menu close menu


Oem Supply Agreement

As long as technological innovation further increases the benefits of specialization, contract manufacturing by OEMs will often be a popular choice. Unfortunately, managers` incentives promote a comprehensive and non-critical approach to outsourcing decisions, which products need to be outsourced, which CMs they need to hire, and in what form – a market agreement, a strategic alliance or something in between. If OEMs share sensitive intellectual property with CMs, it is important that the relationship be confident and closed – but not so close that CMs lose contact with the market and contributions from other OEMs. Since these techniques are not foolproof, OEMs should treat their customers and distributors so that they are immune to calls from upstart CMs, and they should spread their risk by diversifying their product portfolio. Organizational agreements between OEMs and CMs range from single contracts – so-called market agreements – to more interdependent and ongoing pacts, such as framework agreements, joint ventures and other types of partnerships. A potentially renewable or non-renewable market agreement would involve, for example, the manufacture of a particular MP3 player, and the pact would include very specific technical and design details. On the other hand, a framework agreement could require the CM to produce multiple models of an MP3 player in a given year. However, a partnership agreement could require the CM to be the long-term and exclusive supplier of ANO MP3 players. In 1999, DaimlerChrysler (then as Daimler-Benz) commissioned contract manufacturer Magna Steyr to mount its Mercedes-Benz M-Class SUV. The first unit left the factory in just eight months after the initial enterprise agreement. In this case, a fixed-term contract was required for both parties to protect their investments. However, when BMW asked Magna to mount its X3, the parties prepared and signed a longer contract.

In this case, BMW Magna`s support for the advancement of four-wheel drive technology, which would give the X3 part of the road feel, was taken into account for the BMW automobile. Surprisingly, many strategic alliances are transformed into temporary market agreements. This is done for three main reasons: first, many OEMs seem to lose sight of the end goal of their long-term agreements and are beginning to push CMs to save money. As a result, CMs are beginning to feel that their investments in learning how to produce and improve a specialized or unique product do not generate returns. It is understandable that, under this type of pressure, CMs paid for all the concerns they had, for example by selling them directly to OEM customers. This is a particularly dangerous development for the OEM if it cannot easily find another competent CM – one of the main reasons for forming a long-term partnership. However, in principle, customer retention must be based on what distinguishes the product of an OEM from that of its competitors.


Comments are closed.