Original Equipment Manufacturer (OEM)

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Original Equipment Manufacturer (OEM)

An original equipment manufacturer (OEM) makes equipment or components that are then marketed by its client, another manufacturer or a reseller, usually under that reseller's own name. An OEM may make complete devices or just certain components, either of which can then be configured by the reseller. An example of this relationship 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. Developments within the computer industry have played a role in this expansion. As people choose to upgrade their PCs with new parts, they often wish to do so by purchasing replacement parts that have been produced by the same manufacturer that made the originally installed item. The assumption in this case is that components and other processed items may work better or fit better if they come from the OEM. They are more likely to meet the original standards and product specifications established for the product. OEM parts can be contrasted to other replacement parts that may be referred to as "functionally equivalent" or "of like kind and quality."

OEMS TODAY

Today, component parts and processed items are becoming branded, and as such their names are becoming well-known by consumers. In the past, these components were processed from raw materials and became part of a finished product without the consumer ever becoming aware of who made the component. In most cases, consumers did not care as long as the product worked as expected. But times have changed. Consumers upgrading their computers today, for example, may specify a new processor made by an OEM company that they respect, like Intel, and may request the processing power of the OEM's latest release, like the Pentium 4.

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. Heck, they're the same ones it was born with. So, whether you're restoring an old favorite or personalizing your newest baby, you can count on GM parts to provide genuine dependability." To stress the exact standards of OEM parts, they state, "It's reassuring to know you have a partner like GM Parts behind you. We offer a full line of products, all designed and manufactured to exacting standards specifically for your GM vehicle. So you know whenever you use GM parts, the feeling is genuine."

SETTING STANDARDS

Manufacturers must determine the quality and specify standards for components that go into their products. Some assembled products are not manufactured but put together from a variety of purchased component parts, like Dell computers. Some components may be custom made, requiring much teamwork between the engineering departments of both the buyer and the seller as well as management involvement in negotiating prices and other terms.

Components are produced to accepted standards or specifications. Production personnel in the purchasing organization may specify quality. Because components become part of an organization's own product, quality is extremely important. The buyer's own name and entire marketing mix are at stake. Thus a buyer tries to buy from sources that help ensure a good product. In such a situation, a buyer may even find it attractive to develop a close partnership with a single supplier who is dedicated to the same objectives as the buyer and use this partner as a sole source supplier. As an example, Ford Motor Company forged a partnership with Firestone Tires. When the supplier's product was implicated in a series of accidents involving Ford sports utility vehicles, Ford took some responsibility for the problems and deaths that resulted.

If the co-branding and awareness of OEM manufacturers continues, more profitable replacement markets may develop for producers. Since component parts go into finished products, a replacement market often develops on its own. This after-market can be both large and very profitable. Car tires and batteries are two examples of components originally sold in the OEM market that become consumer products in the after-market. But because the target markets are different, different marketing and overall strategies may be necessary for selling OEM parts directly to final consumers.