EMS Industry terms and definitions

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OEM vs. ODM vs. CM vs. CEM vs. ECM vs. EMS

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Approved vendor list (AVL): listing of all approved sources, in addition to product part descriptions and part numbers.

Bill of materials (BOM): a comprehensive listing of all components and sub-assemblies that go into a specific product, showing the quantity of each required to assemble the item or finished product.

Box-build: sometimes, also called systems integration, assembly work other than printed circuit board (PCB) production. The electromechanical assembly process involving enclosure fabrication, installation of sub-assemblies and components, and installation and routing of cabling or wire harnesses.

Cash conversion cycle: days of inventory plus days sales outstanding minus days of payables.

Clean room: a facility in which environmental elements such as heat, humidity, microbial growth, and user cleanliness are controlled. Used for assembly/packaging of sensitive components or products.

Contract manufacturer (CM): an organization that engages in sourcing, product assembly, order fulfillment, product distribution, and aftermarket services. A contract manufacturer usually works on behalf of an OEM. However, some OEMs can also function as contract manufacturers.

Contract electronics manufacturer (CEM): an organization that engages in electronics product design and assembly, engineering services, order fulfillment, product distribution, and aftermarket services. A contract electronics manufacturer can also be called an electronics contract manufacturer (ECM), and usually works on behalf of an OEM. However, some OEMs can also function as ECM, CEM. See also, electronics manufacturing services (EMS).

Core competencies: activities or practices, such as product development, determined by a company as critical to its long-term success and growth. Core competencies are typically based on skill or knowledge sets rather than products or functions. They provide return on investment and act as a barrier for other companies trying to enter a particular market. Many manufacturers choose to focus on core competencies and outsource production, or activity-based, tasks. Many OEMs decide to keep their high-level engineering and design work as internal competencies, particularly as these might apply to new products and highly complex products.

Corrective action request (CAR): an action item that surfaces whereby the requesting party (either the OEM or contract manufacturer) asks the party responsible to conduct a root cause analysis and help bring the issue to resolution.

Days of inventory: the amount of inventory (two period average) divided by cost of goods sold (COGS) divided by the number of days. Inventory days metric measures the number of days of inventory a company has on hand given current production levels.

Days of payable: a company’s payables (two period average) divided by its cost of goods sold (COGS) plus its sales, general and administrative costs divided by number of days.

Days sales outstanding: a company’s receivables (two period average) divided by revenues divided by number of days.

Design for manufacturing (DFM): a process integrating manufacturing and optimization principles into the earliest stages when designing and developing a product to be manufactured.

Design for test (DFT): a process that is typically combined with DFM that optimizes product designs for testing in a production environment.

Electronics manufacturing services (EMS): an industry based on providing contract design, manufacturing and product support services on behalf of OEMs. Traditional services include PCB assembly and box-build and testing. Today, EMS providers are continuing to absorb more and more of the supply chain and they are providing numerous services such as supply chain management, global distribution, logistics, customer support and warranty repair. However, in most cases, all intellectual property (IP) belongs to the OEM. EMS providers are also referred to as electronics contract manufacturers (ECM), contract electronics manufacturers (CEM).

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Engineering change order (ECO): an alteration made to an AVL or BOM, such as the replacement of one component by a substitute component. Any changes should be prepared, approved and incorporated promptly and correctly to minimize problems. Changes often vary in complexity and urgency, but can have a ripple effect. Any ECO should be documented on a blank form or template that contains key information such as a description of change; a reason for the change, the type of change and, the implementation date.

First-pass yield (FPY): typically in percentage, the amount of product tested that passed inspection on the first attempt.

FSC CODES (Federal Supply Class) system consists of 78 groups, which are subdivided into 645 Federal Supply Class classes. Each class covers a relatively large and mixed area of commodities. Below are some FSC codes relative to the electronics industry.
5963 – Electronic Modules
5998 – Electrical and Electronic assemblies, Boards, Cards, and associated hardware
5999 – Miscellaneous Electrical and Electronic components

High-mix, low-volume: a contract manufacturing environment where products assembled vary in application, lot size, and production processes. Contract manufacturers providing high-mix, low-volume production have the ability to change over product requirements and convert assembly lines in a matter of hours, sometimes minutes. They can easily add capacity to accommodate increased volume and rapid throughput cycles. However, high-mix, low-volume manufacturing creates numerous challenges because there are more areas to invite error. Lower volumes demand more frequent changeovers and may only last for a few shifts, or days.

