OEMs and Vendors – From Tug of War to Partnership

Aditi Merchant

Published:, January 2023.

The relationship between an Original Equipment Manufacturer (OEM) and their tier 1 vendors is often fraught with conflict. It is very common to witness mistrust between the two entities, even though both need the other for their survival. This article’s main aim is to examine the reasons why each partner views the other in this way, as also to point out the ways in which an amicable and rewarding collaboration can be established.

Smaller Guy, Bigger Issues

Very often, the tier 1 vendors are significantly smaller in size, scale, revenue, etc. when compared to the OEMs that they support. Hence, they perceive themselves as at the mercy of the whims and fancies of the OEMs they work with. This feeling is reinforced every time the OEMs reschedule their production plans (OEM production plans are worked out based on a monthly/ three-month forecast. Forecasts often go wrong and don’t match real demand) and expect the vendors to adjust their deliveries accordingly. It also happens time to time that the vendors would have made some FG as per an earlier schedule; but because of such changes in plans, the OEMs, do not pick up or pay for that material. This blocks both storage space and working capital of the vendors.

Trying to meet deliveries of parts as per a new times line means that, the vendor will have to their change manufacturing plans as per which thy would have already sourced RM and optimized their production batches. This means that, some capital will be tied up in raw material that will now not get used, set up may have to increase and capacity utilization might be below expectation. Since most vendors service multiple OEMs, any the schedule change by one OEM can have cascading impact on the vendor’s ability to deliver orders from their other customers as well. The only way to try and prevent this is to work overtime and the incur extra cost and/or sacrifice their own after-market orders. However, in spite of all this, one or the other OEM may experience poor OTIF.

OEMs are Unhappy Too

When OEMs experience unreliability- either orders are not in time or they are not in full or both, this impacts their ability to manufacture their products on time and are compelled to reschedule their production plans so that their assembly lines do not go empty. Senior management teams have to waste their precious time and effort in chasing such vendors. Therefore, they start viewing their vendors as unreliable. To most OEMs this inability of vendors is manifest as a capacity issue- after all when they visit the vendors’ plants, they lok very busy. So, to solve this problem they urge their vendors to augment their capacity and/ or have capacity that is dedicated to their business. But Vendors (already struggling with the OEM’s way of working) are reluctant to add or dedicate capacity, as they are unsure whether the augmented capacity will be fully utilized by the OEMs. So, they in turn negotiate for a commitment from OEMs for a set volume of business that they can anticipate and for schedules that do not change. Both are not feasible for the OEMs, as demand dynamics change constantly, and they do not wish to compromise their flexibility to adapt to changing situations.

Thus, there is a virtual standoff between the two entities.

When at a stalemate, OEMs are forced to look out for more reliable partners. Added to that, if they can get the component parts cheaper, or if the vendors agree to a larger payment window, it is an additional bonus for them. Thus, over a period, OEMs tend to add more vendors or replace existing vendors. Strangely, these new vendors too, soon turn unreliable!

What is the Way Forward?

From the problems listed above, it is clear that to evolve a win-win solution for these, the following elements will have to be built into it:

  • OEMS should get near 100% On Time Delivery: This is the biggest pain point for the OEMs. OEMs are usually willing to support their vendors as long as the OTIF performance is good.
  • Increased Vendor productivity: To achieve excellent OTIF performance, however, vendors will have to increase their productivity.
  • Vendor costs should not go up: But at the same time, Vendors costs for doing business should not go up.
  • Long term partnership: The vendors will would also need some assurance that their partnership with the OEM is a long term one. Without this, they will not be in any position to put in additional investments to improve their productivity, reduce wastage, etc.

A Solution that Works

The way out of this seemingly impossible situation and to achieve the above objectives is to implement a ‘pull’ replenishment system, wherein the vendor replenishes raw material stock maintained by the OEM from his own FG stock based on daily consumption signals. To achieve this, the vendor can maintain a mutually agreed level of finished good stock of most of the items he has to supply to the OEM. And the OEM instead sharing a schedule, should provide the vendor visibility of the consumption data from his RM stock daily. A simple colour-based priority system can help the vendor understand the depletion status in the stock and react quickly. Anyway, with stock buffers in place at both the vendor’s and OEM’s end, lead times for manufacturing the component parts will come down dramatically to only that of the transportation lead time. so that there is no interruption to the OEMs production plans. Thus, OEM will experience with high reliability from these vendors!

The vendor, in his turn, will now not need to react to plan changes at the OEM, since he is buffered from it. Instead, he can schedule production batches according to the penetration into his FG stock buffer and based on his batching considerations. This will not only protect his productivity but also improve it. The FG buffer vendors have to maintain will usually be much lower than the slow moving/ un-lifted inventory that they generally end up carrying. However, with an assurance from the OEM that any left-over inventory from this stock will definitely be picked up or compensated for, will overcome any objection vendors may have about this.

Peace of mind for both vendor and the OEM!

It goes without saying, therefore, that it is in the interest of both parties to engage in long term business, and OEMs tend to increase the share of business of such reliable vendors.

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