What is OEM? The abbreviation “OEM” stands for original equipment manufacturer. The OEM definition can be misleading, as an OEM manufacturing does produce the components but they are created based on the design specifications produced by the original company. The part an OEM manufacturing firm plays is purely the manufacturing aspect, and allows both companies to benefit from each other’s strengths. It can be one kind of possible solution in the procurement or sourcing process, respectively.
In many cases, a company does not have the required set up to produce highly specialized and high volume goods themselves, so by engaging in the services offered by OEMs they can make use of external production capacities. There is a similar term referred to as “ODM” which means original design manufacturer. This is when the manufacturer creates the design and specifications themselves, often producing a blank product that you can rebrand to sell as your own. Therefore, ODM production goes further than OEM manufacturing.
The first main advantage you receive when going down the OEM manufacturing route is you generally receive cost effective products. You effectively benefit from the economies of scale as the supplier will be creating bulk amounts of goods to sell to you and is similar form to others. Furthermore, in OEM manufacturing, you often receive high quality goods, as they are tested according to the strict specialized manufacturer’s testing standards. Third party consulting companies can help you to find suitable OEM manufacture companies.
You also get to benefit from the specialized technology that OEMs provide. For example, a car manufacturer such as Ford or VW may use specialized components of another company within their cars that they themselves do not have the technology or expertise to create. Also, you keep all trademarks and intellectual property rights associated with your design and products. Since your company is designing the components to be made, all associated rights belong to you.
On top of this you also benefit from an efficient professional service. Generally, an OEM manufacturing companies can only survive if it sustains the demand for a certain product category by being sufficiently good at it. Companies as customers are usually more demanding than consumers. By entering into an agreement with an OEM manufacturing firm you are outsourcing the job of production. With the process of mostly being more efficient than doing it yourself, you ultimately benefit from lower prices, higher quality and specialized goods, as well as more time to focus on core operations.
However there are some disadvantages, since you may find that the selection of OEM products you can mandate is relatively small, not allowing you a good opportunity to capitalize on very new or innovative products. Requesting samples can clarify this issue. Furthermore, since most OEM firms only like to deal with companies who can create a lot of demand, you might not be able to go down the OEM manufacturing route if you can’t sell enough products. Additionally, you are opening yourself up to the risks of having your intellectual property rights (IPRs) infringed and stolen because you have created the design for the components, which could be sold to competitors. If you have registered all appropriate rights within China you do still have some protection that can be enforced, but that may still not stop some companies.
There are several large industries that continuously heavily benefit from outsourcing production to several different OEM manufacturing firms. The automotive sector is heavily linked to OEM production. Since there can be around 30,000 different parts in a car, it makes sense for manufacturers to outsource production of certain components to specialists. This logic applies to many industries with complex products, which can be broken down in relatively similar components across different manufacturers.
The electronics industry also heavily benefits from OEM manufacturing firms, with a perfect case being seen in Apple. Apple designs their product ranges; however, they are in a partnership with OEM manufacturing company Foxconn who actually oversees the production in China. When you think about the company that Apple is, you often think about their brilliance of innovation, sleek products and their marketing as things they excel in. They are not known and do not have the facilities in place to manufacture the millions of iPhones they sell every year.
That is why their partnership with OEM manufacturing company, Foxconn makes sense; since they can reduce the time it takes to get products onto the market, it does not require heavy investment in machinery, and allows them to focus more time on what they do best. In turn, these electronics products are overall sufficiently similar across different manufacturers so that Foxconn can produce for Samsung, Hewlett-Packard and many others as well to gain expertise and hence improve efficiency.