When an OEM is supplying products to customers but either new to outsourcing or looking for a new manufacturing partner, it may want to fine tune the agreement with the electronics manufacturing services partner manufacturing the product. This entrepreneur is likely interested in how to avoid costly errors. Let’s address concerns that an OEM might have—such as contract scope, liability, and negotiating sales points.
There are several types of OEM trains of thought. Some don’t have an agreement, thinking that the relationship is transactional, the “spend” will be low, or that perhaps not having an agreement is in their favor. This is simply not good business practice, and leads to many unknowns which cannot be agreed upon later. However, there is not a “one type fits all” contract template, and one must consider the relationship that will exist between the OEM and electronics manufacturing services partner. There are two major models to consider:
- Consignment Model: In this type, the OEM buys most of the inputs and transfers the bill-of-materials, instructions, and CAD files to the electronics manufacturing services partner. This is often due to the thought process that you will save money by handling some of the work yourself.
- Turnkey Operation: In this hands-off approach, the electronics manufacturing services partner takes design or production documents from the OEM and handles purchasing and production. Some details include: subassembly, testing, shipping, repair & return management. Each of these aspects should be addressed in your contract.
No matter your agreement type, a contract is still simply good business practice. Here are some best practices when negotiating:
- How to Negotiate. It is important not to simply send a contract over to the electronics manufacturing services partner and then begin the process of negotiations. This will actually slow the process down, wasting time and energy going back and forth. Ensure your own staff members are on the same page in terms of what is acceptable, and provide your negotiator with options and your “bottom line.” One crucial issue is that OEMs may neglect documenting how negotiations will proceed. Internal alignment, then a range of acceptable outcomes.
- Focus the Dialog. Discuss with the electronics manufacturing services partner what the contract negotiations will focus on, like price rates, out of scope charges, cost reduction expectations, materials purchasing and warranty terms. Make it clear that each time one of the points is agreed upon; it will be put into a binding legal document. This minimizes revisions and keeps a good will attitude. This will save both parties time and money, each of which you want to save.
- Reduce Complications. Lay out pricing concerns from the beginning. Price rates are too often left “to be determined” in early negotiations, or the OEM may simply assume any subsequent quotes will be given at the first agreed-upon rate. However, simplify your discussions by using a cost formula. Just fill in a simple table and spell out the simple rates without talking about elaborate options; you want to know what is rolled into each. The only variables to consider are time and quality yield rates, using metrics to hold your manufacturing partner accountable for meeting your goals.
- Fine Tuning and Execution. Agree from the start that the intention to execute a legally binding agreement exists with both parties. Record the steps taken during the negotiations, which will support the process and indicate where you have traveled in the process. This also ensures no details like material liability and warranty terms are not omitted during the course. Finally, move the “range” of outcomes which may have been discussed earlier to specific final, measurable, outcomes.
The Relationship is Key
The relationship with your electronics manufacturing services partner is a key part of your success as an electronics manufacturer and the contract you prepare and enter into sets the tone for all further engagement. Be sure to secure internal alignment before coming to the negotiation table, focus on business points, and create a paper trail to safeguard all terms and conditions have been discussed and approved. By starting and finishing this process clearly and effectively, the relationship between OEM and electronics manufacturing services partner is off to a running start.
SMC is a print circuit board assembly manufacturer, custom cable assembly provider, system integration/box build manufacturer that is located in the heart of Kentucky. Our two locations provide quick and easy access for the technology industry in the eastern region.
We specialize and are certified to manufacture products in the medical, security, military/DOD, industrial controls, construction, and transportation industries. To maximize customer support, we have created five separate engineering departments: process, test, customer, system integration, and quality engineering. These departments offer world class engineering support and product development. SMC has the EMS solutions you need to ensure quality electronic products at a competitive cost.