What Is An Original Equipment Manufacturer (OEM)?

Alibaba.com JANUARY 31, 202410 MIN READ
What Is An Original Equipment Manufacturer (OEM)?

Do you want to turn an innovative idea into a finished product, but you don't have all the components? Partnering with an original equipment manufacturer is one option to consider for cost-effective, high-quality, and fast component manufacturing for your product. In this article, you will learn about what an original equipment manufacturer is, the various distinctions between OEM and other models, benefits, and some future trends. You will also get answers to frequently asked questions to help you get started with partnering with an OEM or setting up shop as one.

What is the original equipment manufacturer (OEM)?

An original equipment manufacturer (OEM) is a company that produces specific parts and components used in the assembly of a purchasing company's final product.

For example, imagine company A manufactures high-end computers using different components like processors, displays, batteries, and keyboards.

However, they lack the expertise to manufacture the processor needed for the laptop. Or the cost of importing and manufacturing raw materials is high.

Company A outsources the task to a processor manufacturing company (let's call it Company B) with the tools and expertise to build the components.

Afterward, the manufactured processor is shipped to the “Company A” warehouse, where it's integrated into the computers to complete the final item.

In this illustration, company B is an original equipment manufacturer, while company A is the purchasing company or a value-added reseller (VAR).

Importance of OEM

Partnering with an original equipment manufacturer is essential for building high-quality products, saving cost, innovation & expertise, and risk mitigation.

Build High-Quality Products

OEMs are standard companies that must meet specific standards to function in their various industries. Also, these companies have specialized expertise in manufacturing these components.

So, they dedicate time to developing the best product for your company. This combination ensures you get top quality at all times, which is vital for the overall efficiency of your product.

Save Cost on Manufacturing

Manufacturing all items in-house means you have to allocate more on shipping raw materials to the warehouse, hiring engineers, setting up machinery, and other costs.

However, with OEM, you pay for units delivered while saving costs on all other pre-manufacturing expenses. In the long run, it's actually an excellent method to deliver products on time and get higher profit margins.

Risk Mitigation

Most companies lack the experience and expertise to manufacture specialized parts. Although it's possible to assemble a team and learn on the job, the risk of building a defective product is excellent for such a gamble. Outsourcing parts manufacturing to OEMs mitigates the risk of errors.

Since they are specialists in manufacturing the product, they can also respond to challenges faster. This allows you to focus on other areas in the development curve and mitigate the chances of defective parts in the product line.

Advantages & Challenges of OEM

Advantages & Challenges of OEM

If you are considering OEM partnerships, Understanding the advantages and challenges is crucial for success. Here are some to help you make informed decisions and effectively manage the relationships with manufacturing partners.

Advantages of OEM (Original Equipment Manufacturer)

  • OEMs offer specialized expertise in the development of the components and parts in a particular industry. Partnering with an OEM enables you to get a high level of knowledge in manufacturing specific components or products, leading to better product delivery.
  • OEMs can produce components in large quantities, enabling you to reduce manufacturing costs. Instead of investing in sourcing raw materials, hiring engineers, and other expenses, you only worry about shipping the finished component to your warehouse.
  • Outsourcing to OEMs can speed up the production process, as it allows you to access ready-made components anytime. This access reduces the time required to bring a product to market, meaning you can claim a significant market share, make mistakes, and innovate faster.
  • Partnering with an OEM allows you to concentrate on core strengths while eliminating distractions. With an OEM handling core component, you can invest time in proper market research, advertising, customer support, and other vital parts of the sales product delivery.

Challenges of OEM

  • Relying heavily on OEMs can create a dependency that poses a significant risk to your business.

    If issues arise with the OEM's production or supply chain, it can impact the entire manufacturing process, leading to missing launch dates, incurring extra costs, and losing market share.

  • Problems might arise when an OEM doesn't maintain quality standards that align with your company's expectations or what they have promised. Issues like this can lead to shipping out defective final products or reproduction, which delays other processes.
  • Intellectual Property theft is another primary concern when partnering with OEMs. Since companies have to share detailed specifications with OEMs, it's almost impossible to guarantee the safety of that information within the OEM company.

    his raises an issue when the OEM also serves competitors looking to get their hands on your trade secrets.

  • While outsourcing can be cost-effective, negotiating favorable terms with OEMs and managing pricing fluctuations can be complex.

    If they are overseas with a different tax, currency, and manufacturing policies, a change in these things might affect their production, leading to updating the cost of the product manufactured.

OEM hardware

OEM hardware is one of the types of original equipment manufacturers. It involves a company that produces hardware components used in assembling another company's final product.

This is primarily popular in the automotive and IT industry. For example, ACDelco is an original equipment manufacturer that produces computers used in cars designed by General Motors.

In IT, OEMs produce hardware devices like hard drives, graphics cards, and CPUs. Some popular names include Intel, Lenovo, Samsung, and Western Digital.

Since the products are original equipment from the manufacturer, the purchasing customer determines the design and specifications. However, sometimes, the OEM might modify the product based on efficiency.