Intellectual property (IP): any product of the human intellect that is unique, novel and unobvious and, has some value in the marketplace. This can include ideas, inventions, business methods and manufacturing processes.

Joint design manufacturer (JDM): a company that helps design products for customers. However, distinction on who owns the intellectual property can be difficult to determine and can surface as licensing problems.

Joint service agreement (JSA): a document used in conjunction with a contract to define processes, performance targets and expectations of both an OEM and a contract manufacturer. The joint service agreement should be specific in terms of how the work will be done and evaluated. It should be supplemented by a management control system that requires a regular review of performance against the JSA expectations. This approach helps minimize the misunderstandings that often develop in outsourcing relationships.

Low-mix, high-volume: a contract manufacturing environment where there are a few number of assemblies produced in large quantities. High-volume production may last for weeks or months using the same setup. Changeovers are at a minimum and equipment utilization rates are very high. Contract manufacturers are most efficient when running at high volumes, with minimal engineering changes.

Manufacturing and supply agreement (MSA): a contract that defines responsibilities and bridges the relationship between an OEM and a contract manufacturer. It outlines what the EMS provider is required to do for the OEM and at what ‘cost’ to the provider. It also details what the OEM will receive from the provider and at what ‘price’. An MSA addresses pricing for both current and new products; inventory liability, and performance and service expectations.

Manufacturing execution systems (MES): digitization of manufacturing for tracking and documenting flow of raw materials into finished goods. The goal of MES is to help ensure manufacturing operations execution while improving production throughput.

Mechatronics: Synergistic combination of mechanical engineering, electronic engineering, and software engineering with the purpose of creating and managing advanced, abstract, hybrid machines automated from an engineering perspective.

Medium-mix, medium-volume: a contract manufacturing environment where production volumes remain relatively stable for an extended period of time. Medium-volume production may last for days or weeks using the same setup.

Minimum order quantity: a pre-designated, minimum order quantity allowed for a component or product.

NAICS CODES (North American Industry Classification System) is the standard used by Federal statistical agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy. Below are some NAICS codes relative to the electronics industry.

334412 – Bare Printed Circuit Board Manufacturing
334418 – Printed Circuit Assembly (Electronic Assembly) Manufacturing
224310 – Audio and Video Equipment Manufacturing
334511 – Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing
334512 – Automatic Environmental Control Manufacturing for Residential, Commercial, and Appliance Use
334513 – Instruments and Related Products Manufacturing for Measuring, Displaying, and Controlling Industrial Process Variables
334515 – Instrument Manufacturing for Measuring and Testing Electricity and Electrical Signals
334516 – Analytical Laboratory Instrument Manufacturing
334518 – Watch, Clock, and Part Manufacturing
334519 – Other Measuring and Controlling Device Manufacturing
335121 – Residential Electric Lighting Fixture Manufacturing
335122 – Commercial, Industrial, and Institutional Electric Lighting Fixture Manufacturing
335129 – Other Lighting Equipment Manufacturing
335314 – Relay and Industrial Control Manufacturing
336322 – Other Motor Vehicle Electrical and Electronic Equipment Manufacturing
339999 – All Other Miscellaneous Manufacturing

New product introduction (NPI): a set of integrated processes used to convert a product design into a manufacturing-ready product while meeting cost, quality and time-to-market objectives.

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Nonrecurring expense (NRE): items and activities required by an EMS provider specific to a particular OEM’s product program, such as setup, tooling and programming. These one-time charges are separate from the product cost.

