The OEM Business

A quote from the General Motors Document »Working and Winning Together«:


»Any successful business relationship is a two-way street. While GM employs a variety of tools and programs to choose, support and strengthen valued suppliers, those same suppliers represent a pool of talent and innovative ideas that, in turn, help to support GM.«


There are two ways of looking at the relationship between OEM and supplier, which at first sight may seem to be contradictory. Firstly, there is a strong desire to buy at the lowest cost. Secondly, OEMs want to buy from suppliers that can provide the best and most innovative materials and components to go into their products. The first priority suggests a »natural« adversarial relationship, while co-operation is needed to fulfil the second priority.


The focus on the price paid to suppliers is natural, given the assembly nature of OEM business. In the table to the right we show just how important the cost of raw materials and components is in the business profile of the largest cable buyers.


It should be noted that in 2003, for the companies covered, on average around 75% of OEM company revenue was allocated to purchases of goods and services. The figures were even higher for 2004, as the price of commodities such as steel, base metals and polymers had escalated. As the relative costs of materials are so high, quite small differences can have a major impact on profitability. In the OEM business overall, net profits are quite small, averaging around 3% of revenue in 2003 (and slightly more in 2004).


This means that a reduction of just 1% in the cost of raw materials and components should result in a 20-30% improvement in profitability: Hence the focus on cost.