Original Equipment Manufacturer (OEM)

Original equipment manufacturer (OEM) is the manufacturer that first produced hardware that is then sold to a company that markets the hardware under its own name. Computer companies may need a part or parts for a product and will often purchase the product from another maker. The company will advertise the part or product as its own, even if it was manufactured by another company. This is considered a perfectly legal marketing tool because a contract for resell has been signed by the involved companies. Another name for OEM is contract manufacturer.

OEMs rely on their ability to drive down the cost of production through economies of scale. Also, using an OEM allows the purchasing company to obtain needed components or products without owning and operating a factory.

OEM is Similar to VAR
While an OEM is similar to a VAR (value-added reseller), it refers specifically to the act of a company branding a product to its own name and offering its own warranty, support and licensing of the product. The term is really a misnomer because OEMs are not the original manufacturers; they customize the original product.

OEM vs. Aftermarket
OEM is the opposite of aftermarket. OEM refers to made specifically for the original product, while aftermarket refers to equipment made by another company that a consumer may use as a replacement.. For example, say a person needs to replace his car thermostat, created expressly for his Ford Taurus by ABC Thermostats. He may buy the OEM part – a duplicate of his original ABC thermostat, used in the original manufacturing of the vehicle. Or he may buy an aftermarket part, an alternative made by another company. In other words, if the replacement also comes from ABC company, it is OEM; otherwise it is aftermarket. Usually, consumers buy an aftermarket product because it's cheaper (the equivalent of a generic drug), or more convenient to obtain. But sometimes OEMs do such a good job in manufacturing a specific part that it becomes known to consumers, who actively seek it out. An example of this is the success of Hurst Performance of Warminster Township, Penn., a manufacturer of gear shifters for automobiles. Hurst shifters became so well-known for their superior performance that car buyers would insist on them as a replacement part, or sometimes even purchase and install them before the originals even needed replacing.

Difference Between ODM and OEM
ODM and OEM are acronyms that are the buzzwords in the manufacturing sector. ODM stands for Original Design Manufacturer and OEM stands for Original Equipment Manufacturer. While many people confuse between the two terms and use them interchangeably, they are not quite the same. OEMs manufacture product based on design specification provided to them, while ODMs also design the product themselves before manufacturing them.

Examples of OEM
An example would be a large automobile manufacturer that uses an OEM's components in the production of the cars it makes and sells. Originally OEM was an adjective only used to describe a company that produced items, usually hardware or component parts, to be marketed under another company's brand. Although this is still the norm, OEMs have begun in recent years to sell their products more widely and in some cases, directly to the public. Component parts, like a computer's processor, include items that go into the assembly of the final product. Other examples include CD-ROM drives included in personal computers, air bags in cars, and motors for appliances. Consumers are also becoming interested in the component materials specifications and manufacturers of such items as wire, paper, textiles, or cement. In another example, General Motors recommends that consumers request Goodwrench parts when replacements are needed for a GM vehicle. In fact, the GM Web site says, "GM parts are the highest-quality products for your GM vehicle and the only ones specifically designed, made, and tested to keep it running at peak performance and appearance.

Benefits of OEM

Buying OEM parts means that you are getting the same part that originally came with your unit – and there are some huge benefits to that.

• Quality: Since OEM parts and components are created and tested according to the manufacturers’ specifications and high-standards, OEM items are guaranteed to be high-quality. They are also guaranteed to be compatible with your equipment and to perform according to factory specs.
• Support: OEM parts automatically facilitate access to a wide variety of support.
• Longevity: These products are specifically designed to ensure optimal performance and proper conditioning of your equipment. OEM parts are sure to last longer than some aftermarket parts due to the high quality material and standardized testing.
• Warranty: Perhaps one of the most important benefits of OEM parts is that each part comes with a manufacturer’s warranty. Every OEM warranty is different, but if you receive your part with any defects, or if it’s faulty, the manufacturer will quickly replace the part.
• Investment: There is no better investment. Since the OEM part or component is designed to fit and perform to factory specifications, it increases the life of your equipment. This will save you money and reduce any down time in the long run.

OEM Challenges and How to Overcome Them
An original equipment manufacturer (OEM) must be resourceful and search for opportunities to stay competitive in an increasingly volatile market. Here are upcoming industry challenges that OEMs may face and standards that can be put in place to meet those challenges.

• Plan for Unpredictable Commodity Prices: The prices of nickel, copper and silver change frequently and inconsistently. Price unpredictability makes it difficult for OEM manufacturers to keep operating costs under control. Increasing commodity prices can directly impact a manufacturer’s bottom line, especially when product prices can’t be increased to offset manufacturer costs. OEMs can counteract rising prices by managing supply chain costs. Implement just-in-time production to respond quickly to changes in demand. Shortening supply chains can also lessen transportation costs. OEMs should also be aware of how purchase decisions may affect the business down the road. Buying commodity in bulk comes with benefits and risks. If the cost of a commodity goes up after a bulk buy, the business comes out ahead. If the price goes down, the business loses. Investing in substitutes may become necessary for some manufacturers. Copper prices have been historically volatile. If prices rise, manufacturers may need to find alternatives for copper and other expensive metals.
• Manage Product Lifecycles: Successful OEMs require sophisticated equipment. But even the greatest equipment eventually runs its course. A product’s end of life (EOL) is defined as the final stage in a product’s existence. Manufacturers address EOL by discontinuing production of one product and developing another. A seamless transition from one product to another is key to ensuring minimal interruptions. Implement a product lifecycle management (PLM) program to manage the stages a product goes through from design to implementation to retirement.
• Lean Means Greater Efficiency: What’s the best way to stay competitive in the face of volatile prices and retiring equipment? Constantly strive to increase productivity. Incorporating Lean manufacturing practices into your business is a sure-fire way to increase efficiency. It all comes down to eliminating waste. Use 5S practices to manage OEM electrical inventory by establishing a clean, organized workspace. Standardize manufacturing to reduce defects. Keep your production lines running smoothly to avoid wasteful stops. Lean warehousing reduces errors, eliminates waste and increases storage density by standardizing inventory and creating visual controls. A more flexible supply chain starts with creating a better layout, design and storage for increased flow.
• Invest in Inventory Management: Every OEM knows that having the right inventory on hand is vital. Invest in inventory management software to track inventory levels, sales and orders. This avoids costly out-of-stock issues. An inventory management program cuts costs by minimizing the number of materials on hand. Creating an efficient supply chain means better SKU visibility and accuracy. Managing inventory helps you save time and money on transportation, all while increasing flexibility.

EFurther Reading

• How OEM engineering leaders can create and scale a “future-ready” competitive edge Genpact
• Challenges for the automotive industry in an on demand environment ( discuss strategic levers enabling OEMs to transform to on demand enterprises.) IBM
• Fuel Quality Challenges - An OEM Perspective Mercedes-Benz Research & Development North America, Inc