Contract development and negotiations can sometimes be ‘new territory’ even for the veteran technology executive developing and negotiating contract electronics manufacturing agreements.
The information below will help executives understand pricing models and the different outsourcing contract types while perhaps provide insight into how executives might make better business decisions when going through the phases of contract development and negotiations to better protect their profits. (See Outsourcing Calculator)
It is helpful to realize about 80% of outsourcing contracts can be categorized into four distinct types of outsourcing contracts:
- Fixed materials pricing model
- Component cost pricing model
- Cost plus pricing model
- Return on invested capital pricing model
Fixed materials pricing models ‘lock-in’ the material cost of goods sold (MCOGs) as a percentage (%) of program revenues. This type of outsourcing contract is quite simple for both the OEM and the contract manufacturer to manage.
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Fixed materials pricing models have minimal overhead costs for the contract manufacturer (no re-quoting multiple OEM programs and, no need for resources and infrastructure to do so) This pricing model fits OEM outsourcing programs with:
- similar types of product lines
- similar product testing requirements
- similar manufacturing volumes
With a fixed materials pricing model, the contract manufacturer determines his business development and acquisition ‘cost’ required to win the OEM’s outsourcing program by using a sampling of the OEM’s products; (PCB-by-PCB, assembly-by-assembly)
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