The following is a reasonable representation of a manufacturing service level agreement an electronics contract manufacturer would present to a technology OEM for the purpose of building a robust outsourcing hardware product program. (See, Top 10 EMS / ODM company rankings)
While some of the accompanying documents are not presented, readers should be able to develop a fairly good understanding of the effort that goes into framing a hardware outsourcing contract manufacturing service level agreement that can ultimately lead to helping executives save on cost and protect profits.
WHEREAS, Customer desires to purchase, and CONTRACT MANUFACTURER desires to manufacture and sell products as specified in this Agreement.
WHEREAS, CONTRACT MANUFACTURER has developed processes and practices for manufacturing products for different electronic applications and at Customer’s request desires to manufacture Customer’s products in accordance with Customer’s specifications.
NOW THEREFORE, IN CONSIDERATION OF the mutual promises and covenants set forth in this Agreement, the parties agree as follows:
1 WORK, LICENSE
It is the intent of the parties that this Agreement and any attached Exhibits shall prevail over the terms and conditions of any Purchase Order or additional materials. In the event of a conflict between the terms of this Agreement and the terms contained in any such Purchase Order or additional materials, terms of this Agreement shall be controlling.
CONTRACT MANUFACTURER agrees to use best commercially reasonable efforts to perform the Work pursuant to Purchase Orders (as defined below) or changes thereto issued by Customer and accepted by PROVIDER. “Work” shall mean CONTRACT MANUFACTURER obligations to procure components, materials, equipment and other supplies and to manufacture, assemble, and test, Customer’s products (hereinafter “Products”) pursuant to Customer’s specifications set forth in Exhibit D (“Specifications”).
Subject to the terms and conditions of this Agreement, Customer hereby grants CONTRACT MANUFACTURER a non-exclusive, non-sublicensable, non-transferable limited license to internally use, at PROVIDER’S place of business, all of Customer’s patents, trade secrets and other intellectual property solely to perform the Work.
2.0 FORECASTS, ORDERS, MATERIAL PROCUREMENT
Customer shall provide PROVIDER, on a monthly basis, a non-binding, except as set forth in Section 2.3b and 3.4, rolling twelve (12) month Product order Forecast (“Forecast”). CONTRACT MANUFACTURER shall view all such Forecasts as Confidential Information (as defined in Section 11). Forecast will indicate which products are released to production and have upside flexibility as defined in Section 3.3.
2.2 Purchase Orders
Customer will issue orders for the Products in accordance with the order forms (“Purchase Orders”) set forth in Exhibit E. Purchase Orders shall be deemed accepted by CONTRACT MANUFACTURER upon receipt, provided however that CONTRACT MANUFACTURER may reject any order that represents a 60% or more volume deviation from Customer’s product Forecast delivered pursuant to CONTRACT MANUFACTURER pursuant to Section 2.1, for such month on the fourth month proceeding such forecasted month, shipment dates, or any Purchase Order that is modified outside the guidelines established in Section 3.2b. CONTRACT MANUFACTURER shall notify Customer of rejection of any Purchase Order within two (2) working days of receipt of such order.
The parties agree that the terms and conditions contained in this Agreement shall prevail over any terms and conditions of any Purchase Order, acknowledgment form or other instrument.
2.3a. Material Procurement
Subject to the notices set forth in Section 2.4, CONTRACT MANUFACTURER agrees to purchase any components and parts (“Materials”) for the manufacture of the Products in accordance with Customer’s approved manufacturer’s list (“AML”) set forth in Exhibit F. To use other vendors of Materials, CONTRACT MANUFACTURER must obtain Customer’s prior written consent, which consent shall normally be provided within fourteen (14) days and, in any event, shall not be unreasonably withheld or delayed.
Customer’s accepted Forecast and Purchase Orders will constitute authorization for CONTRACT MANUFACTURER to procure, using standard purchasing practices, the components, materials and supplies necessary for the manufacture of Products (“Inventory”) covered by such Purchase Orders and Forecast. Following release to production (Rev A), customer authorizes CONTRACT MANUFACTURER to build an additional five (5) unit buffer stock to be used for unplanned demand or the replacement of failed units per Sections 6.1 and 6.2.
