Why supply your own parts? The main reason businesses consider supplying their parts is costs. The notion is that if you control the supply, you reduce possible mark-ups on the vendor side.
That’s a strategy that works for a select few. Before we get into the specific advantages and the disadvantages behind supplying your own parts, I want to explore who employs this strategy, and what it takes for them to be successful.
How the Titans of the Industry Make Life Miserable for Suppliers
The manufacturing game is all about speed and timing. The rate and duration in which you manufacture a product affects your cash flow, and cash flow is king in this or any business. Unless you have excellent cash flow, supplying your own parts is a tough row to hoe. The titans of this industry have great cash flow. So they play the game like this: Because of their tremendous volume, they dictate the terms of their arrangements with suppliers and negotiate payments of 120 days. Suppliers can’t pass up the business, so they accept the terms. From that point, it’s a race against time and money, and with ample resources to absorb any loss of speed, the titans tend to win. Now, if you’re not a titan in the industry, you don’t have that kind of pull. You don’t have volume to dictate those terms, and so your production window is much smaller. Your race against time and money probably feels like a monthly photo-finish. You have to be smart about supplying your own parts. So consider the disadvantages and advantages veeerrrry carefully.
Disadvantages to Supply Your Own Parts for a PCB Assembly
We’re going to start with the disadvantages first, and not because we’re pessimistic or negative. The simple fact is, unless you’re an aforementioned titan, there are more disadvantages than advantages for going this route.
- Your cash flow won’t be optimal. Your goal is to spend cash only when you need to, right? Unless your payment terms are in alignment with the product delivery requirements, like our friend the titan, you’ll be spending cash on inventory that may be sitting on the shelf.
- You may not be able to realize a Contract Manufacturer’s buying power. The impetus behind supplying your own parts is to avoid the mark-ups from the Contract Manufacturer (CM). While these mark-ups tend to be smaller than you think, any savings you do realize may be negated because you can’t equal the buying power of your CM and the distributor relationships they enjoy.
- You may find last minute component shortages are causing additional delays. Unless you have access to a variety of distributors, or know this game as intimately as most CMs, you could be in trouble if you run into component shortages. Furthermore, if you’re supplying the parts, you could be the source of the problem.
In the event of a shortage, all kinds of issues arise. For example, if a customer supplies parts and a shortage arises, they may have the distributor drop ship the parts right to us. Or they may get delivered to the customer, who has to forward them to us
Either way, inevitably delays and usually invoicing issues result, which leads to more wasted time.
The point is not that a CM is immune to this kind of threat. It’s just that those who deal with it for a variety of different customers are more adept at managing the issue.
- Time is doubled on material inspection and counting costs. By supplying your own parts, you take on the added task (and time) of inspecting and counting materials. Your CM will likely do the same. Between the two of you, the cost is unnecessarily doubled. Work with your CM to improve this process to eliminate redundancy.
- You may deliver materials packaged differently than the CM requires. Another potential bump in the road is how you package and deliver the parts. A CM’s quote requires materials packaged in a particular form for optimal assembly. If you don’t meet the specs, you can expect added costs, and your CM may not be willing to eat the difference.
- Your remaining inventory may produce additional handling costs. Every job requires a small amount of overages to ensure you don’t run short on the production run. What happens to that inventory? Does your CM hold on to it? Do they ship it back to you and you warehouse it? Another process to consider.
- Your labeling must meet the BOM descriptions and part numbers. When you ship parts, the CM will accept the shipment and ensure all the parts match the Bill of Materials (BOM). If those labels don’t match the BOM, you might have another hiccup in the process.
Advantages of Supplying Your Own Parts for a PCB Assembly
The disadvantages seem formidable, and unless you have the size and resources to overcome them, they truly are. Yet there are some advantages to consider:
- You control the margins. While requiring the cash flow of an industry titan, there’s no doubt that supplying your own parts allows you more control over margin. How much control depends on you being able to offset all the pricing breaks CMs get with their distributors. But at the right scale, this could work to your advantage.
- You can deplete your current stock. If you have extra inventory, you have the option to sell or consign it to your CM. Again, more control.
- You can keep closer tabs on mark-ups. A good CM should disclose their cost per labor, materials, and tooling on the quote, but some don’t. If you supply the parts, it eliminates the chance that you may be getting gouged.
- You can avoid delivery delays. If your CM has poor supply chain management, it may cause frequent delays. When that happens, I’d advocate searching for another CM. However, if you have a long-standing relationship established, you may not want to change the status quo. In that case, you may opt to buy and consign inventory. I wouldn’t think this would be optimal for you for all the reasons listed above, but every case is different.
- Your material tracking may be more intensive, and require more control. Manufacturers in the medical and pharma industries, for example, are subject to stringent traceability regulations. The “disadvantage” listed above for tracking in this case becomes an advantage, as you maintain complete control throughout the process – ideal in the event of an audit.
Four Guidelines for Supplying Your Own Parts
You’ve weighed the pros and cons, applied them to your own situation, and now you’re ready to move forward with supplying your own parts. As I’ve noted, this is an enormous undertaking, but if you’re going to head in this direction, abide by these guidelines:
- Communicate with your CM on materials packaging. CMs use automated equipment and require materials to be packaged in preferred ways to minimize costs. Communicate with your CM to identify their needs and deliver the components accordingly.
- Verify quantities and mark packages clearly – be sure to include part #s. Again, communication is key, as is the process. Who will be counting? Who is responsible? Are you labeling according to the BOM? Establish your process clearly.
- Be your CM’s best supplier. I write that because there’s an old saying “Your customer is your worst supplier.” Flip that sentiment on its head by delivering materials early enough so they can be counted, verified and fit into production.
- Ensure component packages are correct on first order. It’s important that you verify the land patterns on the bare PCB are correct in advance. You don’t want them shipped and have the party end before it even gets started.
Your takeaway from this breakdown of advantages vs. disadvantages? Many, many complexities = the potential for many, many points of failures.
That’s why pulling this off requires an organization that’s very process-driven and committed to clear communication. Or at the very least, one that has enough resources to overcome any lags or process breakdowns.
Supplying your parts is a big, BIG call because it’s a big, BIG job. Hopefully these insights will add the perspective you need to make the right decision.