The world of sourcing can be a little confusing at times, here are some commonly used acronyms in the sourcing industry to help clear things up!

VAR - A value added re-seller is commonplace in the electronics industry but not exclusive to it. We can use Apple as an example; Foxconn manufacture their hardware, but a great deal of work goes into the software that the hardware is supporting. This software adds value, features and services to the existing product. This process will usually happen after the OEM manufacturing stage in the supply chain.

OEM - In manufacturing terms, an OEM is an original equipment manufacturer. The difficulty of defining this term is that there are two contradicting definitions that can be used for OEM.

1. The original definition of an OEM is this: A company whose products are used as components in another company’s product. There will be a close relationship with the OEM and the company that sells the final product and the OEM will often customise designs based on their VAR’s requirements. So this definition is most often used in products that must source many specialised parts from different suppliers that would be very difficult for them to manufacture on their own such as cars and computers.

The best way to explain this is with a practical example; for the sake of continuity let us use Foxconn. This company manufactures a large amount of goods for Apple and other companies and occupies the early stage of the supply chain. Now, even though Foxconn manufactured the goods, they are uninvolved with the marketing of the products which are then branded with the Apple logo. Therefore Foxconn is the OEM.

2. The more recent definition of an OEM is: a company that buys a product and incorporates or re-brands it into a new product under its own name. Following this, IBM defines the term as ‘a manufacturer of equipment that may be marketed by another manufacturer’. You will be most likely to hear this definition used in the sourcing industry of simpler goods that do not need many specialised parts such as furniture and toys. In this sense, the company that buys and re-brands the product had little to no input into the design process, it is more like wholesale buying and selling.

The easiest way to explain this would be to look on alibaba.com. For example you wish to place a 20,000 unit order of toy laser guns. You can of course try and arrange different styles with the supplier, but you are essentially just buying their product and branding it with your own packaging for sale.

SME - SME stands for small and medium enterprises and companies are classified this way by the European Union. It is also a term used by the World Bank, the United Nations and the World Trade organisation. A company within the European Union is classified mainly by the number of employees within the company and either turnover or balance sheet total.

 Source: http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/

Countries outside of the EU have different classifications for SMEs but the term is still used to the same effect. The United States Small Business Administration (USSBA) broadly classifies small businesses as any firm with 500 or fewer employees.

We hope that this has cleared up the meanings of some useful jargon, stay tuned to the blog for more information!

Check out this other blog we have written to explain other commonly used sourcing acronyms: http://www.chinaperformancegroup.com/2013/05/abbreviations-in-sourcing-business/