The primary objective of the vast majority of manufacturers of original equipment (OEM) is growth, and this means new business areas and new customers. However, success understood in this way often has a different side, namely the inability to meet growing demand.

For this reason, manufacturers of original equipment quite quickly face a choice: they can either develop their own production, hire employees and engage in new technologies, or.... opt for outsourcing electronics manufacturing.

The second option is often more cost-effective and advantageous, as it not only allows for increased throughput, but frees the OEM from the obligation to assemble all the resources necessary for production. However, switching from in-house production to outsourcing electronics manufacturing is always a difficult decision and it is therefore worth looking at the advantages and possible disadvantages of doing so.

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More time and resources for product development

Outsourcing electronics manufacturing allows contract manufacturers of original equipment to do what is most important to them, which is to focus on developing existing products and services, designing new ones, as well as marketing and sales. As the responsibility for production, quality and delivery falls on the contract EMS provider, contract manufacturers of original equipment can develop and launch new products ahead of the competition with peace of mind, track and analyse trends and deliver their products in ever shorter timeframes. And, above all, take care of capricious customers.

Expertise of the contract EMS provider

EMS service providers can take over the tasks of manufacturing, product inspection and testing and supply chain management from contract manufacturers of original equipment. They are also able to cope with changing requirements and quickly adapt production capacity to project specifications and respond flexibly to changes in the materials market and changes in demand for OEM products.

They also have the systems and management solutions to control quality at all stages of production, material flow, supply chain management, and a strong position in the materials market. Additionally, they are able to optimise production processes, build solutions to customer specifications, source alternative material sources, and offer the OEM a range of value-added services.

Value-added services

The systems, procedures and management solutions used – often built up over years based on organisational competence and good practice – allow EMS providers to offer many value-added services, such as:

Supply chain management

An OEM that chooses to self-manufacture has to set up the entire supply chain itself, take care of the quality and timeliness of deliveries, as well as control the delivered materials and store them properly. This is not only difficult, but is associated with considerable costs, as it requires the hiring of specialists and investment in ERP systems, as well as their correct configuration.

In contrast, an experienced EMS provider has a base of verified suppliers and a strong negotiating position already in place. At Assel, we carry out regular supplier audits and have based our claims process on NCR reports and 8D methodology.

Adapting manufacturing to fluctuating demand

Contract EMS providers are able to react quickly and flexibly to demand swaps at the OEM, which has a direct impact on overall costs. And by running the MRP (Material Resource Planning) system loop on a daily basis, Assel can not only make economically sound and appropriate purchasing decisions (accelerating and delaying deliveries, for example), but also manage production and excess material accordingly.

Responding quickly to changes in demand, in turn, allows an OEM, for example, to deliver a larger batch of products to the market and gain a competitive advantage.
 

Surplus material management

Assel uses an ERP system (Microsoft Dynamics AX) for proactive material planning integrated with an MES (Manufacturing Execution System) for tracking, managing and monitoring materials in the production process. This not only enables a rapid response to changing demand, but also minimises unused excess material, resulting in lower overall costs for contract manufacturers of original equipment.

Managing production and material during production

Adequate production management allows for the timely delivery of products ordered by the OEM and includes:

• planning of material requirements
• planning of necessary human resources
• control of individual production stages.

Optimised control of the production process enables:

• precise control of the production process
• efficient management of short-run production
• flexible reactions to changes in production and materials,
• high production quality
• reduction of OEM overheads due to minimisation of losses resulting from suboptimal material management in production
• ensuring conformity of materials delivered to the production line with the OEM's BOM, and
• reporting on the progress of subsequent production stages

In turn, management of material in production is made possible by identifying material labelled appropriately at the time of delivery.

Traceability

For some contract manufacturers of original equipment, it is extremely important to implement traceability procedures that allow them to meet regulatory requirements, but also to provide an efficient after-sales service. At Assel, we have two levels of traceability controls in place, which not only allow us to track each wafer through the production process, but also to record all installed components and their series.

Conducting inspections and tests

Current regulations and quality management systems oblige OEMs to carry out various types of inspections and tests on products arising during the production process. These include visual or manual inspections, inspections carried out by automated optical inspection systems, functional tests or in-circuit tests.

Contract EMS service providers are able to build test systems and design and execute tests according to the OEM's guidelines by taking over this responsibility from the OEM.

Support during product certification

Having certifications is currently necessary to market products, such as having the CE mark in the European Union. However, the need to meet certification requirements is linked to the introduction and maintenance of appropriate procedures, as defined in the regulations.

This is quite a complex process and EMS providers are able to effectively support OEMs during UL, TUV or ETL compliant audits and the preparation of the documentation necessary for certification.

Lower costs

Although costs are rarely the main factor behind the decision to outsource, working with an EMS provider allows OEMs to avoid fixed costs such as investing in new equipment, production halls and maintaining and training staff, including highly skilled production engineers or managers. And also operational costs.
This is particularly important if the OEM's demand is volatile, making downtime costs during periods of reduced demand potentially catastrophic.
In addition, many EMS providers are able to reduce costs by implementing Lean-based manufacturing processes, or using economies of scale in material procurement. This is also possible by:

• Eliminating unnecessary inventory and reducing work in progress
• Reducing production lead times and therefore being able to fulfil more orders
• Efficient risk management
• Flexible management of production volumes and supply chains
   

Flexibility

The success of an OEM depends on getting products to market quickly and responding to increases or decreases in demand for products and services.

EMS providers are specialists in production execution. They are able to flexibly adapt to new and changing customer needs and ensure the supply of suitable components, as they have broad access to the purchasing market, which puts them in a better purchasing position.

