Contract Manufacturing vs OEM: What’s the Difference?

There are many ways for businesses to manufacture a product. While fabricating products in-house may work for some, numerous businesses have chosen to outsource this work to machine shops as partners to either produce the entire product or just certain components. The two main options involve either working with a contract manufacturer or with an original equipment manufacturer (OEM).

For companies in need of machine shop manufacturing, it’s essential to understand the difference between working with an OEM and contract manufacturing. Contract manufacturing advantages are many and varied, though sometimes using an OEM as a partner may be the better option for some manufacturers. So, what is the difference between an OEM and a contract manufacturer? Read on to find out.

What is the Difference Between OEM and Contract Manufacturers?

Though there’s considerable overlap between both these manufacturing practices, there are differences between an OEM and a contract manufacturer. Generally, contract manufacturing involves subcontracting only part of the production process to a vendor. Often, this sort of outsourcing occurs when a company wants to bring a partner with greater expertise into a narrow part of the production process. The fact that a certain production stage may be particularly labor-intensive is often another reason certain stages of fabrication aren’t done in-house. While these both are factors, one of the greatest benefits of contract manufacturing concerns the cost it takes to invest in equipment, materials, and other resources used in production. These are the main reasons companies outsource their product manufacturing. It allows businesses to make capital investments and apply these to activities that add value, like research and development, while also reducing labor costs.

An OEM manufacturer, on the other hand, usually makes the entire product based on their client’s requirements. The client hands the OEM their designs and specifications for a product, with the OEM then producing the entire product in their factory. Yet there are also various levels of OEM. Some modify a product – making changes to its dimensions or aesthetics, for example – while others invent what amounts to a new product. For products that don’t yet exist, it’s likely a company will be better off with an OEM as a partner.

When investigating OEM and contract manufacturing advantages, these things must be considered:

• Anticipated level of control over manufacturing processes
• Differences from other products
• Enterprise model
• Industry
• Marketing
• Precision of product
• Product design

However, these differences aren’t cut and dry, especially when it comes to contract manufacturers. Contract manufacturers like Staub Precision Machine offer advanced design capabilities that allow us to take on roles normally ascribed to OEMs. So, when looking into whether to utilize an OEM or contract manufacturer, it’s important to also look at each vendor’s individual competencies to understand what will work best for a specific product or business. The advantages and disadvantages of individual vendors should be weighed prior to making any firm decision on partnering with an OEM or contract manufacturer.

Benefits of Contract Manufacturing 

To make production more efficient and economical, many companies turn to contract manufacturing, particularly those with specialized technical knowledge. Among these specialty skills is precision machining, especially when a product requires particularly complex components. For such applications, product designers will often utilize contract manufacturing. Advantages in such arrangements stem from the experience, knowledge, and skills the contract manufacturer brings to the table. In such agreements, the contract manufacturer is assigned a certain phase – or perhaps all phases – of production, while the company that designs the product then often concentrates more on its marketing and sales.

Some other contract manufacturing advantages include: 

• Competing interests aren’t an issue, as the contract manufacturer doesn’t deal with product and design specifications.
• More control over aspects of manufacturing subsystems and subcomponents like throughput, quality, and expenditures.  
• Not having to share intellectual property or product liability with vendors means the partnership simply involves business services.
• Tending to be more flexible when it comes to supply chains, such as contract manufacturers’ greater willingness to provide customized specifications, utilize consigned components, and work with suppliers preferred by their customers.

Contract manufacturing advantages can be particularly apparent when a company brings a new product to the market, as they tend to follow their client’s instructions closely.

Specialization

Most often, contract manufacturers will have specific capabilities that allow them to fabricate complicated parts and products, often of higher quality than an OEM, within their area of expertise. One of the advantages of contract manufacturing is that they are experts at what they do, with an extremely well-trained workforce who can meet even the most arduous standards. With such specialization, product manufacturers know that they can rely on the quality of work from the vendors who do their contract manufacturing. Advantages also often include cutting-edge technology for the specialty skills they do.

Scale

Whether scaling up or down production, it’s easier to do with contract manufacturing. The advantages of a contract manufacturer’s specialization are limited only by the agreement made between them and the client. This means if the company that designed and is paying for production has the means to pay for a larger production run, the contract manufacturer will more than likely be able to accommodate the request. Larger production runs should also lower the price per piece as well.

Economical & Efficient

With specialized capabilities and the ability to scale operations, these advantages of contract manufacturing also ensure products are delivered at lower costs and in less time. Using a contract manufacturer allows makers of products to save on labor, materials, and technology during the fabrication process. It also makes the whole process of bringing a product to market more efficient, cutting the time that it takes from concept to shipping the first finished product.

Advantages of OEM Manufacturing

Products made by OEMs benefit from economies of scale, with their larger production runs meaning they can fabricate components and whole products quickly and inexpensively. As with contract manufacturing, the advantages include not needing expensive infrastructure or specially trained workers, as the OEM provides production facilities and labor. Both components and finished goods will generally be top-quality as well.

Typically, OEMs also offer the following:

• Capabilities that allow for greater variation in product design to support better profit margins.
• Customization of products can be done more easily with more opportunities to differentiate categories of the initial product.
• Established a supply chain for components and other elements involved in product development that lessens the time it takes to bring to market.
• Excellent logistics capabilities and an established supply chain mean finished products are shipped quickly to retailers and end users.
• Insight into design and production within their particular area of expertise.

Working with an OEM can be an excellent way to ensure the quality of both parts and products, though for certain cases the advantages of contract manufacturing are greater.

Advantages of Contract Manufacturing Over OEM Manufacturing

Though OEMs may provide additional assistance in the design phase and a certain amount of product customization, contract manufacturing has definite advantages. Advantages like a lower cost often result because the contract manufacturer simply makes the product according to what their client requires and is not involved in the design phase. Additionally, OEMs often require a minimum order, which can lead to higher overall costs.

Oftentimes product customization in an OEM happens due to factors that don’t necessarily match market conditions. This makes working with a contract manufacturer more straightforward, as there’s normally a strict adherence to the contract. Because the supply chain is more exclusive with an OEM, there may also be less understanding of what the end user requires in a product. Again, this isn’t an issue normally found in contract manufacturing.

The best contract manufacturer for a job will: 

• At all times fabricate faultless products promptly.
• Know legal and regulatory requirements that apply to a product.
• Understand what the manufacturer’s customer wants.
• Without exception, meet or exceed all requirements.

The advantages of contract manufacturing and OEM partnerships should be weighed against each other, as with the former it’s simply business while the latter involves a close relationship that can’t as easily be ended. For contract manufacturers, the only responsibility they have for their clients is ensuring that products are made according to specifications within the bounds of a signed agreement. One major contract manufacturing advantage has to do with intellectual property rights, which the client rather than the manufacturer keeps. In the end, the right contract manufacturer is the one who does the job right.

The Staub Advantage for Contract Manufacturing

The advantages of using Staub Precision Machine Inc. for precision machining are numerous. Whether it’s our advanced machinery, collaborative capabilities, cutting-edge automated techniques, or helpful customer service, Staub has what you need to make complex components quickly and accurately. 

Not only can Staub provide specialized processes, but we also combine these specialized processes to benefit our customers. We view contract manufacturing not just as the fabrication of a single component, but as a means to provide multiple services and processes to our customers so that they can keep much of your manufacturing in-house. To learn more about what benefits we bring as your contract manufacturer, contact the experts at Staub.