Recently we presented an overview on the product manufacturing lifecycle which broadly encompasses five stages (assuming a company has reached functional prototype stage):
- Product design and engineering
- Getting ready for production
- Mass production
- Updating, maintaining, and improving the product during mass production
- Product end of life
The step that can prove intimidating to many falls within the second stage of getting ready for production. More specifically, the Request for Quote (RFQ) process, in which a Contract Manufacturer (CM) is chosen, and the price, delivery, and other terms are negotiated.
"Choosing your CM is one of the most important decisions you will make in the course of manufacturing your product."
Should you make a bad choice, the factory may not produce your product on schedule or at the level of quality that you need, resulting in financial penalties for late delivery from retail partners. Quality problems can result in customer dissatisfaction, cancellation of purchase orders and sales agreements, and create significant liability for you if a safety problem makes it out into the field.
High costs, long delivery lead times, and disadvantageous financial terms that result from a poorly managed RFQ process can cripple your cash flow, and by restricting how fast you can ramp production, leave you unable to take advantage of sales opportunities. Our goal is to help you avoid all of these pitfalls by providing an understanding of the major steps and the most important issues to take into account when planning and executing an RFQ.
The overall process can vary, but in general the major steps in the process are:
Preparation of the RFQ package
A set of documents sufficiently detailed for the candidate Contract Manufacturers (CMs) to quote the project. The success of the RFQ process primarily boils down to one thing: the completeness of the data provided in the RFQ package. If parts are missing from the bill of materials (BoM) then the quoted price will be low, and will later have to be corrected during a requote process. Likewise, CAD files that change, missing packaging, manuals that are later added, or any change for that matter, will require a requote.
Selection of candidate CMs
Identify a group of candidate CMs that have the ability and capacity to produce your product and that have the potential to meet your requirements for cost, quality, and schedule.
Vetting of CMs
Visit the CM’s factory(-ies) and perform a physical audit to ensure that they have the capability and capacity needed to produce the product.
Communication of the RFQ package
Provide the RFQ package to the candidate CMs under NDA.
Q & A
The CMs will often have questions, many of which may illustrate weaknesses in the product design or its documentation. It is your job to provide answers to all of the CMs to maintain a level playing field.
The CMs provide binding quotes to manufacture your product under the conditions specified. There are two approaches: Open-book vs. Closed-book pricing.
In a quotation prepared on an open-book basis, every component, down to a piece of wire or a piece of tape, is an individual line item with an individual cost. Likewise, assembly labor, packaging labor, markup(s), etc., are all provided in detail. Fixed costs are split apart into costs for individual tools, fixtures, and so on. With open book pricing you can negotiate on close to even terms when an engineering change is needed or a cost reduction is desired.
In the scenario of a closed-book basis, the quotation may consist only of a total fixed cost and a total unit cost, with no breakdown or detail. There are no advantages to this approach. It removes your ability to analyze the quote and negotiate a lower price, and should engineering changes be needed, you will not have the data to know if the manufacturer’s requote is fair or otherwise as the CM will have the information and you will not.
Analysis and Comparison
The quotes are analyzed, errors are rectified, and high cost items are identified. Through open-book pricing and line by line comparison, one can gain an understanding of where the different CMs are coming in higher or lower and ultimately set the stage for negotiation room.
Negotiate with the candidate CMs to reduce the cost of the identified high-cost items and anywhere else possible.
Identification of the winning bid
Inform the winning CM and notify the other participating CMs that they have not been chosen. It is important to maintain good relationships with the CMs you did not choose as you may need them if the winning bid falls through for any reason.
At this stage, the Request for Quote process is considered complete and the customer would then begin negotiation of the Manufacturing Services Agreement (MSA) with the selected CM, beginning the transition to mass manufacturing.
There are however a few additional items to be aware of while planning for the RFQ:
Competitive vs. non-competitive RFQs
In a competitive RFQ, multiple CMs compete for your business, and this results in the best deal for you. In a non-competitive RFQ, a single CM is chosen and then the quote is negotiated one-on-one. This has the advantage of (usually) saving time (maybe a few weeks in most cases) but it often results in a high price and poor terms. Teams who choose the non-competitive approach often do so in a bid to save time, however they usually end up regretting this decision due to the negative outcomes.
If there is only one CM willing or able to take on your project, then you are in this situation by default.
The disadvantages of having to go through a requote process arise mainly from the fact that this usually occurs after you have chosen the winning CM and much of your negotiating leverage has been lost. If the quotations are ‘open book’ rather than ‘closed book’ then the situation is manageable but still should be minimized by providing an RFQ package that is as complete as possible. If the quotations are ‘closed book’ then you are at a serious disadvantage.
OEM vs. ODM
Contract manufacturers can work for you on an OEM (Original Equipment Manufacturer) or ODM (Original Design Manufacturer) basis. An OEM manufacturers your product based solely on the design data you provide. They do not design any of the product, and their responsibility is limited to just the manufacturing process. When working with an ODM manufacturer, the CM will design some or all of the product to your high level specifications. We will further expand on the advantages/disadvantages of each in a future blog post.