Introduction

Many leading brand OEMs outsource complete manufacturing and design of their products.

What is OEM? OEM (pronounced as separate letters) is short for original equipment manufacturer, which is a somewhat misleading term used to describe a company that has a special relationship with computer and IT producers.

Procurement function in OEM is very important.

Strategic Components

Supply contract can include the following:

• Pricing and volume discounts.
• Minimum and maximum purchase quantities.
• Delivery lead times.
• Product quality.
• Product return polices.

1. Buy - Back policy

Insight: In a case where retailer is making every decision, service level cannot be fully high, this is because [ \frac{C_s}{C_s + C_e} ] is the service level, and excessive cost ($$ C_e $$) is large.

To incentivize the retailer, (so that manufacturer can make more sale), manufacturer can “buy back” (greater than market value). This is called Buy - Back policy

2. Revenue Sharing

To increase the service level, manufacturer can choose to lower the price (to sell to the retailer) to sell more products. This enables the manufacturer to sell more, retailer to sell more, therefore possibly making more product. However, manufacturer is making less money, therefore has to be guaranteed to Revenue sharing. That is, getting fraction of revenue shared.