Good Fences Make Good Neighbors -- Like fences, good contracts make for good relationships between OEMs and their EMS providers.
In his poem, Mending Wall "Mending Wall" is a poem, published in 1914, by Robert Frost (1874–1963). The poem appeared in Frost's second collection of poetry, North of Boston. Summary , Robert Frost wrote, "Good fences The Good Fence is a popular term for Israel's northern border with Lebanon during the period following the Lebanese Civil War during which southern Lebanon was controlled by the Maronite Christians and the South Lebanon Army, friendly to Israel. make good neighbors." A fence is a boundary. A fence may be impenetrable im·pen·e·tra·ble
1. Impossible to penetrate or enter: an impenetrable fortress.
2. Impossible to understand; incomprehensible: impenetrable jargon. , or it may allow limited passage. Some fences restrict the view, while other fences provide transparency. All fences have gates that allow authorized passage. Fences, in the form of written contracts, are needed between original equipment manufacturers (OEMs) and their electronics manufacturing services Electronic manufacturing services (EMS) is term used for companies that design, test, manufacture, distribute and provide return/repair services for electronic component and assemblies for original equipment manufacturers (OEMs). (EMS) providers. A contract is simply a boundary, mutually established between two parties.
At the 2001 APEX show in San Diego San Diego (săn dēā`gō), city (1990 pop. 1,110,549), seat of San Diego co., S Calif., on San Diego Bay; inc. 1850. San Diego includes the unincorporated communities of La Jolla and Spring Valley. Coronado is across the bay. , I served on a panel whose topic was, "Challenges to Small and Mid-sized EMS Providers." Nearly 75 participants were in the audience. One participant asked, "Do you see a need for a written contract with your OEM (Original Equipment Manufacturer) The rebranding of equipment and selling it. The term initially referred to the company that made the products (the "original" manufacturer), but eventually became widely used to refer to the organization that buys the products and customers?" The question returned to the floor was, "How many of you don't have written agreements with your customers?" The large majority of raised hands indicated that most of the participants were without written agreements between their firms and their customers. I was so shocked that I nearly fell out of my chair. Although my industry has grown to be known as "electronics manufacturing services," it started as contract manufacturing.
Here's a real-world example of the need for a written agreement between OEMs and their EMS partners. Before founding my company, I was employed by an EMS provider that engaged with a small start-up company start-up company
A new business. that only had one product. After one year, we had assembled about 10,000 of the product, and the company had, in turn, installed it in thousands of locations throughout the Americas. However, the product started to fail in the field, and our customer's entire business was on the line.
The customer announced that we had placed a part by a manufacturer that was not approved, and that part was causing the failures. The customer initiated a multi-million dollar arbitration. As general manager of my employer's division, I believe that I was last witness deposed. In my deposition, I pointed out the covenant in our contract that allowed my company to place any one of several components from the customer's approved vendor list (AVL (Automatic Vehicle Location) See mobile positioning. ), including the manufacturer's component in question. I also produced our customer's AVL, which was signed by them. Our customer dismissed the arbitration within 24 hours after my deposition.
After thorough diagnostics, we learned later that the failures were caused by a customer firmware A category of memory chips that hold their content without electrical power. Firmware includes flash, ROM, PROM, EPROM and EEPROM technologies. When holding program instructions, firmware can be thought of as "hard software." See flash memory, ROM, PROM, EPROM, EEPROM and FOTA. error. But who knows how this case would have been settled without a written agreement? Conversely, if your EMS partner places an apparently functional substitute component and 10,000 of your products fail in the field, what happens? The mutual liability protections of a written contract are indispensable to the complex business in which we are.
A contract provides benefits and protections to the parties who sign it. Before opening my company's doors for business, attorneys were hired to produce a contract. They first presented a 21-page document, plus exhibits, all of which were so confusing that I could not understand it without the attorneys' interpretation.
I highlighted the benefits and protections that I felt were critical and returned the document to the attorneys. My instructions were to write a new document in plain English Plain English (sometimes known, more broadly, as plain language) is a communication style that focuses on considering the audience's needs when writing. It recommends avoiding unnecessary words and avoiding jargon, technical terms, and long and ambiguous sentences. so that businesspeople could interpret it without needing lawyers and to keep it under five pages in length. I received exactly what I ordered, and the only provision for any addition is related to Specifications.
The major components of a functional contract for an EMS provider are: header, work, payment, price, taxes, components, warranty, returns, license, purchase order commitments, schedule changes, cancellation, minimum order quantities, shipping, term and termination, liability limitation, relationship of the parties, dispute resolution, miscellaneous and execution.
The Header stipulates the date of the agreement and identifies the parties: the OEM and the EMS provider.