In addition, Customer authorizes CONTRACT MANUFACTURER to purchase, in amounts beyond the amount necessary to fill accepted Purchase Orders, the components, materials, and supplies: (i) with lead times greater than ninety (90) days at the time the order is placed (“Long Lead Time Components”) plus 30 days to account for the order, shipment, receipt and manufacturing time and, (ii) purchased in quantities above the required amount in order to achieve price targets (“Economic Order Inventory”), and (iii) purchased in excess of requirements because of minimum lot sizes available from manufacturers (“Minimum Order Inventory”). Together these are called “Special Inventory”. Special inventory shall be limited to the greater of Minimum Order Inventory or the next 45 calendar days of requirements.
CONTRACT MANUFACTURER may purchase Long Lead Time Components sufficient to meet all deliveries under the Purchase Orders and Product Forecast in effect at the time the order with the supplier is placed, and may reasonably purchase Minimum Order Inventory even if greater than the amount necessary to meet Purchase Orders and Product Forecast and terms defined in Section 3.3. Economic Order Inventory shall be purchased by CONTRACT MANUFACTURER at its discretion based on generally accepted industry practices. CONTRACT MANUFACTURER may, from time to time, hold Long Lead Time Components and finished goods in inventory to increase customer flexibility. The components and quantities of all such inventory, including all Non-Cancelable, Non-returnable Items, will be documented in a separate letter and signed by both CONTRACT MANUFACTURER and Customer.
Customer will be responsible for all Inventory and Special Inventory purchased by CONTRACT MANUFACTURER under this Agreement. PROVIDER’ destination factory will utilize all its commercially reasonable efforts to minimize the material exposure. The maximum WIP material exposure for released product shall be less than or equal to 100% of the unshipped monthly forecast.
2.4a Lead Time Report
CONTRACT MANUFACTURER will purchase specified quantities of long lead time material and Customer unique material as authorized by Customer in advance and in writing. CONTRACT MANUFACTURER will compile and maintain (and provide an updated version to Customer on a monthly basis that reflects Customer’s current requirements) a report concerning this long lead time material.
2.4b Capacity Report
CONTRACT MANUFACTURER shall define manufacturing capacity for each Customer unique step in the manufacturing process and total manufacturing capacity for each Product and/or family of Products. CONTRACT MANUFACTURER will also provide component supplier supply capacity information (collectively “Capacity Information”) for unique, custom parts as mutually agreed. Capacity Information along with up-to-date information on CONTRACT MANUFACTURER’ manufacturing capacity model and cycle time plan will be provided to Customer on the first day of each month in a monthly report or as requested by Customer. Component supplier capacity information will be provided on an as-needed basis.
2.4c Operation Reports
During the term of this Agreement, CONTRACT MANUFACTURER agrees to aggressively monitor lead times and cycle times for the various Products as broken down into the following major categories: Order processing cycle time, Material lead time, Manufacturing cycle time, and Pack out and shipping cycle time
The information and reports in Section 2.4 a-c will be reported to Customer on a monthly basis, or as otherwise requested by Customer (“Lead time Reports”). CONTRACT MANUFACTURER agrees to use it best efforts work with Customer to develop strategies which will lead to ongoing reductions in lead times and cycle times for the various categories. The Lead time Reports will include the details and results of the implementation of such strategies.
3.0 SHIPMENTS, SCHEDULE CHANGE, CANCELLATION
CONTRACT MANUFACTURER agrees that all Products delivered pursuant to the terms of this Agreement shall be packaged and prepared for shipment in a manner which (i) follows the requirements set forth in Customer’s Product Documentation, or (ii) follows good commercial practice, (iii) is acceptable to common carriers for shipment, and (iv) is adequate to ensure safe arrival. Each shipment shall be accompanied by a packing slip that includes Customer’s part numbers, Purchase Order number and the quantity shipped.