OEM software

OEM software still follows the same principles; however, the manufacturing company produces software or its components. It's a practice that's popular in the IT space, where an OEM develops a computer program, which is then sold to another company.

When buying OEM software, the purchasing company receives a license to use the tool instead of the actual source code for the software. The purchasing companies of OEM software are often computer builders and hardware manufacturers who buy the program with the aim of bundling it with other offers.

For example, Lenovo might purchase the Windows operating system as an OEM software and install it as part of their PC software. OEM software can also be sold as a standalone or a fully functional product offered at a discounted price with a new computer.

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OEM vs. ODM

We've already established how the OEM method works in manufacturing. It involves a specialist company manufacturing components or products integrated into other companies' offerings and sold as theirs.

In the OEM method, the purchasing company has complete control over design. The OEM only focuses on production and has to rely on the client's specifications for manufacturing.

In contrast, ODM, which stands for original design manufacturer, gives the design and specifications task to the manufacturing company.

They decide how the component functions, measurements, and more on behalf of the purchasing company. Primarily, ODMs have a minimum order quantity (MOQ), which means it's not a great option if you want to purchase a lot of the product.

Generally, the major difference in the OEM VS. ODM manufacturing process is the design and specification process. In OEM, the purchasing company sets the design requirement, while in ODM, the manufacturer handles that aspect.

OEM vs. Aftermarket

OEMs are components that come preinstalled in a product. For example, if you buy a brand-new car, all the elements are manufactured initially and integrated from the factory.

However, aftermarket parts or components are those manufactured by a third-party company and sold to many different companies.

It is a cost-effective option when the original component of your car or computer needs a replacement.

Also, using an aftermarket part doesn't affect the functionality of the products, although you should take great care when choosing. Unlike an OEM, the aftermarket part industry isn't regulated or standardized, and manufacturers can deliver low-quality components that can damage the end product.

OEM vs. VAR

Imagine you've designed a high-end car with innovative features, but you lack the expertise or machinery to produce some of the components. You can partner with a company specializing in manufacturing that component and pay them to deliver a specific unit following your designs and specifications.

In this case, that company is an OEM. They manufacture components or parts of a product, which another company then uses to complete their product development.

In contrast, the purchasing company is a VAR, which stands for value-added reseller. A VAR takes the component manufactured by an OEM and adds value to it before bundling it into a single product offer for reselling to end users.

Future of OEM

The original equipment manufacturing industry has been evolving at over 1.45 trillion dollars in size 1. With various technological advancements and the need to increase customer satisfaction, the OE industry will undergo multiple stages of change in the future:

  1. OEMs will adopt third-party eCommerce platforms or develop their own to facilitate online-to-offline sales. This approach will help manufacturers to deliver seamless purchases for customers at a faster rate.
  2. As it becomes more of an essential part of the manufacturing supply chain, the OEM model will birth other new models. These models will facilitate scaling the manufacturer-to-distributor relationship for unique cases.
  3. There will be legal restructuring in how the OEM model functions to ensure proper regulations and beneficial transactions amongst all parties while maintaining the quality of components delivered.

FAQs

FAQs

What does OEM stand for, and what does it mean?

OEM stands for Original Equipment Manufacturer. It refers to a company that produces and sells products or parts of a product that are then bought by another company and retailed under that purchasing company's brand name.

What is the difference between OEM products and retail products?

OEM products are designed to be sold to other manufacturers who integrate them into bigger systems, like a car or computer, and are often sold in bulk. On the other hand, retail products are packaged versions of software or equipment that are sold directly to consumers in stores or online.

Why are OEM products typically cheaper than retail products?

OEM products are typically cheaper than retail products because they are sold in bulk to manufacturers and don't include the cost of marketing, packaging, or after-sales service. These products are intended for system integrators and tend to be bare-bone versions of retail products.

Are there any drawbacks or risks involved in purchasing OEM products?

Yes, there can be drawbacks and risks with purchasing OEM products. These primarily include a lack of customer support, warranties, and sometimes inferior quality compared to retail versions. Additionally, OEM products usually come with minimal packaging, which may not provide sufficient protection during shipping.

Conclusion

The original equipment manufacturer model is a vital part of the manufacturing supply chain. It allows significant product manufacturers to deliver quality products in record time and at a cost-effective price.

This model is an excellent option for businesses looking to deploy innovative ideas fast. It's also a feasible process that allows you to build an entire product without having to manufacture any of the components in-house.

All you have to do is partner with different OEMs and ship and assemble the components in-house. You can then sell your products offline or showcase them on e-commerce platforms like Alibaba.com.

Alibaba.com is a robust ecommerce platform that serves as a window for wholesalers to reach over 140 million customers. Also, you get support tools for advertising, analytics, product research, and many more to boost your performance.

Are you ready to showcase your product to millions of customers? Join Alibaba.com today.

References
1. https://newventureresearch.com/the-worldwide-oem-manufacturing-assembly-market-2023-edition/