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

By Steve 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.

Four (4) types of EMS manufacturing contract agreements
EMS financial due diligence
Evaluating EMS thin margins

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.

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