By Steve Creely
Supply Chain Specialist
Diamond Electronics Group
Introduction
In the competitive landscape of electronic manufacturing, cost control within the Procurement operation is key to maintaining profitability.
In this blog Steve Creely, Procurement Specialist at Diamond Electronics Ltd, discusses how Electronic component kitting can support a strategy for financial optimisation in an Electronic OEM/CEM.
By consolidating procurement, reducing inventory costs, and improving production efficiency, kitting services provide substantial financial benefits. This article explores the financial impact of adopting an electronic component kitting service for financial and operational managers at UK-based Electronic OEMs.
About Electronic Component Kitting
Kitting services involves supplying all necessary components for a specific assembly or production run into a “line ready” single kit of parts, specifically prepared & packaged to suit a particular production environment. This reduces the complexity of procurement and inventory management, leading to significant cost savings across multiple areas.
In the examples below we are using a fictitious Electronics OEM/CEM with annual revenues of £5m and a net return of 10% per annum The calculations use industry average figures where available.
The Financial Benefits of Electronic Component Kitting
Reduced Procurement and Administrative Costs
Electronic OEMs typically work with multiple component/piece part suppliers, requiring individual purchase orders (POs), invoices, and payments. Managing each transaction incurs administrative costs in terms of personnel, time, and system overheads.
By consolidating purchases through a kitting service, these costs can be significantly reduced.
Fewer Purchase Orders: One PO per kit instead of multiple POs per component minimizes administrative burden.
Supplier Consolidation: Working with fewer suppliers reduces the time and costs associated with vendor management.
Bulk Purchasing Benefits: Kitting providers leverage their purchasing power to secure better pricing on components.
For our example company who raise 300 purchase orders a month with an administrative cost of £35 per order to process, they would incur £10500 in procurement expenses monthly. A 60% reduction through Component kitting would save £6300 per month (£75600 annually).
Lower Inventory Holding Costs
Inventory storage and management represent a major financial burden for OEMs. Excess inventory ties up working capital and increases the risk of obsolescence. Kitting services support Just-in-Time (JIT) inventory strategies, reducing unnecessary stock levels.
Minimised Storage Costs: Pre-sorted kits remove the need for storing large quantities of individual components. Re utilise free-ed up stores space to productive space
Lower Risk of Obsolescence: Components are supplied as needed, reducing losses from outdated stock.
Improved Cash Flow: Reduced inventory investment frees up capital for other critical business needs.
There may be additional opportunities for financial gain by utilising the increase in working capital to leverage costs savings across the wider supplier base
In our example company cutting inventory holding by 20%, with £1 million in stock value could return £200,000 in to working capital saving up to £20,000 in business financing costs.
Labour Cost Reductions and Production Efficiency
Handling and sorting components before and after assembly is a labour-intensive process. Kitting eliminates these inefficiencies by delivering pre-organized kits ready for use on the production line.
Faster Assembly Preparation: Operators no longer need to pick and verify individual components, reducing handling time.
Reduced Downtime: Missing or incorrect components cause production delays, which kitting helps prevent.
Optimised Labour Allocation: Skilled employees focus on value-added tasks rather than repetitive material handling.
If our example OEM spends £1 million annually on direct labour, and kitting reduces handling time by 5%, this translates to a £50,000 annual saving.
Lower Costs from Waste and Errors
Errors in component selection or assembly lead to costly rework and material waste. Kitting services help reduce these risks through structured quality control and batch verification.
Fewer Assembly Errors: Pre-verified kits ensure correct components, reducing costly miss-assemblies.
Reduced Material Waste: Kits are supplied in precise quantities, minimizing excess and scrap.
Enhanced Traceability: Kitting providers track components for compliance and recall management.
Reducing rework and scrap by 10% in a manufacturing environment with £100,000 in annual waste costs results in a £10,000 yearly saving.
Quantifying the Financial Impact
The cumulative cost savings from kitting services extend across multiple financial areas:
Procurement/Admin Reduction: £75600
Reduced Inventory Holding: £20000
Labour Efficiency: £50000
Waste & Rework Reduction: £10000
Total Potential Savings £155,600
By leveraging kitting, OEMs can significantly improve profitability and reinvest savings into growth initiatives.
Addressing questions about using a component Kitting service.
Some OEMs express concern about losing control over component sourcing and quality management. However, reputable kitting providers offer full traceability, certification, and quality assurance, ensuring compliance with industry standards.
OEMs can tailor kitting agreements to maintain preferred suppliers while benefiting from cost savings and efficiency gains.
Other commons questions are answered on our Electronic Component Kitting FAQs page
Conclusion: A Smart Financial Strategy
For financial and operational managers at UK-based electronic OEMs, electronic component kitting provides a clear path to potential cost reductions. By streamlining procurement, reducing inventory, enhancing production efficiency, and minimizing waste, kitting services can offer a significant financial advantage.
Kitting is more than just a cost-cutting tool; it is a strategic investment in lean manufacturing. As competition intensifies, OEMs that embrace kitting will improve their financial position and operational resilience.
Are you ready to explore the cost savings of kitting? Connect with our Kitting Team today to explore how we can assist your organisation.
About the Author:
Steve Creely advises customers on “best practice” implementation of Component Kitting and Supply Chain Services from the Diamond Electronics Group.. He started his supply chain career with a major Japanese Automotive supplier before moving into the electronics components market 15 years ago.
Steve can be contacted on +44(0)1477 500450 or sales@diamondelec.co.uk.
Use the links below to find out more about Electronic Component Kitting Solutions from Diamond Electronics:
About Electronic Component Kitting
Component Kitting FAQs
What our customers say