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When your contract manufacturer becomes your competitor.

Benito Arruñda1, Xosé H Vázquez

  • 1Universitat Pompeu Fabra, Barcelona, Spain. benito.arrunada@upf.edi

Harvard Business Review
|September 14, 2006
PubMed
Summary

Original equipment manufacturers (OEMs) can benefit from contract manufacturing (CM) by reducing costs and focusing on R&D. However, OEMs must carefully manage CM relationships to prevent risks like intellectual property theft and loss of market share.

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Area of Science:

  • Business Strategy
  • Supply Chain Management
  • Industrial Economics

Background:

  • Original equipment manufacturers (OEMs) often start by outsourcing production to contract manufacturers (CMs).
  • Companies like Lenovo and SAIC exemplify the shift from anonymous makers to independent brands.
  • This evolution highlights the complex dynamics between OEMs and their CMs.

Purpose of the Study:

  • To explore the dual nature of relationships between original equipment manufacturers (OEMs) and contract manufacturers (CMs).
  • To identify the benefits and risks associated with outsourcing manufacturing.
  • To provide insights into managing these strategic partnerships effectively.

Main Methods:

  • Conceptual analysis of business relationships.
  • Case study examples (Lenovo, SAIC).
  • Examination of OEM-CM interdependence.

Main Results:

  • Outsourcing manufacturing to CMs offers OEMs benefits like reduced labor costs and increased focus on R&D, design, and marketing.
  • Risks include CMs pursuing other clients (promiscuity), distributors shifting to CMs (infidelity), and IP theft (betrayal).
  • OEMs remain reliant on CMs for specialization and competitiveness.

Conclusions:

  • OEMs must strategically manage their relationships with CMs to mitigate risks.
  • Key strategies include protecting trade secrets, cautious partner selection, and balanced collaboration.
  • Effective management ensures OEMs remain competitive without empowering CMs excessively.