Adapting production to changing demand is also possible due to the ability to delay or accelerate deliveries.

All of this means that EMS providers are not only able to deliver a quality service in a flexible manner, but also reduce the cost of production, making the OEM more competitive.

There are many reasons why OEMs opt for outsourcing electronics manufacturing. However, ultimately by choosing to outsource, the OEM becomes a partner in a mutually beneficial collaboration where both parties focus on their strengths.

For the OEM, the manufacturing process is simply how products are brought to market. Delegating this responsibility to an EMS provider, – who has the resources, tools, procedures and experience – allows the OEM to put all its energy into the design and development of its products and services. And this is why it is a win-win cooperation.

See how to build a relationship between EMS and OEM: https://asselems.com/en/4-tips-for-a-good-relationship-between-ems-and-oem

What is the Difference Between an OEM and a Contract Manufacturer?

Whether you are in charge of a new product line, or are simply trying to bring costs down for an existing brand, your company probably has considered outsourcing all or part of a product’s manufacturing process to a third-party vendor. The hunt for a reliable vendor can get a little confusing at times when those vendors throw around terms like “OEM” and “contract manufacturer” without really being clear on what the difference is, and how the two relate.

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And to be honest, most manufacturers are unclear on the difference themselves. This is all the more reason to get clear on what terms like “OEM” and “contract” mean when talking about third-party manufacturing: A savvy product manager will be able to find just what they need, and find it more quickly, if they understand the relationship.

OEM Stands for “Original Equipment Manufacturer”…But What Does that Mean?

The acronym “OEM” stands for “original equipment manufacturer.” Depending on industry, this can mean different things: 

A Parts Manufacturer

In many industries, OEMs design and manufacture parts or sub-assemblies, which are then sold to other companies. This is common in computer hardware, as well as the automotive industry. So, while the computer on your desk might have a decal that says “DELL,” the hard drive inside is manufactured by Seagate, which is considered the OEM.

A Manufacturer That Sells an End Product

At the opposite end of the spectrum, some industries consider the OEM to be the manufacturer that owns the brand for a certain product. So Apple, for example, would be the OEM for typical Apple products such as iPhones and iPads. They own the designs and assemble the final product—even if other firms help to manufacture certain parts.

A Manufacturer That Sells Rebranded Products

Some industries are distributor-heavy. Sometimes a distributor will take an existing product and sell it under their own label, making them a private label distributor. The OEM, then, is the manufacturer that creates the product for the private label distributor.

A Manufacture with Equipment (but not Design) Capabilities

Sometimes, OEM is contrasted with “ODM,” which stands for “original design manufacturer.” The idea is that an OEM has the equipment and tooling in-house needed to create a product but will need to be given specs by the client/buyer. An ODM, on the other hand, has design and/or formulation capabilities in-house, and so can better assist clients who need design help—especially important for new products coming to market.

Because “OEM” can mean different things, you should be sensitive to what a vendor might mean when they use the term “OEM.”

Contract Manufacturing: Outsourcing Some or All of Production

A much more straightforward term to use for outsourced manufacturing capabilities is contract manufacturer.

A contract manufacturer produces products for another company, under the brand name of that company. This is usually done for a set number of individual items produced, a set time period, or both. Hence the name: The company responsible for the manufacturing is doing so as specified in the contract with the buyer. They do not intend to market and sell the product(s) themselves. On the other hand, the company hiring the contract manufacturer might sell the product under their label, or might provide some other added value before further sale.

The services provided by a contract manufacturer may go beyond just producing the product, of course. Indeed, some contract manufacturers are considered “turnkey,” meaning they handle most of the critical elements in getting a product to market for their clients. This could include:

• Design and/or formulation
• Formalized processes for the receipt, approval, and storage of incoming materials
• Processes for approval of new materials and components
• Supply chain management
• Packaging/bottling and labeling
• Processes and procedures for product documentation and records, including lot control
• Quality control procedures
• Storage
• Fulfillment and logistical support

OEM vs. Contract Manufacturers: What is the Real Difference? And What Do You Need to Ask?

Given the different ways that “OEM” is used, it’s not surprising that the role of an OEM often is not clear. In some instances, an OEM will outsource products of a product, or some of its parts, and thus use contract manufacturers. In others, the OEM is supplying the parts that are assembled into a whole and then branded.

What really matters for the relationship is not what names are applied, but what each party to the arrangement has control of. Who, for example, “owns” the branding on the final product? And who owns the designs/formulations?  

Who Owns the Brand?

In an outsourced manufacturing situation, it should be your company’s brand on the product. A contract manufacturer might assist with bottling and labeling the product, but that should be done according to your brand guidelines. This should not be confused with OEMs that are acting more like channel partners, selling your product line under their own brand.

Who Owns the Designs/Formulations? IP Rights

In most cases, the buyer owns the designs or formulations that will then be used by the contract manufacturer. It is possible that the contract manufacturer helps the buyers with the design or formulation process. But the buyer still owns the rights to that design or formulation.

If You Need to Outsource, Look for a Good Contract Manufacturer

Outsourcing manufacturing of specialty cleaning products is especially common; if that’s the situation your company is in, then you will want to consider contract manufacturing. This is the most straightforward way of conceiving of your company’s relationship to the vendor.

Still, not all contract manufacturers do the same things, even if they specialize in the same range of products. When shopping for a vendor, it is worth asking what parts of the process they are comfortable with. What kinds of quality testing do they do? How much will they help with design and formulation? With bottling and labeling? With storage? Just how turnkey is the operation?

Asking these questions will get you to the right manufacturer, more so than worrying about what kind of label they carry—OEM, ODM, CM, or otherwise.

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