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Know The Difference: OEM Manufacturer And Contract Manufacturer

by | Aug 26, 2022 | Contract Manufacturers | 0 comments

There are two essential types of manufacturing: Original Equipment Manufacturing (OEM) and Contract Manufacturing (CM).

What we cover in this blog?

Even if it sounds ideal, not every business or organization has the capabilities, finances, or time to manufacture everything in-house, particularly in the manufacturing base. It might be substantial to invest in equipment, machinery, and experience.

So, What is Contract Manufacturing?

How does it work?

Who are Original Equipment Manufacturers?

How do you differentiate between Contract Manufacturer and OEM Manufacturer?

The following article gives us a concise definition of all of the above.

Contract Manufacturing (CM)

Manufacturing is a multidisciplinary and multi-approach field. As a leading contract manufacturerof various dynamics, we are frequently asked to explain the relationship between various manufacturing strategies.

Today, let’s understand the two essential types of manufacturing: Original Equipment Manufacturing (OEM) and Contract Manufacturing (CM).

Contract Manufacturing entails outsourcing a portion of the production of a product to a third party. Numerous businesses employ this method to delegate labor-intensive production tasks to a third party, sometimes known as a Contract Manufacturer (CM).

A benefit of contract manufacturing is that it enables businesses to make and sell valued goods without investing in their equipment, machinery, and other production resources.

Outsourcing production enables the manufacturer to free up capital, reduce labor expenses, and allocate greater resources to Research and Development (R&D) and other value-adding activities.

Who Is An OEM Manufacturer?

OEM stands for Original Equipment Manufacturer, which implies that a factory manufactures a product based on the client’s specifications.

When you get into an OEM arrangement with a factory, the client is expected to supply the factory with a complete product specification sheet and their product design.

There are different levels of the original equipment manufacturer (OEM), ranging from using a factory-made product with considerable modifications, such as changes in shape and dimensions, to inventing a nearly new product.

If you are developing a product that does not currently exist on the market, you will likely engage in Original Equipment Contract Manufacturing.

Many OEM projects require the creation of specific molds or another tooling to manufacture the product. These must be created before production begins, and the buyer always pays for them.

In some instances, the manufacturer will cover the cost of molds and include it in the selling price.

Also, OEMs may manufacture subcomponents for their clients’ use in their manufacturing processes.

What The OEM Client Does:

  • Product development
  • Market analysis
  • Marketing
  • Testing the product

What OEM Service Manufacturer Does:

  • Implements the product
OEM and Contract Manufacturer's ultimate goal should be customer satisfaction

OEM vs. Contract Manufacturing (CM)

Contract Manufacturing (CM) goes beyond Original Equipment Manufacturer (OEM)!
While an OEM may offer customizable items or provide additional assistance throughout the product design phase, a CM is simply a Contract Manufacturer.

If you operate as a CM, clients approach you with product specifications, and your only responsibility is to provide the product.

The client keeps all Intellectual Property (IP) rights but must submit all design specifications in exchange.

To get a better grip on the context, let us look at the advantages of each of the manufacturing processes;

Advantages Of Choosing Contract Manufacturing

Some of the perks of outsourcing to the Contract Manufacturers are listed below;

  • Greater Supply Chain Management: Contract Manufacturers are willing to take consigned parts, work with customer-designated suppliers, and provide more tailored part specifications, drawings, etc.
  • Better Subsystem And Subcomponent manufacturing control, including cost, quality, and throughput.
  • No Shared IP Or Product Liability means the buyer can manage the relationship in business terms.
    • The buyer provides design and product specifications, and the contract manufacturer has no competing business to cause conflicts of interest.

Advantages Of Choosing OEM

As a general rule, an OEM provides:

  • A well-established, sophisticated supply chain of essential components and elements has been applied to new product development to shorten turnaround time.
  • Has both design and manufacturing understanding of products in the specified category.
  • Their expertise and supply chain allow for a relatively quick time to market.
  • Utilizes the supplier’s existing supply chain and category expertise to lower costs, possibly including components with ubiquitous needs.
  • Allows for greater levels of customization and, consequently, greater opportunities for product differentiation.

OEM allows for greater design freedom and differentiation, often supporting stronger margins while leveraging the supplier’s existing supply base and experience for cost savings and reasonable time-to-market.

Although it requires a greater investment and customer participation, it allows the client to stand out uniquely more in the current market dynamics.

When choosing the type of manufacturing service, there are several essential considerations:

  • Your industry and enterprise model
  • Your emphasis on marketing, product design, and competitive differentiation
  • Your desired level of manufacturing process management
  • Product precision and exclusiveness (s)
  • Your IP’s level of sensitivity

Above all, we still may wonder why we need contract manufacturers and how they add value to our business.

The Final Footprints

Now that we’ve reviewed the definitions and purposes of these two essential manufacturing strategies

Here are some final takeaways to help guide your search for an ideal manufacturer to optimize your production.

The right Contract Manufacturer will:

  • Understand customer, legal and regulatory specifications
  • Meet and exceed these requirements without exception.
  • Deliver flawless products on time, always.

Regardless of the attributes and services provided, your Contract Manufacturer’s ultimate goal should be customer satisfaction and quality service.

Looking to connect with the right manufacturing partner?!

Violin Technologies is here to serve you!

Violin Technologiesis an ISO 9001:2015 certified company with factories located in Chennai, India, and a warehouse in Wooddale, Illinois, USA. We provide end-to-end manufacturing/ supply chain partnerships. Click here to know more about us and contact us for further information.