OEM Partnerships Are a Key Ingredient in the iPhone’s Success. What About for Your Medical Device?

Defining OEM Partnerships

An OEM sources some component of a product (hardware, software, or intellectual property), or sometimes the entire product from a supplier. These suppliers allow OEMs to do any number of activities such as:

And OEM suppliers can offer much more than manufacturing expertise. For example, Intel and ARM provide OEMs the processor architectures and designs that make all of these great products possible, and not just consumer products, but medical devices as well. The range of OEM medical products is as broad, ranging from vital sign measurement technology to highly-specialized components and everything in between. Here are just a few specific examples:

With so many different OEM suppliers available, how does an OEM like Apple choose a supplier like Foxconn? And are these the same factors in the medical device industry when an Insulet Corp. chooses to partner with Flextronics? Are there basic general principles common to all successful OEM partnerships and the products that they produce? Finally, and most importantly, what are key ingredients to identifying the right partner who will give you the best chance for your ideas and products to succeed in today’s dynamic healthcare market?

Reasons for an OEM Partnership

Before we delve into these questions, let’s consider why companies form these relationships. Fundamentally, they are trying to figure out how to serve a customer’s needs. In developing a solution, they consider whether it is better to buy, build, or partner with someone to start delighting customers with great products. There are a number of reasons to consider buying or partnering with a supplier including:

Generally, any issues that lie outside the company’s core competencies and talents may be better addressed by an OEM supplier. According to academic research, “commonly cited reasons for resorting to OEM manufacturers are the rising costs of product development, internationalization of markets, and shorter product life cycles.”¹  The reasons that an OEM decides to partner with a supplier are often as unique as the company and its strategy.

Peter Pachall highlights these nuances in considering Steve Jobs’s desire “to do for television sets what he had done for computers, music players, and phones: make them simple and elegant.”²

As Pachall points out, the decision to outsource a business task and work with an OEM supplier can be intertwined in a company’s strategy. It does not have to be such a significant decision for a company, as in this case. Regardless of impact, it is absolutely dependent on the company considering this type of outsourcing, its strengths, and its goals.

Case Studies of OEM Partnership in Three Different Industries

Once a company decides to externally source some portion of its solution from an OEM supplier, it needs to investigate and evaluate its options to choose a partner. While there is no magic formula, academic business research provides some insight on the relationships between OEMs and their suppliers. The following studies detail the characteristics of these relationships in three different industries.

Computers and Electronics. In a survey of 105 Taiwanese manufacturers, researchers identified that successful partners pursue one of four distinct strategies on which to focus their OEM business.⁴

In parsing out the data and identifying these strategies, they concluded that “interfirm collaboration… is the key to success.”⁵  Thus, choosing the right partner should focus on the supplier’s strategy and how it fits with your company in promoting cooperation and teamwork in the partnership.

Automotive. With the observation that OEMs and suppliers struggle to find the best ways to work with each other, researchers categorized the roles that suppliers play in an OEM’s product development to uncover best practices. An empirical study identified four types of suppliers along three attributes, nature of component product, its cost, and the nature of the OEM relationship (See Table I: Product types and supplier roles in product development: an exploratory analysis).⁶ 

In the automotive industry, the product or component type directly affects the relationship that an OEM has with its supplier. It plays a factor on the timing of the relationship between partners in the final product’s development as well as the depth of interaction and sharing between partners.

Industrial Manufacturing. And in a study of 393 manufacturing firms, the nature of the OEM relationship is studied through a financial lens.⁷ Researchers found that joint investment in development by both OEM partners —a supplier and its customer—resulted in increased performance, while specific investments by only one party reduced these same indicators of performance.⁸ Here, a mutual monetary commitment between OEM partners correlates with success. Having both parties invest in a product or technology’s development creates a tangible and meaningful connection.

Finally, the process for deciding on an OEM supplier has even been analytically modeled. An OEM translates its business strategy into “an appropriate set of metrics used to measure supplier performance.”⁹ The model optimizes this performance to determine the best fit. As this model and these studies highlight, there are many factors to consider in choosing the right OEM supplier: business strategies, the component or product sourced, and even financial investment.

OEM Partnership in Medical Devices: An Industry Perspective

Of all these insights, which of these apply to the medical device industry? And what do they mean to an OEM evaluating suppliers? How should you consider these factors in deciding on a partner? From the perspective of a supplier like SunTech Medical, which

There are many shared characteristics across industries for OEM suppliers. In fact, many of the generally observed academic insights above fit quite well with industry experience. In practice, they simply translate to basic guidelines that apply for many partnerships.

Strategy Factors = Complementing Interests

Partnerships allow companies to further their joint interests by working together. Some suppliers’ strategy focuses solely on supporting OEM companies. Others decide to split their efforts between supplying OEMs and manufacturing their own-branded finished products. While this split strategy can cause conflicts of interest with their customers, both types of suppliers can be successful partners to an OEM. The most important assessments each party must make are 1) how much their interests are promoted by working with a partner and 2) how much conflict is there between the parties to gain from these complementing capabilities. From a more academic perspective, “one needs to understand more about the different mechanisms of interfirm collaboration and competition strategies and how to balance the two.”¹⁰ Regardless of the products that a supplier manufactures (whether solely OEM or additionally own-branded finished product), there will always be some conflict that partners need to learn to manage. When there are fundamental differences in business strategy between an OEM and a supplier, the potential conflicts may be too difficult to manage to cooperate successfully. Conversely, there are not likely to be many, if any, suppliers that can meaningfully contribute to an OEM product’s success without the presence of some conflict between the parties. Thus, building a successful partnership starts with being able to identify the differences between the OEM and its supplier partner and find common ground to effectively work together.

