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Nine key points help OEMs negotiate better contract service agreements with EMS providers

By Steven Linahan

Inside of EMS factory.There is an old saying, you win business on price and lose it on service.

However, service is more often than not an amalgam of several focus areas used to describe anything that does not have clear expectations and deliverables which should be stated in the EMS provider services agreement.

I strongly recommend that when OEM executives are evaluating and searching for EMS providers, a simple statement of contractual business T&C’s be included in the request for quote (RFQ) package.

These should be agreed to at the beginning stages before anyone signs anything – and everyone is still keenly motivated.

See, also:
Search EMS Resources Directory
Checklist for evaluating EMS providers
59 Questions for OEMs to ask ODMs

 

Price rates
Surprisingly, this basic element from any customer’s agreements is often omitted or left as TBD. Service providers aren’t going to fill this in later.

Many OEMs believe that they establish a price based on a quote and assume subsequent quotes will follow in the same manner. Wrong. State your cost formula and fill in the rates.

The following is a typical formula:

[(Material + Mark up) + (Labor rate + Mark up)] x SG&A x Profit % rate

An even simpler version:

X% over BOM

See, also:
Outsourcing Calculator for OEMs
Ways OEMs can reduce EMS pricing

 

Quite often, EMS providers will tell you about their elaborate systems, and EMS cost v. OEM price methods or activity-based costing… I’ve heard them all.

Just fill in a simple table and spell out the simple rates that you will be charged for labor by function, over head rates, SG&A and profit and know what is rolled into each. The only variables should be time and quality yield rates, which should be stated by you.

Quality yields should be managed with metrics and actions holding EMS providers accountable for meeting goals. (Specify rework and prototype rates)

 

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In your search results, you can further target provider options.


 

Out of scope charges
List any out of scope charges you will pay for. Clearly state that any other charges and fees that are not specifically allowed for in the OEM-EMS provider service agreement are not allowed. OT should be stated as being the responsibility of the supplier to meet delivery dates.

 

‘EMS providers live and die by purchase price variances (PPV). There is great visibility in managing their top 70% of spend to generate PPV.’

 

Cost reduction expectations
No buyer should ever omit this. Doing so leaves the objective completely open ended. Depending on your business this is a reduction in BOM and MVA stated in monthly, quarterly or yearly rates. This is obviously for the controllable portion of the BOM. Don’t fall for the blah, blah, blah corporate buying leverage and commodity management story.

EMS providers live and die by purchase price variances (PPV). As a company, there is great visibility in managing their top 70% of spend to generate PPV.

 

Nine Key point help OEMs negotiate better contract services agreements with EMS Providers

 

This is [actually] good if you are in that top spend as it creates opportunity to get some of this PPV back. But, odds are you may only have one or two parts in their company PPV wheelhouse.

This leaves you with a little bit of nothing, or perhaps the annual EMS providers’ supplier commodity re-negotiation.

Without a specific reduction goal committed, your EMS provider is not going to work to generate those reductions (except annually).

Material liability
How are materials purchased? Are materials purchased against the PO? By forecast? If by forecast, what is the extent of the purchasing window?

This looms larger than you think considering the counterintuitive effort on inventory turns by EMS providers.

 

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EMS providers buy common and unique parts to MRP windows but unless you state you have a right to review and challenge their item master data for lot size and lead times, and unless you insist on controlling A class and super A class parts purchase windows, and signing off on all non-cancellable and non-returnable (NCNR) and customs that are not returnable, don’t be alarmed when find yourself with a big liability in play without a lot of recourse. (See, also: 80 Metrics to focus EMS provider materials management and increase EMS profits)

Insist that all items not signed off and accepted as NCNR are 100% returnable with no penalty.

Sometimes there is a tradeoff in supplier selection for flexibility. You do have a say in sourcing because it is your liability they are deciding for you.

 

‘The fastest way to get a delivery is to cancel an order.’

 

Warranty terms
Its important to note that most EMS providers offer a pass though component warranty of the supplier’s and warrant only the manufacturing labor. However, my opinion is this isn’t always the practice as it is intended more for catastrophic component failures and in cases where the customer is high maintenance.

Mostly, though, it is important to know where your product will be serviced: US, Asia, Europe? Is the factory facility funded by the supplier? Do you have to ship products internationally for service?

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