CONTRACT MANUFACTURER acknowledges and agrees that CONTRACT MANUFACTURER shall use its commercially reasonable efforts to meet the target goal of 100% on-time delivery to Customer’s clients (defined as the shipment point of the Product in the applicable Purchase Order) based on the acknowledged delivery due date. This section, as appropriate, may be modified by an addendum to reflect specific Product requirements. All shipments shall be F.O.B. origin (CONTRACT MANUFACTURER’ dock). Title and risk of loss shall pass to Customer upon CONTRACT MANFUACTURER’ tendered delivery to the common carrier or Customer’s designee.
Upon learning of any potential delivery delays, CONTRACT MANUFACTURER will notify Customer within one (1) business day as to the cause and extent of such delay. If CONTRACT MANUFACTURER fails to make deliveries at the specified time and such failure is caused by CONTRACT MANUFACTURER, CONTRACT MANUFACTURER will, at no additional cost to Customer, employ accelerated measures such as material expediting fees, premium transportation costs, or labor overtime required to meet the specified delivery schedule or minimize the lateness of deliveries.
3.3 Quantity Increases and Shipment Schedule Changes
Forecast changes must be received by Thursday to be entered into the weekend ERP/MRP run. Prior to the date that is 120 days before a shipment date set forth in any accepted Forecast, Customer may, in its sole discretion, make any changes to the items included in such Forecast, such changes including, without limitation, changes in shipment date or quantity. Thereafter, for products released to production with a monthly Forecast in excess of XXX systems per month, Customer may (i) increase the quantity of Products or (ii) reschedule the quantity of Products and their shipment date as TBD.
Any Purchase Order quantities increased or rescheduled pursuant to this Section may not be subsequently increased or rescheduled without the prior written approval of CONTRACT MANUFACTURER. CONTRACT MANUFACTURER shall use reasonable commercial efforts to meet any quantity increases requested by Customer. In the event, that CONTRACT MANUFACTURER is unable to meet any such increase requests, CONTRACT MANUFACTURER shall within two (2) days of receiving Customer request for quantity increase notify Customer, in writing, of CONTRACT MANUFACTURER inability to meet such quantity increase with key constraints defined. CONTRACT MANUFACTURER will consider all Forecast change requests, regardless of above constraints, to determine the solutions (normal commercial practices) available to meet the request and make these options available to the customer. In the event Customer reschedules deliveries and CONTRACT MANUFACTURER inventory exceeds a 45 day target supply, Customer will pay 1.5% carrying cost on the quantity greater than the 45 day supply.
Customer may not cancel any accepted Purchase order without CONTRACT MANUFACTURER’ prior written approval, such approval not to be unreasonably withheld. If the parties agree upon a cancellation, Customer will pay CONTRACT MANUFACTURER for Products, Inventory, and Special Inventory affected by the cancellation as follows: (i) 100% of the contract price for all finished Products in CONTRACT MANUFACTURER’ possession, (ii) 110% of the cost of all Inventory and Special Inventory in PROVIDER’ possession and not returnable to the vendor or usable for other customers, whether in raw form or work in process, less the salvage value thereof, (iii) 105% of the cost of all Inventory and Special Inventory on order and not cancelable, (iv) any vendor cancellation charges incurred with respect to Inventory and Special Inventory accepted for cancellation or return by the vendor, and (v) expenses incurred by CONTRACT MANUFACTURER related to labor and equipment specifically put in place to support Customer’s purchase orders. CONTRACT MANUFACTURER shall provide to Customer within twenty (20) business days a detailed invoice of the cost of cancellation. Customer shall pay the amount set fort in such invoice thirty (30) days after receipt of such invoice.
CONTRACT MANUFACTURER will use reasonable commercial efforts to return unused Inventory and Special Inventory and to cancel pending orders for such inventory, and to otherwise mitigate the amounts payable by Customer.
4.0 ENGINEERING CHANGES
Customer may request, in writing, that CONTRACT MANUFACTURER incorporate engineering changes into the Product. Such request will include a description of the proposed engineering change sufficient to permit CONTRACT MANUFACTURER to evaluate its feasibility and cost. CONTRACT MANUFACTURER’ evaluation shall be in writing and shall state the costs and time of implementation and the impact on the delivery schedule and pricing of the Product. CONTRACT MANUFACTURER shall provide such evaluation within three (3) business days after receipt of Customer request for engineering change. Customer may request one (1) day response on critical ECO’s to expedite response.
