There are two types of interesting short-term agreements. Elamex, a manufacturer of electronic components, allows customers to choose either a turnkey contract or a Shelter contract. In the first agreement, an Elamex customer shares the assembly line with other customers; everyone pays Elamex based on the number of units produced by the company for it. In the latter agreement, part of the facility is dedicated to the production of a particular customer`s products, and the customer pays a proportional share of the overhead costs and even brings his own managers for process monitoring. Since Elamex has no design skills, the company has only a small number of long-term alliances. It follows that the company prefers to be with experienced manufacturers rather than start-ups. There are, of course, other important aspects of this agreement. Information such as packaging and logistics are often discussed in these agreements. If you take into account the cost of sending a package to a parent, you will find that these «small» reflections can lead to a considerable effort. However, in principle, customer loyalty must be based on what distinguishes the product of an equipment item from that of its competitors. Loyalty cannot be based on low prices, as consumers who are looking for the best price are constantly ready to change – and CMs are almost always in a better position than OEMs to offer the best price. The same goes for the quality that ensures the operational excellence of CMs and the product range, which is a characteristic of the size of CMs. In fact, the products that CMs offer to other brands are similar in quality and cost, precisely because they were manufactured by the same company.
In contrast, a CM that produces unique products for a particular OEM would be bound by a long-term agreement that would eliminate it as a threat of competition. Your business is unique, so the terms and clauses of your agreement should directly reflect your business model and the constraints of your manufacturer and supplier. A key element of an order manufacturing contract is the one that retains the design rights of the product – the manufacturer or its customer. The decision could call for one or the other or depend on whether or not the manufacturer needs to adapt the design to its manufacturing processes. These contracts also contain refund guidelines. For example, one contract cannot provide for reimbursements from the manufacturer, while another may provide for refunds if the manufacturer does not meet certain quality standards. Another essential component is termination: how much dismissal must be made and what scenarios lead to termination. Manufacturing can be extremely expensive. Companies have to buy land and build buildings or buy an existing production site and adapt it to their needs. You need to order and install large machines, purchase material handling equipment, and identify and order deliveries.
Companies can circumvent all this preparatory work by subcontracting the manufacture of their products to a contract manufacturer. A well-thought-out order manufacturing agreement is essential for the success of the relationship. Without an agreement, there is virtually no protection against any of these scenarios. Your company can indeed be held responsible for manufacturer`s mistakes and the difficulties of your partner company can impact yours.. . . .