THE MECHANICS OF OEM MANUFACTURING

Original Equipment Manufacturer (OEM) manufacturing involves a company producing parts or products that are then marketed and sold by another company under its own brand name. 

OEM manufacturers are usually ‘MEGA MANUFACTURERS’ and work using the M2M (manufacturer–to–manufacturer) business model.  Here's how it typically works:

1. Product Design and Development: The company that wants to sell the product (referred to as the "BRAND" company) designs the product according to its specifications and requirements. This can involve everything from conceptualization to prototyping.  Product development and design can be accomplished by involving a industry specific product designers thru fees or subsequent royalties on future sales. Or, in can be done in-house.

2. Capital Investment: 

• Capital investment are financial resources allocated to the creation, enhancement, or modification of the product.
• Capital investments also include the amount of money needed market research, tooling cost, production equipment & facilities, and other product development.
• Capital Investments Dollars are may also be utilized for tooling costs, production facilities, the equipment to product the product to go to market for sales. 

Depending on the product and requirements, these investments can be substantial. In the contract furniture the average investments be between ($10 ~ $100) Million Dollars. 

In Summary, all these investments are covered in the final product price to the consumer.  Usually, based on industry, market research, and product life cycles.  In the contract furniture industry, over 90% of the “BRAND’s” product are produced on and OEM Basis.

3. OEM Contract Negotiation: 

The ‘brand’ company seeks out an OEM manufacturer capable of producing the desired product. 

The most important element in negotiating an OEM contract term is the type of ownership. Several ownership options can be utilized in whole or in combination.

• Full Ownership & Proprietorship: Means the ‘brand’ invests in all elements of the product except the manufacturing process and facilities. As such they also own all distribution rights worldwide. ‘They pay for everything – They own everything’.

• Partial Ownership: Means the ‘brand’ invests some elements, while the OEM manufacturer invests in the rest. Under this ownership model, the OEM require quantity guarantees (that’s OEM’s get their return on investment) and may also assign territory rights to the product, based on which the OEM may elect to produce the sell and market the products other than the assigned territories ONLY under the M2M classification business model. Not direct to the consumers, distribution channels, etc.

4. Production: Once the contract is finalized, the OEM manufacturer begins the production process including manufacturing or sourcing raw materials, components, assembly, testing, and conducting quality control checks throughout the process.

5. Branding and Packaging: After the products are manufactured, they are often shipped to the ‘brand’ company under their branding elements (logo, packaging design, etc.) to make them recognizable to consumers.

6. Distribution and Sales: Finally, the brand company sells the products through its distribution channels, such as retail stores, e-commerce platforms, or wholesalers. The ‘brand’ company is responsible for marketing, sales, customer service, and all other aspects of selling the product.

Throughout this process, the OEM manufacturer typically remains anonymous to consumers, who only see the brand company's name on the product. This arrangement allows the brand company to focus on marketing and selling the product without having to invest in manufacturing facilities or capabilities. Meanwhile, the OEM manufacturer specializes in production, leveraging its expertise and resources to fulfill the brand company's requirements.