CONTRACT MANUFACTURER will not be obligated to proceed with the engineering change until the parties have agreed upon the changes to the Specifications, delivery schedule and Product pricing and upon the implementation costs to be borne by Customer including, without limitation, the cost of Inventory and Special Inventory on-hand and on-order that becomes obsolete.
4.1a ENGINEERING CHANGE IMPLEMENTATION COSTS
Following release to production (Rev A), Customer will be allowed up to three (3) ECOs per week effecting up to 20 line items (individual component part numbers) each as part of the product manufacturing cost. The implementation of greater than 3 ECOs per week will subject to charges TBD.
5.0 TOOLING, NON-RECURRING EXPENSES, SOFTWARE, AND SYSTEMS INFRASTRUCTURE
5.1 CONTRACT MANUFACTURER shall provide non-Product specific tooling at its expense, including, but not limited to assembly equipment, ICT testers, material handling equipment, general scopes and analyzers, and inspection equipment. Customer shall pay for or obtain and consign to CONTRACT MANUFACTURER any Product specific tooling and other reasonably necessary non-recurring expenses, to be set forth in CONTRACT MANUFACTURER’ quotation, including, but not limited to functional test equipment and specialized test and measurement equipment. All software, which Customer provides to PROVIDER, is and shall remain the property of Customer. Customer grants CONTRACT MANUFACTURER a license to copy, modify and use such software required to perform CONTRACT MANUFACTURER’ obligations under this Agreement. All software developed by CONTRACT MANUFACTURER to support the process tooling or otherwise shall be and remain the property of CONTRACT MANUFACTURER. CONTRACT MANUFACTURER shall hold Customer Property at its own risk and shall not modify the property without the written permission of Customer. CONTRACT MANUFACTURER will use customer property only for purposes of this Agreement. Upon Customer’s request, CONTRACT MANUFACTURER shall redeliver the property to Customer in the same condition as originally received by CONTRACT MANUFACTURER with the exception of reasonable wear and tear. In the event the property is lost, damaged or destroyed, PROVIDER’ liability for the property is limited to the book value of the property.
5.2 Systems Development, Deployment and Operations
CONTRACT MANUFACTURER agrees to work with CUSTOMER to support the development, deployment, and ongoing operations of computer systems at CONTRACT MANUFACTURER as required to support the manufacturing and product fulfillment processes. CONTRACT MANUFACTURER furthermore recognizes CUSTOMER intention to deploy an Oracle Enterprise Resource Planning System and associated Order Management System at CONTRACT MANUFACTURER to be operated by CONTRACT MANUFACTURER personnel. The specific requirements for this activity are set forth in Exhibit C.
6.0 PRODUCT ACCEPTANCE, WARRANTIES, AND RETURN SERVICES
6.1 Product Acceptance
The Products delivered by CONTRACT MANUFACTURER will be inspected and tested as required by Customer within twenty (20) days of Customers receipt of such Products. The Product test shall be based on, but is not limited to, (a) any material failure to meet any applicable specifications and/or written representations and warranties made by CONTRACT MANUFACTURER or (b) any repeated inability to perform, without interruption, in material compliance with the performance characteristics described in the Specifications. If the Products are found to be defective in material or workmanship, Customer has the right to reject such Products during said period. Products not rejected during said period will be deemed accepted. Customer may return defective Products, freight collect, after obtaining a return material authorization number from CONTRACT MANUFACTURER to be displayed on the shipping container and completing a failure report. Rejected Products will be either repaired or replaced at PROVIDER’ option and cost within twenty (20) business days. CONTRACT MANUFACTURER will replace failed product within two (2) business days when possible using production or buffer inventory. If CONTRACT MANUFACTURER fails to repair or replace such Product within such twenty (20) business day period, then Customer shall have the right, without liability, to require expedited shipping of the conforming Product at CONTRACT MANUFACTURER’ sole cost. Both parties agree to work in good faith to implement Returned Product Services per Section 6.3 such that the replacement time is set to two (2) days.