Original design manufacturer (ODM): a company that manufactures products of its own designs, which are then sold under an OEM’s brand name. Typically, the ODM determines what products to build and the OEM simply purchases the items as finished goods inventory. Unlike an EMS provider, an ODM designs products based on intellectual property the ODM developed. More OEMs are considering the ODM model because it can sometimes offer a more complete solution with less design and supply-chain interactions required from the supplier.

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Original equipment manufacturer (OEM): a company that designs and specifies products under its own company name and brand. Traditionally, OEMs design products, purchase components from suppliers, operate their own manufacturing plants, and handle sales, service and support activities, but many of those functions are being outsourced today.

Outsourcing: the process of subcontracting a process, such as product design or manufacturing, to a third-party company.

Plants, property and equipment (PP&E): key elements of a fixed-asset manufacturing model. Plants include factories and warehouses. Property includes land and leasing. Equipment includes production tools and automated assembly machines.

Printed circuit board assembly (PCBA): or PCB assembly, assembled electronics hardware that has passed through surface mount technology (SMT) and assembled at individual circuit board level or many boards assembled into a system and used in a wide variety of digital electronics and other products.

Purchase Price Variance (PPV): the cost (amount) for materials purchased v. the price that is either above or below the initial quoted price. This is can best be viewed as the cost the EMS provider acquires materials for compared to the price the EMS provider sells the materials or FGI to the customer.

Request for quote (RFQ): a document that is prepared by the OEM and submitted to the EMS provider for quotation. It typically includes product specifications and quantities, in addition to an AVL and BOM. The RFQ should also include key elements the OEM will request of the contract manufacturer in the MSA, such as inventory liabilities.

Return materials authorization (RMA): is part of the process for returning a product to receive a refund, replacement, or repair during the product warranty period.

Return on invested capital (ROIC): an important model (net profit divided by PP&E plus inventory plus accounts receivable minus accounts payable) that can help OEMs determine the cost effectiveness of outsourcing. By decreasing fixed costs, such as PP&E, an OEM can immediately lower total costs, increase its return on invested capital, increase its return on equity, and increase its return on assets. The OEM’s break even point may be achieved sooner, with lower volumes, less revenue and against lower costs.

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The RoHS Directive mandates the removal of six hazardous substances from all electronic products shipped into the European Union. The Directive came into effect on July 1, 2006. It places a ban on four heavy metals (lead, cadmium, mercury and hexavalent chromium) and the Brominated Flame Retardants (PFR) PBB and PBDE.

SIC CODES (Standard Industrial Classification) is the system for classifying industries by a four-digit code. Established in the United States in 1937, it is used by government agencies to classify industry areas. Below are some SIC codes relative to the electronics industry.
3672 – Printed Circuit Board
3625 – Relays and Industrial Control
3822 – Environmental Controls
3823 – Process Control Instruments
3829 – Measuring and Controlling Devices
3873 – Watches, Clocks, Watchcases & Parts

Surface-mount technology (SMT): a process for creating electronics circuits where various components become mounted or placed directly onto the surface of printed circuit boards (PCB) resulting in creation of a surface-mount device (SMD).

Time to market (TTM): the length of time it takes to get a quality product into the marketplace. Faster time to market is a critical business objective for all manufacturers. Companies in every industry are using speed as a competitive weapon. The goal is to get to market with a new product (or a better quality product) quicker than anyone else. Being the first to market can increase a company’s profit margin and its market share.

Time to volume (TTV): the length of time it takes to bring a product from prototype or first article to a high-volume production mode.

Vendor-managed inventory (VMI): a process in which a supplier owns components until they are issued or released to the production line. Usually, VMI is handled by a distributor located within a plant.

Volume price agreement (VPA): a contract service agreement containing pricing, deliverables and cost reductions based on volume manufacturing.

The European Union Directive on Waste Electrical and Electronic Equipment shifts the burden for recycling onto producers. The EU member States must adopt appropriate measures in order to minimize the unsorted municipal waste element from electronic product waste and achieve a high level of separate collection of electronic waste.

Work in progress (WIP): WIP is the phase at which raw materials have been deployed to the production floor with value-add applied via various stages of development along the production line. Can also include material handling and special circumstances.

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