The Work simply specifies the task, such as procuring the materials and assembling the products. The OEM is responsible for providing detailed written instructions such as bill of materials The list of components that make up a system. For example, a bill of materials for a house would include the cement block, lumber, shingles, doors, windows, plumbing, electric, heating and so on. (BOM), approved vendor list (AVL), schematics, assembly drawings, revision number, test specifications and anticipated yield; all known as the Specifications.
The EMS provider is responsible for accepting the Specifications and performing the Work to a mutually agreed standard, such as IPC-A-610 Rev. C Class x, Bellcore/Telcordia, OEM-specific standards, or a combination of standards. If the EMS provider is designing the product, then detailed design criteria Noun 1. design criteria - criteria that designers should meet in designing some system or device; "the job specifications summarized the design criteria"
criterion, standard - the ideal in terms of which something can be judged; "they live by the standards of their should be part of the Specifications. Typically, the Specifications are an attached exhibit to the contract.
The Payment describes when and how. Payment terms and currency specifications are required.
The Price might be product-specific or as simple as, "to be agreed by EMS provider and OEM from time to time."
This section specifies who pays the taxes, if any, related to the Work.
This section defines what components means to your company and who will provide them.
The OEM and EMS provider agree to the definition of a "defect," how long the products will be free from defects, and any commonsense com·mon·sense
Having or exhibiting native good judgment: "commonsense scholarship on the foibles and oversights of a genius" Times Literary Supplement. exclusions to the warranty such as products that are altered, subjected to misuse, negligence or abnormal stress.
Should your EMS provider warrant functionality? I believe that the designer of the product should be responsible for functionality. If the contract's definition of Work has your EMS partner writing the Specifications, your EMS provider should be responsible for functionality. If the OEM authored the Specifications, then the EMS provider's liability should be strictly limited to the agreed assembly standards.
Who warrants components? Many would say that the party who purchases the components should warrant them. I disagree. An integrated circuit integrated circuit (IC), electronic circuit built on a semiconductor substrate, usually one of single-crystal silicon. The circuit, often called a chip, is packaged in a hermetically sealed case or a nonhermetic plastic capsule, with leads extending from it for may include millions of transistors. The specifications and assembly of many of these devices are far more complex than the products in which they are used. From the EMS provider's perspective, considering very slim profit margins, providing a full warranty on materials is nearly impossible. If the EMS provider purchases the materials, a reasonable compromise is for the EMS provider to pass-through to the OEM any warranty that is offered by the materials manufacturer or supplier.
My company's material vendors are very eager to please us and our OEM customers who specify their components, so such pass-through arrangements work very well with all of our suppliers. In cases where the OEM purchases materials, the OEM should warrant them. The party responsible for the product design should warrant merchantability mer·chant·a·ble
Suitable for buying and selling; marketable.
merchant·a·bil , fitness for a particular use and non-infringement. The other party should disclaim dis·claim
v. dis·claimed, dis·claim·ing, dis·claims
1. To deny or renounce any claim to or connection with; disown.
2. To deny the validity of; repudiate.
3. these specific warranties.
The OEM and EMS provider agree as to how defective product will be returned, and how long this right will exist. The EMS provider should state the remedies available to the OEM for defective products, such as prompt repair or replacement, or refund/credit of the purchase price.
The OEM grants the EMS provider license to perform the Work and stipulates that the EMS provider's performance of the Work will not infringe on the proprietary rights of any third party. Both parties specify that they have the right and power to enter into the contract, and they indemnify To compensate for loss or damage; to provide security for financial reimbursement to an individual in case of a specified loss incurred by the person.
Insurance companies indemnify their policyholders against damage caused by such things as fire, theft, and flooding, which each other from liabilities that may result from any breach of the contract by the other.
Purchase order commitments
How often will the OEM issue purchase orders and what period of time will those orders cover? Considering component delivery lead-times and production planning Production planning
The function of a manufacturing enterprise responsible for the efficient planning, scheduling, and coordination of all production activities. requirements, I believe the OEM should issue purchase orders monthly, and those purchase orders should cover at least 120 days.
This section sets boundaries for how the OEM may change quantities and delivery dates specified by the purchase orders. Although the contracts I've seen vary widely in terms and conditions for schedule changes, the basic protections for both parties include the flexibility for the OEM to reschedule re·sched·ule
tr.v. re·sched·uled, re·sched·ul·ing, re·sched·ules
To schedule again or anew: rescheduled the meeting for the following week; rescheduled the debts of many developing nations. deliveries up to 30 days. Any schedule change pushing delivery in excess of 30 days may be considered a cancellation unless both parties agree to the change in advance, in writing.
