original equipment manufacturer

n. (Abbr. OEM)
A company that purchases computers or other complex components from manufacturers, adds other hardware or software, and sells the systems, often for specific applications.

(Original Equipment Manufacturer) The rebranding of equipment and selling it. The term initially referred to the company that made the products (the "original" manufacturer), but eventually became widely used to refer to the organization that buys the products and resells them. However, the OEM reseller is often the designer of the equipment, which is made to order.

Added Value or None

The reseller often does not add extra value to the equipment, but merely brands it with its own logo. The reseller's name is either placed on the devices by the contract manufacturer that makes the equipment or by the reseller itself. However, a reseller may indeed add value. For example, it might purchase a computer, add its own hardware and software and sell it as a turnkey system (see VAR).

There are numerous companies that specialize in OEM manufacturing and never sell anything under their own brand (see contract manufacturer). Many companies do both. They manufacture and sell retail, but also have a separate OEM division for goods that are private labeled.

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1. The original definition: a company whose products are used as components in another company's product. The OEM will generally work closely with the company that sells the finished product (often called a "value-added reseller" or VAR) and customize the designs based on the VAR's needs.

2. The more recent definition: a company that buys a product and incorporates or re-brands it into a new product under its own name.

Investopedia Says:
There isn't a typo here; the two definitions do contradict each other. This term has become very confusing since it now can be used in both contexts. OEM sometimes means the company that sells the component to the the VAR, and other times it refers to the VAR who is acquiring a product from an OEM. The reason for this is that "OEM" (the abbreviation) is sometimes used as a verb instead of a noun. For example, a manufacturer might say that it is going to OEM a new product, meaning it is going to produce a new product based on components bought from an OEM.

The term is most often used in the computer industry, where products such as Windows will be referred to as OEM. A company like Dell Computers will incorporate the Windows operating software into its computers and sell the computers to its customers with the Windows product installed.

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A manufacturer of parts that are used in the assembly of name brands, especially of cars and computers. It implies that the parts are of better quality than might be found on the replacement parts market.

An original equipment manufacturer (OEM) is a company that produces products or major components of products that are sold to customers as new. Some companies and consumers, when choosing replacement parts for their products or equipment, prefer to purchase parts that were made by the same manufacturer that produced the original equipment. The view is that components and other processed items may work better or fit better if they come from the OEM and meet the original standards, tooling, 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 Good Wrench 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 of both buyer and seller organizations 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.

Further Reading:

Convey, Mary Christine. "CAPA Refines Generic Auto Parts Definitions." National Underwriter. September 4, 2000.

Rayner, Bruce. "Some Industry Terms Need to Be Changed." Electronic Buyers' News. November 27, 2000.