If your company works with a contract manufacturer (CM), then there are certain expectations for the quality and scope of work the contractor will perform.
Today, CMs are sophisticated enough to take an Original Equipment Manufacturer's (OEM) Bill-of-Materials (BOM) and Approved Vendor List (AVL), including the manufacturer's name and part numbers and key engineering documents, and do everything product related. This includes purchasing the BOM components, managing engineering and assembly document changes, testing, and packaging of the final products.
In fact, there are two basic working models for a CM. The first is the consignment model where the OEM buys all the materials, does the assembly parts kitting, and transfers all the BOM components, assembly instructions, and computer-aided design (CAD) files to the CM. The second is known as a turnkey operation where the CM just takes all of the documentation from the OEM and handles the purchasing and the production.
Depending upon the CM's capabilities, turnkey services may include subassembly and top level final assembly, testing, shipping to OEM customers, and even repair and return management. Whatever the scope of work, there should be several meetings between the OEM and the CM to clarify and document mutual expectations for work performance.
Department representatives from both the OEM and CM participate in the meetings of their respective concerns. The following is a checklist of major areas and meeting agenda topics that should be covered in these early agreements:
First, the major areas of discussion:
Materials
Manufacturing
Testing
Documentation -- ECO/ECN procedures
Order fulfillment
Finance
Rework/repair and return
Quality control and quality assurance
Supplier coordination
Next, the agenda topics:
Materials:
Consignment procedures -- review consignment terms, contract, and Standard Operating Procedures (SOP)
Materials Requirements Planning (MRP) -- software tools used by both companies -- transfer of information methods
Inventory management: stockroom shelving, part numbering system, bin labeling, special handling requirements, security
Supplier participation program: buffer stock, transportation of goods, receiving verification, and packing slip management
Finished goods tracking, including subassembly level stocking/tracking methods
Repair/rework stock buffer
Incoming inspection criteria and documentation requirements
Inventory cycle counting and audits
Materials Handling: ESD provisions, heat-sink attachment, and waffle pack re-seal for humidity immunity
Expedited inventory shipping charges: requirements, criteria, and authorizations
Shipping materials: storage, inventory levels, re-order levels, and equipment
Process and timing from consignment to full turnkey transition
Interim materials with OEM's purchasing takeover plan and quote
ECO/ECN changes that affect materials: stock purge and materials review procedures for discrepant/obsolete/scrap materials
Manufacturing:
(Company names are placeholders only)
Primary contract manufacturer is ABC-CM -- contract requirements -- PO requirements to initiate
Primary PCB fabrication house is DEF
Primary metal fabrication supplier is GHI
Wire harness supplier is JKL
Installation Kit assembly supplier is MNO
Shipping material supplier is PQR
Testing:
Process integration defined by OEM's senior manufacturing test engineer
Test equipment management, including calibration, safety, training, physical space requirement, and connectivity
Training and certification of test operators
Real-time data and archival statistics back-up procedures
Bone pile management and reporting
Board and component level troubleshooting and repair and records management
Yield reports
Telecom requirements for remote control, programming, and data retrieval
Time-motion study at test work centers/stations
Continuous process improvement techniques with procedural implementation and tracking
ECO/ECN real-time process for WIP impact
Test station procedure and work instruction documentation -- flow charts
Documentation -- ECO/ECN procedures:
Process flow charts posted at every work-center unique to OEM
Software tools for viewing, creating, and modifying in-house documents
Security for proprietary documentation
Obsolescence procedures
Authorization signature requirements
Standard ISO controls
Report formats and schedules
Order fulfillment:
CM standard procedures adopted, modified, and incorporated into OEM SOP
Build to order and build to forecast
Master production schedule generation and maintenance -- frozen time fences
Planned order releases and sales order integration into WIP
Pack-out last minute literature or programming requirements
Shipping notification from CM when order is shipped to OEM customer
Custom packs
Labeling, serializing, and tracking
Shipping methods and fees
Other services provided by CM
Finance:
Terms and conditions
Sales order management (managed by OEM CFO)
Expedite charges
Blanket POs
International shipments: export, freight management, customs
Invoice management
Long-term agreements
Shipping methods
Discrepant material cost management and coverage
