Glossary of Contract Manufacturing Terms
Bill of materials (BOM): a comprehensive listing of all components and subassemblies that go into a specific product, showing the quantity of each required to assemble the item.
Box-build: a term commonly used to describe assembly work other than printed circuit board (PCB) production. The electromechanical assembly process involves enclosure fabrication, installation of subassemblies and components, and routing of cabling or wire harnesses.
Contract manufacturing: production of products on behalf of an OEM, in which the design and brand name belongs to the OEM. Contract manufacturers have made it possible for some companies to operate without owning any brick-and-mortar factories. Price pressure and the need for global product expansion are driving the growth of contract manufacturing. Any contract manufacturer should provide an advantage that isn’t already part of the OEM’s infrastructure. Also see "electronics manufacturing services" and "outsourcing."
Contract manufacturer (CM): a company that engages in product assembly, engineering services, order fulfillment and product distribution. A CM usually works on behalf of an OEM. However, OEMs can also function as contract manufacturers.
Core competencies: activities or practices, such as product development, deemed by a company as critical to its long-term success and growth. Typically, core competencies are based on skills or knowledge sets rather than products or functions. They provide return on investment and act as a barrier for other companies trying to enter the market. Many manufacturers choose to focus on core competencies and outsource production tasks. Most OEMs plan to keep their high-level engineering and design work as internal competencies, particularly as they apply to new products and high-end products.
Corrective action request (CAR): an action item that surfaces whereby the requesting party (either the OEM or EMS provider) asks the party responsible to conduct a root cause analysis and resolve the issue identified.
Electronics manufacturing services (EMS): an industry based on providing contract design, manufacturing and product support services on behalf of OEMs. Traditional services include PCB assembly, box-build and testing. Today, EMS providers are also providing numerous services such as supply chain management, global distribution, logistics, customer support and repair. However, all intellectual property belongs to the OEM. Also see "contract manufacturing" and "outsourcing."
Engineering change order (ECO): an alteration made to an AVL or BOM, such as the replacement of one component by a substitute component. Any changes should be prepared, approved and incorporated promptly and correctly to minimize problems. Changes often vary in complexity and urgency, but can have a ripple effect. Any ECO should be documented on a blank form or template that contains key information, such as a description of change, a reason for the change, the type of change and the implementation date (e.g., immediate action or implement when possible).
First-pass yield (FPY): the percentage of product tested that passed inspection on first attempt.
High-mix, low-volume: a contract manufacturing environment where the products being assembled vary in application, lot size and production processes. Contract manufacturers that are equipped for high-mix, low-volume production have the ability to change over product requirements and convert assembly lines in a matter of hours. They can easily add capacity to accommodate increased volume and rapid throughput cycles. However, high-mix, low-volume manufacturing creates numerous challenges because there are more areas to invite error. Lower quantities demand more frequent changeover and may only last several shifts or days.
Intellectual property (IP): any product of the human intellect that is unique, novel and unobvious, and has some value in the marketplace. It includes ideas, inventions, business methods and manufacturing processes.
Joint design manufacturer (JDM): a company that helps design products for OEM customers. However, distinction on who owns the intellectual property is murky and can surface as licensing problems.
Joint service agreement (JSA): a document used in conjunction with a contract to define the processes, performance targets and expectations of both an OEM and a contract manufacturer. The joint service agreement should be specific in terms of how the work will be done and evaluated. It should be supplemented by a management control system that requires a regular review of performance against the JSA expectations. This approach helps minimize the misunderstandings that often develop in outsourcing relationships. Also see "manufacturing and supply agreement."
Low-mix, high-volume: a contract manufacturing environment where there are a few number of assemblies produced in large quantities. High-volume production may last for weeks or months using the same setup. Changeover is at a minimum and equipment utilization is very high. Contract manufacturers are at their most efficient when running at high volumes, with minimal engineering changes.
Manufacturing and supply agreement (MSA): a contract that defines responsibilities and bridges the relationship between an OEM and a contract manufacturer. It outlines what the EMS provider is required to do for the OEM and at what "cost" to the provider. It also details what the OEM will receive from the provider and at what "price." An MSA addresses pricing for both current and new products, inventory liability, and performance and service expectations. Also see "joint service agreement."
Medium-mix, medium-volume: a contract manufacturing environment where production volumes remain relatively stable for an extended period of time. Medium-volume production may last for days or weeks using the same setup.
New product introduction (NPI): a set of integrated processes used to convert a product design into a manufacturing-ready product while meeting cost, quality and time-to-market objectives.
Nonrecurring expense (NRE): items and activities required by an EMS provider specific to a particular OEM’s product program, such as setup, tooling and programming. These one-time charges are separate from the product cost.
Original design manufacturer (ODM): a company that manufactures products of its own designs, which are then sold under an OEM’s brand name. Typically, the ODM determines what products to build and the OEM simply purchases the items ready-to-go. Unlike an EMS provider, an ODM designs products based on its own intellectual property. More and more OEMs are considering the ODM model because it offers them a more complete turnkey solution, with less design and supply-chain interactions with the supplier.
Original equipment manufacturer (OEM): a company that designs and specifies products under its own company name and brand. Traditionally, OEMs design products, purchase components from suppliers, operate their own manufacturing plants, and handle sales, service and support activities, but many of those functions are being outsourced today.
Outsourcing: the process of subcontracting a process, such as product design or manufacturing, to a third-party company. Outsourcing to EMS providers has traditionally appealed to makers of computers, telecommunications hardware and other electronic items. However, outsourcing also is becoming a cost-effective option for manufacturers of fiber optic components and medical devices. Many companies outsource older, more stable product lines so they can focus operations on newer, more technically complex products with higher profit margins. Also see "contract manufacturing" and "electronics manufacturing services."
Plants, property and equipment (PP&E): key elements of a fixed-asset manufacturing model. Plants include factories and warehouses. Property includes land and leasing. Equipment includes production tools and automated assembly machines.
Request for quote (RFQ): a document that is prepared by the OEM and submitted to the EMS provider for quotation. It typically includes product specifications and quantities, in addition to an AVL and BOM. The RFQ should also include key elements the OEM will request of the contract manufacturer in the MSA, such as inventory liabilities.
Return on invested capital: an important model (net profit divided by PP&E + inventory + accounts receivable - accounts payable) that can help OEMs determine the cost effectiveness of outsourcing. By decreasing fixed costs, such as PP&E, an OEM can immediately lower total costs, increase its return on invested capital, increase its return on equity, and increase its return on assets. The OEM’s break even point may be achieved sooner, with lower volumes, less revenue and against lower costs.
Time to market: the length of time it takes to get a quality product into the marketplace. Faster time to market is a critical business objective for all manufacturers. Companies in every industry are using speed as a competitive weapon. The goal is to get to market with a new product (or a better quality product) quicker than anyone else. Being the first to market can increase a company’s profit margin and its market share.
Time to volume: the length of time it takes to bring a product from prototype or first article to a high-volume production mode.
Vendor-managed inventory (VMI): a process in which a supplier owns components until they are issued or released to the production line. Usually, VMI is handled by a distributor located within a plant.
Volume price agreement (VPA): a contract service agreement containing pricing, deliverables and cost reductions based on volume manufacturing.