In the OEM-EMS relationship, getting to win-win requires a clearly stated business case.

One of the recurring themes I hear in electronics manufacturing services (EMS) is how challenging it is for many program managers and salespeople to negotiate with customers. I’m often told the industry has changed, but when I ask hard questions I tend to find that the biggest change is that the people doing the negotiation seem to know a lot a less about the business of building electronic products than their predecessors. And this isn’t just on the EMS side. Years ago, OEMs put highly technical senior people on the team that managed outsourcing efforts. While those people were tough negotiators, they negotiated based on strong knowledge of the processes and challenges inherent in electronics manufacturing. Similarly, EMS program managers (PMs) were often pulled from operations. If expenses were increasing, they had the knowledge to explain the reason a price increase was necessary.

Fast forward to today and you’ll find many EMS PMs are not just new to EMS, they are also new to manufacturing. Providing technical explanations can be difficult for them. And OEM outsourcing teams also have different dynamics. In some cases, people have shifted from disparate industries. For example, I’ve seen purchasing managers move from consumer electronics to medical electronics. Both industries look for cost-reduction, but the medical industry is far more limited in the paths available to get there. In other cases, they are new to purchasing outsourced manufacturing. While that changes the playing field in terms of negotiation, it doesn’t necessarily change the rules of the game.

A foul is still a foul. Contentious relationships don’t work in EMS. Like it or not, the OEM and EMS are joined at the hip when they enter a manufacturing relationship. When one party behaves badly, both eventually suffer. That is what makes compromise preferable. A system of checks and balances drives that. If a contract manufacturer is losing money on an account because a customer has unreasonable pricing expectations, one of three things will happen:

• The EMS firm will begin nonperforming on the account in the hope it will leave.
• The EMS firm will ask the customer to leave.
• The EMS firm will have financial issues that either delay materials or force it to close its doors.

In all these cases, the OEM is hit with the unanticipated cost of rapidly moving to another contract manufacturer. In several of these cases, there is a high probability of supply-chain interruption. In short, forcing a contract manufacturer to lose money on a project costs the OEM more money over the long run.

Outsourcing is win-win or lose-lose. The outsourcing relationship normally involves some level of favor sharing. The OEM that forces a cost-reduction today may find a price increase pop up on the next engineering change order (ECO), or the next time it pulls in a forecast, overtime charges accrue to meet the new dates.

Similarly, an EMS company that performs poorly may find high-running products shift to a new manufacturer, receivables stretch out or a stronger push for cost-reduction. In short, karma is alive and well in outsourcing relationships.

Leveling the new playing field. Imagine a game of football where one team had no rules; the other team had marginal knowledge of the rules, and the referees would only call a penalty when the opposing team could explain the rule violation. In some outsourcing situations, the scenario is that bleak. Negotiations fail not because they weren’t legitimate, but because the correct business case never gets made since the individual who needs to make it isn’t knowledgeable enough. And, after a certain number of “no rules” wins, the customer’s team decides that is the best way to play the game.

Knowledge is power in business negotiations. I have never seen an OEM fail to agree to a negotiated price increase, contract term or payment term when a strong business case was made. I have seen negotiations start badly when an OEM’s lead negotiator or attorney didn’t understand outsourcing. Here are few steps for ensuring a level playing field:

• Give PMs the resources and training they need to successfully negotiate. This includes strong knowledge of cost drivers and key technical issues that can solve problems with the programs they manage.
• Create a list of subject matter experts who can explain an issue in more detail if it becomes apparent a negotiation is failing because the business case is not properly presented. It is important to put these “special team players” in as early as possible.
• Create a “no shame” culture that doesn’t punish PMs for asking for help on situations they don’t understand well.
• Teach PMs to provide multiple options in a negotiation so the customer can decide what option works best for them.
• Consider educating the OEM’s team if issues like material liability, long lead-time parts or design-induced defects seem confusing to them. Offer a plant tour so reluctant parties better understand why you seek for specific contract terms.

The bottom line is that in a relationship as complex as electronics contract manufacturing, win-win negotiations are the only viable option. Getting to win-win requires clear communication of the business case. Ensure PMs have the knowledge and “expert” bench strength supporting them to do that and the playing field will level out.

Susan Mucha is president of Powell-Mucha Consulting Inc. (powell-muchaconsulting.com), a consulting firm providing strategic planning, training and market positioning support to EMS companies, and author of Find It. Book It. Grow It. A Robust Process for Account Acquisition in Electronics Manufacturing Services; smucha@powell-muchaconsulting.com.