Product Factors = Key Similarities

The product serves as the basis for the OEM partnership. It is the reason the OEM company decided to outsource a component of their solution. This way, they are able to exercise their strengths, and the supplier theirs, in pursuit of their own goals. The academic insight above takes this point further. Although complementary capabilities allow for a mutually beneficial relationship, partners still need to work together to make this come to fruition. The timing and productivity of this interaction is the key. In addition to finding common ground to work together, they need to have a shared focus, especially in today’s healthcare environment. As Paul Levy eloquently describes Intermountain Health’s approach to patient care:

If this is the approach that successful providers are taking, it becomes even more important that companies developing healthcare solutions do as well.

Investment Factors = Mutual Trust

The final ingredient to making a successful partnership is finding a company that has demonstrated itself to be a reliable and complementary supplier. This may sound obvious, but there are two points to emphasize about this experience. First, it takes more than simply having the capital, technology, or products to be a successful supplier. It takes expertise in helping companies integrate and implement technology solutions. In healthcare, it also takes clinical expertise to innovate and develop solutions that can successfully be trialed and eventually proven clinically-effective and beneficial to the patient and business.

Second, while OEM suppliers have made specific investments in their products and expertise, experienced suppliers know when joint investment in a project is needed. They understand that successful partnerships are made only when both parties benefit. While a joint investment is a tangible sign of commitment between companies, the symbolic power of this mutual trust allows for success. It does not guarantee it, but it provides a solid foundation from which to build it. In an examination of the so-called “crisis of ethics” in business today, Robert Hurley argues that this is really a “crisis of trust.”¹² Subsequently, he puts forward five guidelines to build and demonstrate trust at the company level.

Exercising these guidelines in action with customers serves as the most tangible evidence that a supplier has earned the trust of its partners.

As in any relationship, finding the "right" partner is difficult. For companies considering an OEM partnership, there are clear guidelines for choosing a supplier who can augment not only a company’s abilities but also its chances to create products that truly benefit customers. This guidance is borne out in academic business research as well as industry experience. While the principles are basic, companies’ knowledge about them and their execution can make the difference in developing a product with iPhone-like success.

References

1. Lin B-W, “Original equipment manufacturers (OEM) manufacturing strategy for network innovation agility: the case of Taiwanese manufacturing networks,” Int J Prod Res, 42 (5): 943–957, 2004.
2. Pachall P, “5 Big Obstacles Standing in the Way of a Real Apple TV,” PC Magazine, <http://www.pcmag.com/article2/0,2817,2395238,00.asp#fbid=23C9POjwvO9>, 2011 Oct 25, Accessed 2011 Oct 26.
3. Pachall P, “5 Big Obstacles Standing in the Way of a Real Apple TV,” PC Magazine, <http://www.pcmag.com/article2/0,2817,2395238,00.asp#fbid=23C9POjwvO9>, 2011 Oct 25, Accessed 2011 Oct 26.
4. Lin B-W, “Original equipment manufacturers (OEM) manufacturing strategy for network innovation agility: the case of Taiwanese manufacturing networks,” Int J Prod Res, 42 (5): 943–957, 2004.
5. Lin B-W, “Original equipment manufacturers (OEM) manufacturing strategy for network innovation agility: the case of Taiwanese manufacturing networks,” Int J Prod Res, 42 (5): 943–957, 2004.
6. Laseter TM, Ramdas K, “Product types and supplier roles in product development: an exploratory analysis,” Engineering Management, IEEE Transactions on, 49 (2): 107-118, 2002.
7. Huang SH, Keskar H, “Comprehensive and configurable metrics for supplier selection,” International Journal of Production Economics,105 (2): p 510-523, February 2007.
8. Artz KW, “Buyer–Supplier Performance: The Role of Asset Specificity, Reciprocal Investments and Relational Exchange,” British Journal of Management, 10 (2): 113–126, June 1999.
9. Huang SH, Keskar H, “Comprehensive and configurable metrics for supplier selection,” International Journal of Production Economics,105 (2): 510-523, February 2007.
10: Lin B-W, “Original equipment manufacturers (OEM) manufacturing strategy for network innovation agility: the case of Taiwanese manufacturing networks,” Int J Prod Res, 42 (5): 943–957, 2004.
11. Levy P, “‘But they are different.’ Not!,” The Health Care Blog, <thehealthcareblog.com/blog/2011/06/10/but-they-are-different-not/>, 10 June 2011, accessed 14 Nov 2011.
12. Hurley R, “Trust Me,” Wall Street Journal,<http://online.wsj.com/article/SB10001424052970204138204576603031565507232.html?mod=dist_smartbrief>, 24 Oct 2011, accessed 5 Nov 2011.

Tony Francisco is senior product manager, OEM, SunTech Medical Inc. (Morrisville, NC). 

Image from Flickr user Yutaka Tsutano.