Contract Manufacturing Turn Key Content decision making tool

One of the consistent challenges of Contract Manufacturers Category Leaders is to manage company request to add or remove turn key content from/to the contract manufacturer (CM) responsibility.

Usually CM supplier main objective is to increase it’s turn key content of the BOM (Bill Of Material) value and responsibility to reach higher base value and to gain more Over Head charges within the costing model.

To explain more clearly the issue I would like to overview the costing models common by CM supplier performing Turn Key activity to OEM (Original Electronic Manufacturer) or other company.

Turn-Key Costing Model

Most of Turn Key Costing models are based on few principles:

1. BOM (Bill Of Material) Cost – according agreed BOM value

2. BOM Over Head (OH) – by percentage from total BOM value

3. Labor Cost – according agreed rate per hour

4. Profit and G&A – by percentage from total activity value

5. Logistics Charges – such as warehouse costs, packaging , shipment

Turn Key cost model would look like the following:

[BOM Value]X[1+OH] + Labor + [Profit and G&A] + Logistics

For example:

BOM Cost = $15,000

BOM OH = 5%

Labor  = 50 hours

Cost per hour = 60 usd

Profit and G&A = 10%

Logistics = $750

Total costing = [15,000]x[1+0.05] + 50×60 + [(15,000+50×60)x[0.1] + 750

Total cost = 15,750 + 3,000 + 1,800 + 750 = $21,300

Turn-Key content shifting decision making tool

Many companies which manufacture it’s products through integration process, can calculates its expenses by COGS (Cost Of Goods) model.

Most of COGS model are based on:

BOM cost ($)

Labor cost ($)

Internal Over Head (%)

Therefore shifting BOM content from In house Operations to Turn Key content should be driven by cost effective test scenario.

Developing the two scenarios options: Turn Key Vs. In house, comparing the two alternatives will allow us to draw the neutral curve which represent the sensitivity curve between benefit or loss of the alternative.

At the chart above we can see the neutral curve which define the benefit/loss areas of the turn key content, on the upper left side we can find the high value material with low labor cost which suggest to keep item in house.

At the lower right we can find the low value material with high labor cost which suggest us to shift the item to Turn Key content.

About the author:

My name is Yiftach Harris, I’m 39 years old, Industrial Engineer (B.Sc) and Lives in Israel.

Professional with Contract Manufacturing, Supply Chain, Inventory control, Procurement sourcing, Purchasing processes.

Working for Global Electronic Company as Global Category Leader.