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Original Equipment Manufacturer (OEM)

Definition

Original Equipment Manufacturer (OEM) is a term used primarily in the automotive and IT industries to describe a company that manufactures products or components that are used in the products of another company, which are then sold to customers. Essentially, an OEM provides the components or parts required for the final product, but the design belongs to the selling company. An example is a car manufacturer like Ford, which purchases parts such as tires or radios from an OEM, then installs these parts in its vehicles before selling them to customers.

Phonetic

Original Equipment Manufacturer is phonetically transcribed as /əˌrɪdʒ.ɪˈnæl ɪˈkwɪp.mənt məˈnjuː.fæk.tʃərər/ OEM — /ˌoʊ.iːˈɛm/

Key Takeaways

Sure, here they are:

  1. OEMs Produce for Others: An Original Equipment Manufacturer, or OEM, refers to a company that designs and manufactures products that are marketed and sold by another company. Essentially, an OEM produces the components or services that are then purchased by another company and retailed under the latter company’s brand name.
  2. OEM Products are Often High Quality: Despite not being sold under their own name, products made by OEMs are usually of high quality. Because the OEM’s brand isn’t on the final product, they need to maintain high standards to retain the business of the companies that do market the products.
  3. OEMs are Valuable for Business: Companies resort to OEMs because they can save costs, and ensure quality, and efficiency. OEMs often have specific expertise and scale in manufacturing which allows them to produce goods more efficiently and reliably than other companies might be able to on their own.

Importance

The term Original Equipment Manufacturer (OEM) is crucial in business/finance because it denotes companies that produce parts and equipment that may be marketed by another manufacturer. Essentially, these manufacturers create a significant portion of a final product’s components, facilitating the product’s marketing and selling under a separate brand’s label. Understanding the role of OEMs is beneficial in business arrangements and in creating a competitive market structure. It can lead to quality improvements, cost savings, and foster innovation. Hence, the concept of OEMs is vital in procurement strategies, global supply chain management, and strategic business partnerships, playing an integral role in industrial economics.

Explanation

Original Equipment Manufacturer (OEM) plays a vital role in the manufacturing and production industry. Its primary purpose is producing components or parts that are then used in the creation of the final products sold by another company. For instance, if an automobile manufacturing company does not produce certain car parts like tires or batteries internally, they may order these components from an OEM which specializes in making them. Thus, an OEM is a company whose goods are used as components in the products of another company, that company then sells the finished item to users.The usage of OEMs is beneficial for the final product companies as it allows them to focus on their core competencies while outsourcing the production of certain parts to specialized manufacturers, ensuring high quality and cost-efficiency. This not only reduces their production time but also enables them to offer the final product at a competitive price in the market. Additionally, the OEMs themselves can take advantage of economies of scale, producing bulk quantities of a single product for various companies. Hence, the OEM business model is a critical asset for various industrial sectors, providing specialized production capabilities, cost-effectiveness, and market efficiency.

Examples

1. Apple Inc.: This leading technology company is a prime example of an Original Equipment Manufacturer. They produce the internal components of their highly popular and globally recognized iPhones in their own manufacturing facilities. Apple designs and manufactures the original parts, like A-series processors or retina displays, and assembles the phone itself.2. General Motors: Known for manufacturing original auto parts and vehicles, General Motors is one of the biggest OEMs in the automobile industry. They produce various well-known car models alongside original parts specific to each model. Dealerships and mechanic shops often source parts directly from GM to ensure quality and compatibility.3. Whirlpool Corporation: Whirlpool is an American multinational manufacturer that produces a wide range of home appliances. They design and manufacture original parts for their refrigerators, washing machines, microwaves, and other appliances. They provide these original parts to appliance repair services and directly to consumers for replacement purposes.

Frequently Asked Questions(FAQ)

What is an Original Equipment Manufacturer (OEM)?

The term Original Equipment Manufacturer (OEM) typically refers to companies that produce systems, parts, or equipment that are marketed by another manufacturer.

Can you provide an example of an OEM in business?

Yes, a common example is car manufacturers, who often use certain parts from different manufacturers in the production of their vehicles. The manufacturers of those parts are considered OEMs.

How does the term OEM apply in the technology sector?

In the tech sector, OEM can refer to companies that manufacture hardware, software, or components used in the final product sold to the customer. An example would be a hard drive manufactured by Company A that is used in a computer manufactured and sold by Company B.

What is the difference between OEM and ODM?

OEM refers to companies that make a part or system to be used in a final product sold by another company (the re-seller). ODM (Original Design Manufacturer) is a company that designs and manufactures a product as per another company’s specifications.

How does an OEM benefit businesses?

OEM relationships allow businesses to reduce their time-to-market, save costs on research, design, and development, and help them to focus on their core business by outsourcing certain production aspects.

Are OEM products always of high-quality?

While there isn’t a guarantee, OEM-produced parts and components are generally of high quality since they are built to the specific requirements set by the manufacturer that will use them in their final product.

Are OEM products more expensive?

Not necessarily. It often depends on the supplier-manufacturer agreement, the quantity being purchased, and the type of product or component. However, because the products are often high-quality, they could potentially be more expensive than lesser-quality alternatives.

Related Finance Terms

  • Supply Chain Management
  • Product Licensing
  • Component Sourcing
  • Assembly Line Production
  • Aftermarket Support

Sources for More Information

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