What is an original equipment manufacturer (OEM)?

In the past, many companies built, marketed and sold all their products on their own. But with the rise of globalization, modern supply chains are often spread across multiple countries and territories, connecting designers in one part of the world with manufacturers, suppliers and distributors in another.

Despite geopolitical tensions, a recent report from DHL found that global trade remains at near record levels, underscoring the importance of international supply networks. OEMs are at the center of these networks, helping organizations improve scalability and shorten time-to-market.

Today, OEMs produce a wide range of material goods, including computer processors (CPUs), replacement parts for the automotive industry, and healthcare and industrial components. OEM products and services are also helping modernize inventory management strategies and warranty coverage by standardizing parts and improving supply chain visibility.  

The following sections detail how original equipment manufacturers (OEMs) relate and compare with other equipment supply chain business models.

Original design manufacturers (ODMs) and OEMs are similar but distinct business models that are often confused for one another in the supply chain management discipline. Here’s a look at how each model functions and their unique advantages and disadvantages.  

• The OEM model: In the OEM model, the customer owns the product design and intellectual property and hires an OEM to follow its design specifications when building its product. Customers requiring a high level of customization for their products favor OEMs over ODMs because they provide a higher level of control.

• The ODM model: In the ODM model, the manufacturer designs and builds the product themselves and the customer rebrands and sells the product as its own. The ODM model is common in industries where manufacturers develop standardized products and then sell them to brands that use them in their own finished products. Advantages of the ODM model include lower development costs and faster time to market.  

Contract manufacturers (CMs) are companies that manufacture products on behalf of another company according to that company’s specifications. Like OEMs and ODMs, contract manufacturers produce goods on behalf of another company, but unlike OEMs and ODMs, they don’t participate in the product design phase.

Companies choose contract manufacturers over OEMs and ODMs when they own the product design and need a partner who will focus primarily on labor efficiencies and high-volume production.

One of the most well-known contract manufacturers in the world is Foxconn, a company that specializes in making parts and components for the technology and consumer electronics sectors. Foxconn’s scale and manufacturing expertise help its customers achieve economies of scale, cost savings that come from higher production volumes.

Value-added resellers (VARs) are companies that purchase hardware, software or other technology products from manufacturers. They enhance them with their own products or services and then sell them as a complete solution to customers.

For example, SHI International is a VAR that purchases Cisco and Microsoft products, adds consulting, systems integration and cloud services, and then delivers the combined offering as a complete IT solution.

Aftermarket parts are components manufactured by third-party companies designed to fit multiple product models. They often have lower price points than OEM parts.

Suppliers of aftermarket parts directly compete with OEMs by offering lower prices, greater availability and enhanced features. Examples of aftermarket parts include oil filters and brake components for cars, electronics accessories for iPhones and laptops and bearings for industrial equipment.

Original equipment manufacturers (OEMs) influence nearly every stage of the product lifecycle in the modern supply chain. From design and manufacturing to distribution, inventory management, customer support and warranty coverage, they are considered indispensable for enterprises looking to build economies of scale.

Here’s a closer look at well-known OEM capabilities and how organizations leverage them.

Most modern products have become too complex for most organizations to build in-house. For example, a single laptop might contain a processor from one vendor, a memory chip from another and storage components from a third.

The OEM model allows each organization to focus on the design and manufacture of the component it has the most expertise in.

One of the biggest advantages to partnering with an OEM is access to economies of scale—cost advantages customers unlock when production volumes increase.

Since OEMs manufacture products for multiple customers, they can spread production costs across larger volumes, lowering individual unit costs and increasing manufacturing efficiency and product consistency. Economies of scale make the manufacturing of advanced products like computer chips, flight control systems and industrial robots more affordable.

As demand for a product grows, organizations must increase production without sacrificing quality. OEM partnerships support scalability by providing an already established manufacturing infrastructure capable of handling fluctuations in demand.

For example, when demand for a tennis shoe increases, a company does not need to build a new factory or expand its workforce. Instead, it can leverage the resources of an existing OEM that specializes in making tennis shoes.

OEMs help organizations improve time-to-market by leveraging existing manufacturing expertise, up-and-running facilities and supply chain networks.

Rather than creating manufacturing operations from scratch, businesses can bring products to market faster by using an OEM’s existing distribution network.

OEMs have a strong influence on modern inventory management strategies, collaborating closely with customers to optimize inventory levels, reduce carrying costs and improve visibility.

OEMs have a deep knowledge of their own products and components and can provide more accurate planning data, replacement parts and lifecycle support than generic suppliers.

Many modern OEMs support the entire product lifecycle rather than just its construction, including training, field services, technical documentation, customer support and product updates.

These sophisticated programs ensure that organizations maximize the performance of equipment they’ve purchased with support at every stage.

The primary operational and strategic benefits to choosing an original equipment manufacturer (OEM) over an original design manufacturer (ODM) or contract manufacturer include expertise, quality control and shorter time-to-market.

Here’s a closer look at those benefits and others:

• Increased quality control: Because OEMs have so much experience building, storing and distributing the parts and services they offer, they can often deliver a level of quality control their competitors can’t. OEMs follow strict manufacturing standards and testing procedures, reducing the likelihood of defects and improving product reliability and performance.