No one likes to send or receive an order cancellation, but it happens. Both OEM and EMS provider must establish a procedure to handle cancellations. The contract should offer the OEM the right to cancel without any cost or penalty whatsoever in situations where no real cost occurs to the EMS provider. Real cost is defined as any out-of-pocket expenses out-of-pocket expenses n. moneys paid directly for necessary items by a contractor, trustee, executor, administrator or any person responsible to cover expenses not detailed by agreement. to the EMS provider. For instance, any materials that were purchased by the EMS provider that may be returned to the supplier at no cost to the EMS provider, or used in the assembly of other products for the EMS provider's customer, are not considered out-of-pocket expenses.
However, an argument exists that the costs to purchase, receive (including inbound in·bound 1
Bound inward; incoming: inbound commuter traffic.
Adj. 1. inbound freight charges), store, manage [via materials/enterprise resource planning Resource planning may refer to:
Materials purchased by the EMS provider for a canceled OEM order that are not cancelable or returnable to the supplier are definitely an out-of-pocket expense to the EMS provider. The contract should specify that the OEM purchases these materials at the EMS provider's cost, plus a reasonable allowance to cover the EMS provider's expense of purchasing, receiving, storage, management, packaging and shipping the material to the OEM. However, the loss of the profit dollars on the canceled order is not considered an out-of-pocket expense.
Minimum order quantities
We always alert our customers to the fact that we often purchase more material than is needed for their orders. Two reasons exist for purchasing material in excess of the OEM's purchase order quantity. First, most EMS providers employ a high level of automation in the assembly of electronic products. Therefore, EMS providers purchase materials in specialized packaging to accommodate automation, such as tape and reel, trays and tubes. With tape and reeled components, the EMS provider may have to purchase a reel of 5,000 components to satisfy an order requiring only 100 placements.
Second, component manufacturers often set "minimum buy quantities" that may require the EMS provider to purchase 250 components, when only 100 placements were made to satisfy the order. Protections to both OEM and EMS provider commensurate with Cancellation terms may be stipulated here.
This section specifies the "free on board" (F.O.B.) point for products and who pays for freight expense In accounting, the concept of a freight expense account can be generalized as a payment for sending out a product to a customer. It falls under the umbrella category of Expenses and is treated like other expense accounts in relation to the accounting equation. . While your attorney can explain all of the legal ramifications ramifications npl → Auswirkungen pl of F.O.B., your purpose for specifying F.O.B. is to determine the point at which the ownership of the product changes hands. "F.O.B. origin" means that title to the product transfers to the OEM when the EMS provider tenders the products to a freight carrier. If any damage occurs in transit, the damage and claim with the freight carrier are the OEM's responsibility.
Conversely, "F.O.B. destination" means that title to the product transfers to the OEM when the EMS provider's freight carrier delivers the products to the OEM's dock. If any damage occurs in transit, the damage and claim with the freight carrier are the EMS provider's responsibility. Because F.O.B. specification does not determine the party responsible for paying the freight charges, such specification must be made separately.
Term and termination
This section stipulates the life of the agreement. You may leave the Term open-ended with a statement such as, "This Agreement shall begin upon the date hereof and shall end upon notice from the customer that all Work hereunder Adv. 1. hereunder - in a subsequent part of this document or statement or matter etc.; "the landlord demises unto the tenant the premises hereinafter called the demised premises"; "the terms specified hereunder"
2. has been completed." Or you may specify any Term you choose; for example, six months or 1 year. You may also make the Term "evergreen" by stating that it continues indefinitely until such time as either party issues a written request to terminate the agreement.
This paragraph is for your lawyer to construct. In my opinion, the liability limitation should protect both OEM and EMS provider from claims from the other party for conditions such as incidental or consequential damages Injury or harm that does not ensue directly and immediately from the act of a party, but only from some of the results of such act, and that is compensable by a monetary award after a judgment has been rendered in a lawsuit. , lost profits, and procurement costs of substitute goods or services.
Relationship of the parties
At a bare minimum, the EMS provider will state that it is an independent contractor A person who contracts to do work for another person according to his or her own processes and methods; the contractor is not subject to another's control except for what is specified in a mutually binding agreement for a specific job. of the OEM and not the OEM's agent or employee.
Because litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute.
