The electronics contract manufacturing service agreement is the most important part of the relationship between the electronics manufacturing services (EMS) provider and the original equipment manufacturer (OEM).
Whether work is being done locally or offshoring to EMS factories in various countries…it is not just an agreement between two parties. Outsourcing service agreements outline what one party will ‘give’ in exchange for some sort of remittance provided by the receiving party.
The EMS provider is expected to provide goods or services to the OEM, in exchange for some sort of compensation provided in return by the OEM. Sprinkled in are rules of engagement that detail who; what, where, when, and how much.
In your search results, you will be able to further target provider options by choosing End Markets and/or other Services.
EMS providers are motivated to pursue formal contracts with customers because this re-assigns the risk to the customer (OEM) rather than the provider. Without a contract the customer is not held liable for its forecast, so all purchasing or other spending that is done by the EMS provider is at the risk of the provider, with limited reward.
This is the primary reason why the EMS provider pursues the contract more aggressively than most OEMs – because of the transfer of risk in the relationship that comes with the contract. Meanwhile, the OEM is interested in mitigating OEM supply chain exposure and risk.
EMS providers are quick to establish and maintain contractual advantages
EMS providers contribute significant internal forethought and discipline, focused on determining the actual and anticipated ‘costs’ of doing business with a potential OEM client program, well in advance of placing a contract service agreement in front of potential OEM customers for signature.
SEE ALSO
Effective RFQ for EMS manufacturing programs
Understanding EMS quotes for electro-mechanical assembly services
When is outsourcing is not the answer?
When factoring the EMS provider’s cost of doing business into a contract, providers solicit input from various internal cross-functional groups such as process and test engineering, production, program management, and finance; to mention a few. Click image below to request a copy of our Handbook of EMS Manufacturing Multi-National Pricing Considerations & Drivers.
Individuals from these departments have first-hand knowledge from working with similar technologies or products within the provider or, from experiences with positions held previously with other contract manufacturing or OEM employers.
This type of planning and input should not come as a surprise to OEMs familiear with EMS balance sheet, P&L and cash flow statements because contrary to EMS provider being the operational experts, EMS providers have little control over their MCOGs and this is because of their second most costly expense – S,G&A.
So anything EMS providers can do to help manage margins without knowing their true costs is always important. Every EMS quote is always padded because EMS true costs are not know.
In the meantime, OEMs will continue to pay for mis-management of EMS provider S,G&A. (Read more on costly indirect labor here)
Additionally, and contrary to what some OEM executives believe, OEMs engaging electronics contract manufacturers usually do not invest a sufficient amount of time or resources when formulating and negotiating their contract service agreements.
RELATED READING
How OEMs take control of EMS manufacturing quote process
How OEMs select EMS provider partners
Cost modeling your EMS forecast for your OEM programs
When OEMs are being madly driven toward an outsourcing endpoint against a tightly-managed timeline or, when you do not have enough internal outsourcing depth and scope to manage the EMS relationship, it serves OEMs best to take the time and carefully evaluate all phases associated with developing contract agreements and choosing EMS partners.
An outsource manufacturing contract is only as good as the intentions of both parties who formulate it. The success of the relationship for both parties is directly proportional to the amount of time and knowledge applied before negotiations begin. Initial stages of contract negotiations and the language of the service agreement are critical to the success of both parties. (SEE: Four (4) types of EMS manufacturing agreements)
In your search results you can further target other Industries and/or Services plus, you can add more geographies to your search.
Some key areas where OEMs typically do not place enough attention during the contract development process include a common understanding between both parties on the language of the contractual terms and conditions as well as cost reductions and how they will be passed to the OEM.
Once a contract is signed, ideally it should remain in a file cabinet with only periodic reference needed. If either party finds itself frequently pulling out the contract to review and contest terms and deliverables, it is likely the relationship is on a slippery slope and the lawyers will soon be involved. So do you due diligence beforehand.
Don’t get lost in the detail
EMS providers provide services that fill a need in the marketplace. Regardless of any previous or existing relationships the OEM may have with the provider, the provider is in business to make money.
In most instances, unfortunately, OEMs feel they are getting a good deal as a contract reaches the point of a mutual understanding. Except for the medical sector and other non-traditional EMS markets, most OEMs tend to go for price only as the deciding factor when signing the dotted-line.
This myopic view often ends in a very short-term relationship because in many instances, the EMS provider’s price may be below cost and is not sustainable. The reality is that the price per unit is important but it does not always reflect the cost of a dynamic business model (opportunity costs).
At the end of the day, providers will continue to present contracts to OEMs enabling EMS providers to justify a profit at the expense of the OEM. The provider wants to charge as much as possible while convincing the OEM to sign the contract. Conversely, the OEM wants to pay the provider as little without the provider walking out on the deal. In some way, both parties want something neither can have, simultaneously.
What happens in between determines how good the relationship will be.
Get custom list of providers
Electronic OEM professionals reading this and wanting help locating contract electronic service providers matching your program and end market, Venture Outsource offers a free service. Speak with a Provider Advisor. Advisors have access to detailed information on listings in our global database and can help you compare provider service capabilities to better match your program needs. Advisors also have intelligence on specific providers, plus info on emerging industry trends and best practices to share with you.
Get list of EMS manufacturers for your requirements (Its free)
Save time and money. Find quality EMS manufacturers. Fast. Venture Outsource has a massive, global database of contract electronic design and manufacturing capabilities. Speak with a Provider Advisor.
“Was able to very quickly find details on the important elements of setting up EMS and ODM partnerships, talked with an advisor for personalized info on quality providers matching our requirements while getting up to speed quickly about the industry and connect with key staff from like-minded companies and potential partners. Great resource.”
— Jeff Treuhaft, Sr. Vice President, Fusion-IO
Advisors tell you matches we find for your needs, answer your questions and, can share EMS industry knowledge specific to your industries and markets.
