use buying a car as an example. A strategic car buyer negotiates based on going dealer to dealer and haggling out a price with each one. A should-cost car buyer researches the dealer invoice and dealer profit margin to determine what they should pay and then demands that price from their preferred dealer.

Pro Tip: Should-cost analysis is the most important cost reduction technique used by top-tier OEMs.

The Pros and Cons of Including a Target Price

Let’s make it simple: when quoting PCBAs always include a target price if you have a should-cost model. Here’s why.

Pros

• Establishes Expertise: A should-cost target price reveals a lot about you, especially if you can explain the underlying assumptions. The EMS will immediately sense your expertise, treat you with more respect, and conduct price negotiations much differently.
• Changes the Conversation: Instead of bantering about particular prices, the conversation will shift to things like placement costs, profit margins, and the ability of the EMS company to be competitive. This is a much more favorable conversation for you than just arguing about price quotes.

Cons

• Potential for Higher Quotes: Suppliers may price their quotes just under the target, even if they could have proposed a lower cost. Obviously, knowing the target they can calibrate their pricing strategy to maximize their margin while still appearing competitive.

Pro Tip: If an EMS knows your target price and is adjusting their quote like this it is because they have an advantage on material cost that you don’t know about. Materials are likely 80% of your costs. Always, and I mean always, understand and control your material cost. Never trust suppliers, especially an EMS company, to determine your material cost! 

• Inefficiency: Without a target, suppliers will need to shoot in the dark and you will need to go through 2 or 3 rounds to get to the final price
• Inaccuracy: After 2 or 3 rounds you will end up with a price that is simply the lowest price one of your small set of suppliers has happened to quote. Very unlikely this is the best price available to you.

Best Practices for Managing EMS Quote Targets

Your best practice will be determined by the importance of PCBAs to your overall material costs. Infrequently buying low-value PCBAs is much different than constantly sourcing high-value, high-volume PCBAs. Assuming your PCBA spend is at least moderately important to you, here are some best practices.

1. Have an Internal Should-Cost Model: Unless your PCBA spend is very low, develop an internal should-cost model to inform your RFQ process. This helps you understand what you should be paying and sets a benchmark for evaluating quotes.
2. Consider Not-to-Exceed (NTE) Pricing: Instead of explicitly revealing your target, consider providing an NTE price. This indicates the maximum amount you're willing to spend without revealing your precise target. This is a reasonable compromise that can prevent suppliers from wasting your time with inflated quotes. 
3. Detailed Specifications: Ensure your RFQ includes clear and detailed specifications including an accurate BOM and assembly drawing. A good documentation package reduces the variability in quotes and helps suppliers understand exactly what is required, leading to more accurate pricing.
4. Pre-RFQ Conferences: In very strategic situations like an important NPI release, quoting an annual package of PCBAs, or introducing a new supplier, a pre-quote conference to explain your requirements, should-cost model, and targets in detail can be helpful. This forum allows you to address questions and clarify expectations, reducing misunderstandings, encouraging more precise quotes, and saveving everyone time.

Should You Disclose Competitor's Pricing?

Disclosing competitor prices during an RFQ process is a variation of the target price theme. In many ways, this is much more controversial than providing up-front targets.

When Not to Disclose

• If you are buying solely based on the lowest quote without considering other factors, it is generally not ethical to disclose competitive pricing. 
• This practice is common in commodity purchasing where there is no discernible difference between suppliers.

When to Disclose

• When there are discernible differences between suppliers, such as performance, quality, and technical capabilities, it can be beneficial to disclose competitive prices. 

There are always such differences between EMS companies. For example, if an incumbent EMS has been performing well and quotes within ±5% of the average quote (excluding outliers), it is reasonable to guide them to adjust their quote. Remember, price quotes are based on estimates the EMS company is making, and these estimates have a natural tolerance of ±5%, so you can ethically regard all prices within ±5% of the median as being equal. This approach helps maintain valuable relationships while ensuring competitiveness.

• If you are evaluating new suppliers, guiding them on price can be advantageous if they offer intangible benefits, such as local presence, industry experience, or superior quality practices.
• Never disclose a particular supplier's pricing. It is both unethical and unnecessary. 

Addressing Common Concerns

1. High Quotes from Some Suppliers

If certain suppliers consistently quote higher than others, consider giving them feedback on specific cost areas. Start by giving them a material cost to assume and see if they are still high. If yes, the problem is their labor cost or profit margin. If not, the problem is their material cost. Providing this kind of feedback can help them adjust their pricing and drive them to make process improvements to become more competitive.

2. Public Sector Considerations: 

In the public sector, RFPs often include an estimated target figure. This practice tends to bring quotes around that figure. However, to avoid quotes that consistently hit the maximum limits, ensure your scope and NTE pricing are clearly communicated.

Conclusion

Deciding whether to include a target price in your EMS quotes involves weighing the potential benefits of guiding supplier quotes against the risks of adversely influencing their pricing strategies. Developing a robust should-cost model and disclosing competitive quotes when appropriate can ensure that you maintain relationships with high-performing suppliers while fostering a competitive quoting environment.