When a person begins a civil lawsuit, the person enters into a process called litigation. is very expensive, I recommend that OEM and EMS provider agree to no more than 30 days of mediation, followed by binding arbitration if the disputes cannot be settled in mediation. A few national and international mediation/arbitration firms provide homogenous homogenous - homogeneous services in a variety of locales. I suggest that you consult your attorney for recommendations and that you specify the mediator/arbitrator in the contract. Of course, you can relegate rel·e·gate
tr.v. rel·e·gat·ed, rel·e·gat·ing, rel·e·gates
1. To assign to an obscure place, position, or condition.
2. To assign to a particular class or category; classify. See Synonyms at commit. dispute resolution to the courts...
These topics are for your attorneys to complete. They are standard contract law and include topics such as governing law, force majeure [French, A superior or irresistible power.] An event that is a result of the elements of nature, as opposed to one caused by human behavior.
The term force majeure (acts of God or acts of nature), assignability, amendment and waiver, notice, waiver of terms and conditions, entire agreement and severability Severability
A clause in a contract that allows for the terms of the contract to be independent of one another, so that if a term in the contract is deemed unenforceable by a court, the contract as a whole will not be deemed unenforceable. .
This section contains the signatures and identities of both parties.
How effective is Qualcon's Manufacturing Management Agreement? It contains everything we need, and Intel and Motorola both executed it verbatim ver·ba·tim
Using exactly the same words; corresponding word for word: a verbatim report of the conversation.
adv. . Since our founding, not a single dispute has gone to mediation, arbitration or court.
You might be tempted to ask for a copy of our agreement, but please don't. We consider it to be proprietary because it offers a distinct competitive advantage.
Once you've created your own contract, stay open to changes. Creating a document compatible with all engagements is virtually impossible. We frequently make minor amendments to our agreement to accommodate our customers. If your contract is written in easily understandable language, minor changes will not be difficult. While changes to business terms are the normal requests, be sure to have your attorney review any requested changes to legal stipulations before you agree to them.
Do you need a contract for a manufacturing engagement that is limited to consigned materials? Granted, materials liability is one of the most treacherous issues an EMS provider will face because upwards of 75 percent of the expense of assembly are materials. But do not be deterred from insisting on a written agreement in a consigned-material engagement. An incredible amount of liability still exists for both parties.
In most of our consigned-material engagements, we have executed our standard agreement. Our agreement is written so that it is compatible with the provision of consigned materials as well as for turnkey engagements. Such contractual flexibility is required in instances where we purchase some materials and our customer provides other materials via consignment The delivery of goods to a carrier to be shipped to a designated person for sale. A Bailment of goods for sale.
A consignment is an arrangement resulting from a contract in which one person, the consignor, either ships or entrusts goods to another, the .
And, OEMs, please be reasonable with your contracts. My company once received a 14,291-word agreement from a Fortune 500 customer with whom we were doing business on a consigned-materials basis. This behemoth behemoth (bē`hĭmŏth, bĭhē`–) [Heb.,=plural of beast], large, fanciful primeval monster, like Leviathan, evoking the hippopotamus mentioned in the Book of Job. document was intended to be a one-size-fits-all agreement for vendors. It was clearly written for component manufacturers engaged with this firm. Some of the proposed agreement's fatal flaws were:
- The customer insisted that we warrant functionality of the assembled product, which they designed.
- The customer demanded that we warrant all components purchased by us to meet their expectations of functionality in the circuit.
- The customer would not accept any responsibility for excess materials during the engagement and at its conclusion.
The document was so complex that the customer's staff attorney could not explain some pieces of it. We prudently declined to sign the document, and we no longer do business with this firm. My company's record for consecutive manufacturing defect-free assemblies stands at 36,312 units, produced for this customer. Because of an unreasonable contract, they lost an excellent EMS partner and we lost an otherwise excellent customer.
EMS providers, do not be deterred by an OEM that insists on your execution of their contract. We executed a 52-page, 14,078-word agreement with one of our largest customers. Through the experience of producing your own contract, you will decide what is and is not important to you. Use this knowledge in interpreting the business requirements of contracts presented by your customers. By all means, once you and your customer have agreed to the business terms, have your attorney review it and offer legal interpretation and advice.
If your manufacturing partnership does not include a written agreement, I urge to you to engage a lawyer to create a document that works for you and your partner. Establishing the rules is much easier prior to a dispute. The advice offered herein is no substitute for competent legal counsel.
My father once said that a contract is only as good as the parties executing it. Nonetheless, I must reiterate re·it·er·ate
tr.v. re·it·er·at·ed, re·it·er·at·ing, re·it·er·ates
To say or do again or repeatedly. See Synonyms at repeat.
re·it , "Good fences make good neighbors."
Bob Bilbrough is the founder and CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. of Qualcon, Flowery flow·er·y
adj. flow·er·i·er, flow·er·i·est
1. Of, relating to, or suggestive of flowers: a flowery perfume.
2. Abounding in or covered with flowers.
3. Branch, GA; e-mail: email@example.com.
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