Let’s say you have found a CM that is a good fit for your needs, and you are about to give them some assembly work. I already made a list of the general terms you can negotiate. But what other terms can be considered specifically when working with a contract assembler like this?
6 terms you can probably negotiate with a contract assembler
Two months ago, I wrote an article about the type of manufacturer you should choose, along with a video that illustrates it.
And one of its conclusions is clear: many companies that are currently working with an OEM manufacturer would be better off with a CM (Contract Manufacturer).
A CM may well be a great choice for assembling your products en masse, so if you are interested in contract assembly for your new products, these are the 6 terms you should consider negotiating with them before they act as your contract assembler:
1. Visibility of the components’ suppliers and prices
Basically, open-book purchasing. This allows you to:
- Visit those suppliers and estimate the risks of failure at different points in your supply chain.
- Go and see a source of delays or quality issues and make up your own mind.
- Add controls or set up a backup where needed.
- Know the details of the price you pay (see next point).
Naturally, if the contract assembler has to run a search & qualification project to line up some of these suppliers, you will be requested to pay for that work. But you own all those data, and you can take some of them to another assembler if needed.
2. Visibility of the pricing structure
The typical Chinese or Vietnamese OEM supplier does not want you to know their pricing structure. It is a business secret, just like their supplier list. And, based on their business model, it makes sense.
A real contract manufacturer has a somewhat different business model. They will break their cost structure down and share it, at least to an extent. And this protects you largely against arbitrary price increases since they will have to bring evidence of a rise in their costs.
3. Very low MOQ
Since you have a better view of their cost structure, and you can see the bill of materials (including the MOQs of each component) of your product, why would a CM impose an MOQ on you?
The logical solution, if you place orders that are individually very low and if the procurement of inputs is not a constraint, is for the assembly factory to charge a fixed setup fee. That fee should reflect the extra cost of setting up the lines, bringing the materials needed, and so on.
(Obviously, a great manufacturer will be looking into ways to reduce the cost of that setup. There are many ways to make changeovers more ‘seamless’, if you place a lot of orders overall.)
4. Contracts directly between your company and the main component suppliers
If your volumes are quite significant, a contract assembler and its suppliers are likely to accept this. It can provide you with more protection (especially if that supplier has a lot of assets) in case they provide faulty components. You can sue that supplier directly, in case your direct supplier cannot compensate you for your losses.
Obviously, the best is to work with a great pool of suppliers. And the second best thing is to detect and stop those defective materials before the assembly starts. Unfortunately, in some cases, a bad product might find its way all the way to the market, and it might cost your company a lot of money…
5. Resources for new product development
A common complaint when working with a CM is that their project managers sometimes get very busy because of urgent requests from their top customers. And all the (relatively) small customers have to wait.
You need to be sure your project manager will be able to dedicate at least X hours a week on your developments and on your orders. And you might need to do the same for some key resources (e.g. process engineers etc.).
6. Ability to spread production in several countries in the mid-to-long-term
This is probably not something you need to negotiate from the get-go, but it is something you can probably inquire about. One of the typical CM’s key competencies is to structure its customers’ supply chains. If you are based in the USA and you know you will need to diversify your manufacturing countries after a while, make sure you work with people who are planning to offer that to their customers.
Is your Western-owned contract manufacturer truly a CM?
Many buyers specifically want to deal with a Western-owned contract manufacturer/assembler in China as they feel they’re more trustworthy and have peace of mind that the project will be transparent. However, you need to be careful as even when talking to a non-Chinese rep, you still need to do your due diligence as if the company is Chinese.
Unfortunately, we have come across a number of Western-owned trading companies that pretend to own a factory. Their whole website may show details of a manufacturing facility…but this isn’t their own factory, in fact, it’s owned fully by their Chinese partner/supplier.
A legal records check is quick to do and will clearly show you whether a potential supplier truly is a contract assembler/manufacturer, or merely a trading company. Read trading companies and their dirty little secrets for more info on this topic.
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If you are still wondering how to find a CM, head to this page: List of Contract Manufacturers in China.
And, if you need advice on the way to pick the best CM, read this article: 5 Tips To Select a Great Contract Manufacturer in China or Vietnam.
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