• Enhanced compatibility: OEM products are designed to work seamlessly with the systems they support. From system boards and processors to sensors and hydraulic components, OEM parts are better constructed and more compatible than generic alternatives. Choosing an OEM reduces complexity around installation, ensures swift integration with existing systems and minimizes the likelihood of failures and disruptions.

• Reduced downtime: In many of the industries OEMs support, such as healthcare, oil and gas and automotive manufacturing, downtime can cost millions. In a recent report from IBM, one-third of companies surveyed said an hour of downtime cost them between USD 1 and 5 million. OEM replacement parts often reduce downtime by providing more reliable performance and eliminating uncertainties around parts compatibility.

• Stronger warranty protection: OEM products often provide enhanced warranty coverage that their competitors don’t. Customers often require OEMs to maintain warranty eligibility for replacement parts, particularly for complex or high-value equipment. Using approved components helps organizations protect their investments and reduces long-term risk.

• Access to technical expertise: OEMs have foundational expertise around their products that is difficult for competitors to match. This expertise often includes engineering support, diagnostic assistance, extensive documentation and training resources. In the information technology (IT) sector, many OEMs offer software updates as well, saving customers time and resources.

• Long-term reliability: Because OEM parts are manufactured according to original specifications, they support more predictable asset performance over time. For organizations operating critical infrastructure in the healthcare, industrial manufacturing and technology sectors, the reliability benefits of choosing an OEM often outweigh the higher acquisition costs.

OEMs operate across virtually every sector of the global economy, from automotive and industrial maintenance to healthcare, technology and consumer electronics. Here are some examples of how industries have integrated OEMs into their supply chains:

• Automotive: OEMs in the automotive sector are critical in enabling one of the most complex product lifecycles on the planet. Automotive manufacturers produce OEM replacement parts ranging from oil filters and brake components to advanced electronic modules and engine systems. Customers willing to pay a premium for reliability and performance frequently purchase OEM parts through dealership parts departments to ensure their compatibility and maintain warranty coverage for their vehicles.

• Technology: Technology companies rely heavily on OEM relationships because of the expertise and resources required to manufacture computer chips and other components. OEM agreements play a major role in distributing operating systems (OS) and other software preinstalled on hardware devices. For example, Intel is one of the largest suppliers of processors worldwide and is heavily integrated into the supply chains of large enterprises like Dell, Hewlett Packard and Lenovo.

• Consumer electronics: Consumer electronics companies often collaborate with large-scale contract manufacturers to provide the expertise and global production capacity they require. For example, Apple relies on Foxconn to make its iPhones, iPads and other electronic devices. Partnerships in the consumer electronics space enable brands to focus on innovation, marketing and customer engagement while leveraging the specialized manufacturing capabilities of an OEM or contract manufacturer.

• Industrial manufacturing: Industrial OEMs produce the machinery, automation systems, motors, pumps and control equipment used in some of the most advanced manufacturing environments in the world. For example, Caterpillar—one of the world’s largest industrial OEMs—designs and builds heavy equipment used in construction, mining, forestry and energy. Maintenance repair and operations (MRO) teams frequently rely on OEM replacement parts to maintain reliability, support safety requirements and minimize downtime.

• Healthcare: The healthcare sector relies on OEMs to support some of their most advanced medical devices, imaging systems and laboratory equipment. Healthcare providers often prioritize OEM parts and services because of the criticality of their equipment and because regulatory compliance is so rigorous in the healthcare industry. OEM expertise helps ensure that medical equipment remains accurate, reliable and available for patient care.

• Aerospace and defense: Aerospace OEMs manufacture highly specialized parts and systems like aircraft engines, avionics systems and structural components. OEMs in aerospace and defense will often design and build an entire aircraft by integrating thousands—even millions—of individual components designed and built by a global supplier network. The OEM then warranties the aircraft, taking on the added responsibility of maintaining and repairing it throughout its lifecycle.

A continuing evolution from manufacturing physical products to providing fully integrated products, software and lifecycle services shapes the future of modern OEMs.

While designing and producing equipment remains an OEM’s core function, many modern OEMs are differentiating themselves by adding capabilities around supplier connectivity, data and artificial intelligence (AI):

• Integration of Industrial IoT: Industrial equipment is becoming increasingly connected through the Industrial Internet of Things (IoT), a trend that OEMs in the smart manufacturing space are watching closely. As sensors embedded in machines gain more abilities to monitor their surroundings and transmit real-time data to operators, expect predictive maintenance and process optimization capabilities to increase.

• AI-powered maintenance and operations: Artificial intelligence (AI) capabilities are fast becoming a key differentiator among OEMs. Instead of simply monitoring and reporting equipment status, advanced AI systems can predict component failures and even recommend maintenance actions. OEMs that integrate these new capabilities into their workflows are likely to have a significant advantage over competitors that don’t.

• Digital twins: A growing number of OEMs are developing digital twins, which are virtual representations of physical assets that use real-time operational data to predict how equipment will react to changes in operating conditions. Digital twins help OEMs simulate equipment performance, test operating scenarios and accurately predict failures.