The electronics contract manufacturing service contract is an important component of outsourcing when original equipment manufacturing (OEM) executives are tasked with outsourcing their design or manufacturing. (See, also: Fixed v. variable asset models)
The hardware manufacturing contract service level agreement is the most important document in the relationship between the electronics manufacturing services (EMS) provider and the OEM.
Not just an agreement between two parties, the service agreement provides the critical outline of the exchange between the vendor and customer. Sprinkled in are rules of engagement that detail the who, what, where, when and how much.
Formal contracts enable EMS providers to reassign the risk to the customer (OEM). Without a contract, the customer typically is not held liable for its forecast, so all purchasing and other spending made by the EMS provider is at its own risk and comes with limited rewards. The OEM, on the other hand, is interested in mitigating its supply chain exposure and risk. (SEE ALSO: How to drive cost out of your manufacturing product portfolio)
Well-managed EMS providers put significant internal forethought and discipline into determining the actual and anticipated costs of doing business with a potential OEM client well in advance of signing a contract service agreement.
Additionally, providers will also solicit input from various internal cross-functional groups such as process and test engineering, production, program management and finance. Individuals from these departments often have first-hand knowledge from working with similar technologies or products. This type of planning and input should be used to determine costs and help an EMS better manage its profits and margins.
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How to reduce costs from your EMS manufacturing programs
EMS Manufacturer internal cost vs OEM quoted fees vs OEM target price
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Contrary to what some device manufacturer executives believe, many OEM organizations do not invest enough time or resources when formulating and negotiating their contract service agreements. One likely reason is that they do not understand how a sophisticated EMS business model is run.
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Regardless of the technology or marketplace, full-service global contract manufacturing organizations are still sometimes referred to as ‘board stuffers.’ This mindset needs to change.
When OEMs rush to an outsourcing endpoint against a tightly managed timeline or, more importantly, when they do not have enough internal outsourcing depth and scope, it will best serve them to carefully develop the contract agreement. Every supply chain director knows this, however, too few have the background or the time to execute successfully. Often, an outsourcing contract is typically only as good as the intentions of the parties who formulate it.
The success of the relationship is directly proportional to the amount of time invested and knowledge applied before negotiations begin. The initial stages of contract negotiations and the language of the service agreement are critical to the success of both parties.
Areas in which OEMs fail to emphasize enough during the contract development process include a common understanding of the language relating to the terms and conditions as well as cost reductions and how they will be passed on to the OEM.
Once a contract is signed, it should serve only as a periodic reference. If it is frequently being reviewed to contest terms, the relationship is likely on a slippery slope, and lawyers may soon be involved. This is because one or both parties failed to perform due diligence beforehand.
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