Responsibilities for damaged goods
Insurance
Rework/repair and return:
Logistics concerning who, where, and when
Repair work level: board swap or component level
Customer contact and relationship management tools
Rework inventory management
Billing
Turnaround expectations
Additional test equipment and training requirements
Location
Warranty related issues
Operator error problems and NTF (No Trouble Found) cost issues
Feedback to OEM
Quality control and quality assurance:
Customer contract requirements for quality assurance (QA) reports
OEM QA report requirements
Statistical process control reports
Yield reports by work station
Continuous process improvements (CPI)
FEMA analysis reports and corrective action reports
Temporary Manufacturing Deviation (TMD) processes
Inspection criteria by work station: Cosmetic, AQL, Box Build, and Out of Box audits
Fastener torque controls
Equipment calibration: reflow oven profile control
Supplier coordination:
List of component/service suppliers (list to be provided by OEM)
Meetings with each supplier to set mutual expectations
Inter-supplier confidentiality
Introduction of turnkey transition plans so each supplier can make adequate preparations
Supplier performance evaluations: time and accuracy studies, on time deliveries, and packing slip count integrity
Introduction procedures of new manufacturer and subsequent component qualifications for alternate source identification
Procedures for introducing new suppliers as suggested by CM
Other logistics relating to supplier-material coordination
In part two of this article, we will discuss the express agreements and documented production and test methodologies that should be in place prior to commencement of solidifying the business relationship between the OEM and the CM.
Thank you for the compliment. I want to give this practical advice because there is so much to gain from anticipating as many issues as possible and so much to lose by rushing into agreements with so many unknowns. I believe some responder to an earlier blog commented that it is no light task setting up with a CM and that to find and hone a good OEM/CM relationship could take up to a year. I believe this was in reference to Apple moving from Foxconn to another CM.
The list almost looks like a blue-book to go by for OEM-Contractor negotiation.
With reference to the Apple-Foxconn issue where some other issues became the point of public discussion , is it advisable to include those issues in the contractual negiations and make them part of the contract?
A really good article that could explain the all the details to a novice going for a negotiation with a cm. hope to see more details in future articles.....
Yes, great article, Douglas. It is very informational with everything that should be talked about in meetings. Something else I would like to mention is the OEM's Quality Assurance representative should be involved in visiting the CM's facilities to ensure they have the right equipment and follow the proper standards when manufacturing.
Clairvoyant,
Good point about the CM survey. I can see where this article would tie in with the previous one about Supplier Quality Audit checklist. I think all of these disciplines are known by most Manufacturing people, but it takes time and deliberate focus to make sure all of the company's key people and impacted representatives are actively involved. The follow up is also key to setting a continuing expectation with the CM.
Prabhakar,
Yes, it you are referring to working conditions as a criteria for establishing a business relationship. This makes me think of Bolaji's earlier article about more product introductions being made overseas first. Let's just hope that other countries pick up the ethical mandate of prequalification based upon working environment and human rights. The EU REACH requirement automatically demands a higher level of attention to human health and safety, but until working conditions become a high priority qualifier for doing business, big CMs are going to save or make as much money as they can. Unfortunately, the most flexible and manipulative place to cut cost is still the working wage and working conditions of the employees.
It is really difficult for an OEM to disengage with an EMS once they've been together awhile. The information came from Charlie Barnhart, who said it could take up to 18 months to transfer business to one EMS from another. And this is an apples-to-apples comparison. If you need to make ECOs or create a new AVL, it may take even longer.
Thank you for the notice of Charlie Barnhart's contribution. He must have been around the block a few times. It is imperitive to consider the amount of work bringing up a new CM and when you add to that the learning curve for an entire PLM system, a company has years of investment in education and training to look forward to. I appreciate your experience and contributions immensely.
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Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
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