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Talking Points in OEM-Contractor Negotiation

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:

  1. Materials
  2. Manufacturing
  3. Testing
  4. Documentation — ECO/ECN procedures
  5. Order fulfillment
  6. Finance
  7. Rework/repair and return
  8. Quality control and quality assurance
  9. Supplier coordination

Next, the agenda topics:

  1. 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

  2. Manufacturing:
  3. (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

  4. 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

  5. Documentation — ECO/ECN procedures:
    • Process flow charts posted at every work-center unique to OEM
    • ECO/ECN control, incorporation, feedback, cost impact, risk analysis, purges WIP
    • Revision control
    • Data transfer medium — inter- and intra-company
    • 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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.

11 comments on “Talking Points in OEM-Contractor Negotiation

  1. Barbara Jorgensen
    April 20, 2012

    As always, Douglas, a great how-to article! I'm willing to bet this will get printed out and brought to the next contract negotiation.

  2. dalexander
    April 20, 2012

    Barbara,

    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.

  3. prabhakar_deosthali
    April 21, 2012

    Douglas,

    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?

  4. elctrnx_lyf
    April 21, 2012

    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…..

  5. Clairvoyant
    April 21, 2012

    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.

  6. dalexander
    April 21, 2012

    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.

  7. dalexander
    April 21, 2012

    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.

  8. _hm
    April 22, 2012

    @Barbar: I agree with you. It is with wealth of information. We go through this evreyday, and it is very demanding and time consuming.

     

  9. Barbara Jorgensen
    April 23, 2012

    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.

     

  10. dalexander
    April 23, 2012

    Barbara,

    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.

  11. Barbara Jorgensen
    April 23, 2012

    Douglas–thanks! And Charlie has been around awhile, he used to work at a major EMS. I believe he is doing a cost analysis of engaging and disengaging as well. I'm looking forward to the analysis.

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