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22 Oct, 2020 / BY Neil Sharp

What types of Service Level Agreement can you have with an EMS company?

Service Level Agreements between EMS provider and OEMs

EMS providers exist solely to serve businesses like yours, so they can be as flexible as you need them to be. However, there are a number of different agreements available which will govern the way the relationship works. And whilst your business and products will be unique, it’s likely that one of the below solutions, or at least a version of them, will be right for you:

Fixed Firm Order

This is a simple agreement and works well when:

  • The product design is stable
  • Demand patterns are known (and can therefore be forecast)
  • End-users wish to order product against an agreed lead-time.

In this scenario, you, the customer specify the number of units you will require over a period of time. Then, the build pack and other necessary details are sent to the assembly provider and the EMS quotes a price per unit and the required lead-time for fulifilment.

With a recurring order, per-unit costs can be kept down through economies of scale - and because the timelines, material and labour requirements are predictable, stock liabilities are highly visible.

But in an era of ‘same day shipping’, driven by changing consumer behaviour, only a limited number of Original Equipment Manufacturers (OEMs) now have the luxury of operating in this way. There is a need for greater flexibility to reflect the fast-moving markets in which most of us now operate.

Businesses now tend to have fluctuating requirements for stock and they want to fulfil customer orders in good time.  But, at the same time, they cannot risk the loss involved in stockpiling unsaleable inventory if demand slumps or updates to products are needed.

That said, if the end-user is prepared to wait for product (and obsolescence is not a risk) this kind of fixed agreement may still work best for you.

Fixed, then forecast

An agreement like this would typically see a ‘rolling’ 3-month commitment placed for a specified number of finished units. These would be produced against a scheduled purchase order with the rest of the annual quantity forecast. An agreement like this is subject to change following regular reviews between the OEM and their EMS partner.

In this scenario the EMS partner may also hold some stock of long lead-time devices so that the overall time required to produce a product from scratch can be reduced.

This type of agreement provides the EMS partner with enough order coverage to satisfy short-term demand and a degree of forward visibility for the supply chain and production departments to plan around.

Stock liabilities for the OEM increase slightly at this stage, although much depends on the levels of raw material that need to be held in advance.

‘Just in Time’ not ‘Just in Case’

The reality is, we live in an on-demand culture. No matter how niche our requirements; the expectation today is the market can supply. These days, everything from a curry to a crystal decanter can be on our doorstep within hours of ordering it. This expectation now extends to every walk of life - and on-demand consumer culture is clearly being facilitated by advances in manufacturing.

More sophisticated, agile production techniques and additive manufacturing are fueling leaner supply chains. They are enabling companies of any size to fulfil complex, individually configured products at, practically, a moments notice. There is no need, anymore, to store up expensive banks of electronic products to serve the market ‘just in case’, the supply chain can deliver products ‘just in time’ to meet customer demand.

For OEM’s offering complex electro-mechanical products, the challenge of being able to ship whatever quantity of product is required by an end-user without having to build up a large inventory liability - can be solved through ‘postponement manufacturing’.

Configure to order - postponement manufacturing

These contracts are characterised by a high degree of flexibility, as they bring the ability to respond to urgent demand with customised products, often against the tightest of deadlines.

To achieve this, an EMS typically builds stock of generic versions of the product or machine up to an ‘embryo’ level which is then held in inventory, awaiting further instructions. Once firm customer demand is known, the final product is configured and packaged to order.

The job of forecasting and preparing for the unknown, without creating an unmanageable liability on the EMS side requires great skill. To produce enough embryo units to meet demand, the EMS provider needs:

  1. An indication of the total number of finished products or systems required per annum, along with typical monthly run rates.
  2. A robust supporting supply chain.

The Service Level Agreement between the EMS provider and OEM will specify all the roles and responsibilities to make a postponement manufacturing strategy work. 

But the level of co-operation required between the two companies is obviously more intense compared with other kinds of contract. Regular review meetings are needed to discuss forecasting, stock and liability levels, as well as plan for product updates and the withdrawals of lines from production.

The rewards of getting this right are obvious:

  • The risk of carrying excess and obsolete inventory becomes negligible
  • Delivery time to the end user is reduced
  • A high levels of configuration to order can be supported

But this degree of flexibility comes at a greater cost compared to other outsourced solutions. And it should be noted that the strategy does not work well for OEMs that only plan to outsource small parts of their product or supply chain, or those looking to switch regularly between suppliers to find the cheapest route.

The first six months: Working in partnership with JJS

 

 

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