Electronics contract manufacturers typically follow Incoterms (International Commercial Terms) in their service level agreements. These are commercial terms that are pre-defined and released by the International Chamber of Commerce (ICC) that related to international commercial law.
Contract services agreement signed between contract manufacturers and OEM customers dive deeper into specific statements of work (SOW), schedules, and exhibits that more clearly define who is responsible for what, under what circumstance, transaction details, and so on.
Electronics OEM equipment manufacturers want to know how to engage contract manufacturers during phase I of contract negotiations after the contract manufacturer responds with a quote following the OEM’s RFP/RFQ.
What types of manufacturing costing tools are available? How can we determine what is fair pricing for us to pay our CM?
OEM prospective customer strategy is important for establishing the proper setting and tone between the two parties before selecting a contract manufacturing partner.
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Top 10 impacts to EMS/ODM quote pricing OEM programs
Important to OEM customers is what values or costs were added on top of the costed bill of materials (BOM? How do we identify variances to then chip away at PPV to drive down our landed costs (MCOGs).
Knowing where contract manufacurers mark up profit in materials and the factory (MCOGs, S,G&A and F(Factory)G,&A is key.
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Discovery vs disclosure
How OEMs posture during first meeting with contract manufacturers reveals a lot to the contract manufacturer how they (CMs) will approach their side of the contract negotiations phase.
Meanwhile, savvy OEMs understand the importance of the approved vendors lists (AVL) and costed BOM (eBOM and mBOM), knowing when (and how) to compare pricing for identifying opportunities to reduce total spend with their contract manufacturing partners.
Add to this, timeliness is also key. At what phase of contract negotiations is best for OEMs to reveal more of their cards to apply pressure, and justify to the contract manufacturer, OEM reasoning for driving down CM pricing in quotes presented to OEMs.
Below are some typical aspects of a contract manufacturing contract between OEM equipment manufacturers and their contract manufacturing partners. Venture Outsource has years of experience developing considerable depth of expertise identifying contract manufacturing costs and helping formulate strategies for driving opportunities for OEM executives sourcing electronics manufacturing services (EMS) manufacturing to reduce overall spend using very detailed outsource contract manufacturing cost models.
Considerations when contract manufacturing with EMS manufacturers
1.1. Additional Services
1.2. Affiliate
1.3. Approved Manufacturers List
1.4. Build Schedule
1.5. Build Schedule Forecast
1.6. Commercially Reasonable Efforts
1.7. Components Supplied by OEM CUSTOMER
1.8. Consigned Inventory
1.9. EDI
1.10. Effective Date
1.11. E&O Inventory
1.12. EOL Components
1.13. Epidemic Failure
1.14. Excess Inventory
1.15. Fee and Price Schedule
1.16. Finished Goods Inventory
1.17. Forecast
1.18. EXW (Ex Works)
1.19. Including
1.20. Inventory Turns
1.21. In writing
1.22. CONTRACT MANUFACTURER About
1.23. CONTRACT MANUFACTURER Intellectual Property
1.24. CONTRACT MANUFACTURER Distribution Facility
1.25. CONTRACT MANUFACTURER Existing Intellectual Property
1.26. CONTRACT MANUFACTURER Intellectual Property
1.27. CONTRACT MANUFACTURER Manufacturing Process
1.28. CONTRACT MANUFACTURER Production Facility
1.29. Lead-time
1.30. Loaned Equipment
1.31. Manufacturing Services
1.32. Materials Declaration Requirements
1.33. NRE Costs
1.34. Obsolete Materials
1.35. Packaging and Shipping Specifications
1.36. Person
1.37. Product(s)
1.38. Proprietary Information and Technology
1.39. Purchasing Standard Cost
1.40. Re-Order Point
1.41. ROP Inventory
1.42. ROP Model
1.43. Specifications
1.44. SOW
1.45. Subsidiary(ies)
1.46. CONTRACT MANUFACTURER Purchase Requirements
1.47. Test Procedures
1.48. Unique Components
2. List of Schedule(s)
3. Forecasts
3.1. Build Schedules
3.2. Re-Order Point
SEE ALSO
Manufacturing cost models and best price determination
Search OEM Community and private message OEM peers
4. Manufacturing Services and Commitment
4.1. Testing
4.2. Packaging and Shipping
4.3. Items to be Supplied by OEM CUSTOMER
4.4. Items to be Supplied by CONTRACT MANUFACTURER
4.5. OEM CUSTOMER Inspection
4.6. Materials Procurement
4.7. Materials Quality
4.8. Materials Declaration
4.9. Equitable Adjustment
4.10. On-going Cost Reductions
4.11. Notice
4.12. Expedited Builds
4.13. Allocation
4.14. Disaster Recovery and Redundancy
5. Warranty & Remedy
5.1. CONTRACT MANUFACTURER Warranty
5.2. Component Pass Through Warranty
5.3. Other Representations
5.4. Repair or Replacement of Defective Product
5.5. Limitation of Warranty
5.6. Epidemic Failure
5.7. ECO Upgrade
6. Limitation of Damages
7. Delivery, Title, Risk of Loss and Payment Terms
7.1. Delivery
7.2. Customer Shipments
7.3. Expedited Shipments
7.4. Evaluation by OEM CUSTOMER
7.5. Pricing and Payment
7.6. Taxes
7.7. Foreign Currency
A. Currency Process
B. Exchange Rate
8. Import and Export
9. Design or Repair Services; and U. S. Government Contracts
10. Change Orders, Rescheduling and Cancellation
10.1. Changes to Manufacturing Services, Packaging and Shipping Specifications and Test Procedures
10.2. Production Increases
10.3. Product Configuration Changes and Engineering Changes
10.4. Treatment of Obsolete and E&O Inventory
10.4.1. EOL Materials
10.5. Rescheduled Delivery of Orders
10.6. Treatment of Excess Inventory
10.7. Termination Charges
10.8. Duty to Mitigate Costs
11. Term
12. Termination
12.1. Termination for Convenience
12.2. Termination for Cause
12.3. Termination for Bankruptcy/Insolvency
12.4. Change of Ownership
12.5. Termination Consequences
SEE ALSO
Manufacturing labor rates Asia v developed economies
Labor: Mexico vs China
Asia manufacturing costs, by nation
13. Confidentiality
13.1. Confidentiality Obligations
13.2. Employees, Agents and Representatives
13.3. Term and Enforcement
13.4. Return of Proprietary Information and Technology
14. Intellectual Property Rights; Assignment
14.1. CONTRACT MANUFACTURER Existing Intellectual Property
14.2. CONTRACT MANUFACTURER Created Intellectual Property
14.3. License to OEM CUSTOMER Proprietary Information and Technology
15. Indemnification
15.1. OEM CUSTOMER Indemnification
15.2. CONTRACT MANUFACTURER Indemnification
16. Relationship of Parties
17. Insurance
18. Publicity
19. Force Majeure
20. Miscellaneou
20.1. Notices
20.2. Attorneys’ Fees and Costs
20.3. Amendment
20.4. Partial Invalidity
20.5. Monies
20.6. Entire Agreement
20.7. Binding Effect
20.8. Waiver
20.9. Captions
20.10. Construction
20.11. Section References
20.12. Dispute Resolution
20.13. Other Documents
20.14. Counterparts
20.15. Governing Law and Jurisdiction
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