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Four steps to better OEM-EMS contract term sheets – in less time

By Steven Linahan

In this article I expound upon the term sheet as the vehicle for expediting the usual contract negotiation process of the supply agreement on those points most often debated, and the subject for prolonged negotiation, for those same business terms.

Using those terms laid out and presented in advance of an agreement or letter of understanding, PO for NRE… streamlines those negotiations hugely.

The normal process for OEMs to process ODM / EMS provider selection; notification and award, followed by efforts to negotiate the supply agreement can typically take months for the standard, prolonged negotiation. And this includes teams of legal eagles. By following suggestions in this article, you can cut the time involved in this process, significantly,
while still being effective.

When searching for your ODM or EMS provider, I strongly recommend requiring a simple but thorough statement of contractual business T&C’s be included in the RFQ package, and agreed to, at the beginning stages before either party signs anything – while everyone is still keenly motivated. (See, also: 9 key points help OEMs negotiate better contract service agreements with EMS providers)

Following are several key business terms when engaging ODM / EMS providers:

Price formula
Request to know the provider’s pricing formula and activity or service rates with current your product. This should be extended to cover any new products. This should also state any volume considerations or volume price breaks in a simple matrix.

Many providers quote business today and then raise prices later for new products and models after the competing stage with alternate EMS providers is done. This is not always the case but its more prevalent than we want to believe so set your baseline here.

Out of scope charges
Define what is payable as scope fees and charges. State clearly that anything not listed is denied. Items such as ECO charges for admin fees, calibration for items such as test or tools, rework, delays, reschedule fees, conversion costs, employee over time (to deliver on time or from expedites…) are all examples of items you either will or won’t cover.

Cost reductions and expectations
State your expectation in percent (%) levels expected for materials and transformation rates. There should be at least a stated target level accepted if you cannot get a hard commitment.

Order placement
How are orders to be placed? Purchase order or by forecast? Also, be sure and state the liability where necessary.

Changes / reschedules
Outline upside thresholds or limits, capacity reservation, push outs, cancellations…
In relation to the above, how is material liability accounted for? Who is responsible for what? This means common parts, unique parts, NRE, broken reels, MOQ’s…

I suggest providers be required to present a list of all ‘special’ parts and he discloses those parts that subject to any carrying charges or special consideration in the event of a push out beyond what you state is reasonable or, that you owe the supplier in event of cancellation.

Not listing or disclosing common industry known material liability issues leaves you open to the standard full liability conversation that isn’t valid. Defining in advance what you and the supplier expect is a much better approach.

Warranty, service terms
Outline what is covered and what is not covered for the duration of contract warranty, charges for service as well as where (geography) services will be performed, plus the rates. Shipping repairs back to China may not be everyone’s idea of service.

Choice of law for international agreements
As simple as it sounds, choice of law for international agreements is more thought provoking than it appears. The common convention is to insure neither party is put at a disadvantage in the event the contract and or business terms have to be settled by a court.

This aside, laws and contracts are interpreted differently in different countries. Also consider arbitration and what conventions govern arbitration.

IP protection and non-competes
Intellectual property and non-compete clauses are especially important with ODM agreements. These insure your product is not competing with a similar product in the market and also there is a common ground on which party owns portions or all of the IP.

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