An original equipment manufacturer (OEM) supplies replacement products or components for resale or incorporation into another product under a reseller’s brand name. OEM also defines part of a growing class of services in outsourcing.
The OEM economy of scale is driven by the demand for reduction in costs of production by major manufacturing entities. Since the introduction of OEM in the computer software industry, acquisition of those second market products or components as first run products is done through repackaging with the brand name of those value added resellers (VAR). OEM outsourcing services contribute assembly or other operation production processes on behalf of a client corporation.
Expanding Offerings And Adding Value
Originating in the automotive sector as a cost-cutting measure in the manufacturing of replacement parts, OEM has been seen widely in the globalization of the sector. Companies can purchase the products they need to fulfill their service product lines without the expense and exposure of owning and operating a factory in a foreign location. The concept of the value added reseller (VAR) first emerged in the early 1960s.
VAR was introduced as a commercial model that mirrored military appropriations of parts. The branding of parts by purchasing companies prior to resale contributed to the growth of auto manufacturers and other major firms seeking parts at a reduced cost. At the time of release of new car models, manufacturers of OEM replacement parts are producing products for the auto manufacturer prior to the roll out of a vehicle.
Increase Efficiency and Profits
When cars go to market, the OEM is already there for resale to new car buyers who will soon require repairs under warranty. Aftermarket parts fill the gap when the market is either limited in the original OEM distribution of parts recognized by the auto manufacturer or when the consumer is seeking a lower-than-market value on a spare part. OEM standard packaging generally indicates if a part “meets OEM standards” for parts sold at discount auto parts retail stores.
This statement does not indicate automaker agreement and should be taken as a broad claim stipulating that the part merely meets technical specifications. Reduced working capital requirements for Just-In-Time production and risk transfer in OEM supplier partners increase efficiency and profits. Potential liabilities that would be sustained from product defect litigation, where proportional risk is assigned, are also refracted.
OEMs And Today’s Automotive Industry
The evolution of OEM as a process-oriented relationship appeared in the 1990s when Fiat began to leave assembly to partners in its industrial network. It marked the beginning of process outsourcing in the auto industry. Now, autos are assembled using parts from a number of manufacturers, and the fabrication of OEM is not typically distinguished as a separate brand of parts when used by the original automaker and its retail franchises.
Automakers have also exited sectors such as fuel injection, making suppliers the technology leaders in those OEM segments. Labor rate differentials offered by suppliers have translated into significant savings. The farming out of OEM to suppliers reflects a general shift to outsourcing prior to the transfer of assembly to off-site factories. This was already present in certain parts segments such as tires and audio systems.
OEM Partnerships And Future Investments
Competition between suppliers, non-unionized labor, and cheaper materials in developing and emerging markets offer considerable cost savings and lower capital investment requirements. Price pressures have put an end to some manufacturing-sector-related consumer credit OEM segments.
The consumer finance segment of the auto manufacturing industry is an example of how manufacturers are establishing wholly owned subsidiaries with OEM partners, gaining control of direct-to-consumer credit services and retail profits. Research-and-development-focused companies, in niche product or service segments supplying economies of scale, are the best bet for a return on investment.