OEM vs ODM explained – what's best for manufacturers?

OEM stands for Original Equipment Manufacturer, and ODM stands for Original Design Manufacturer. Here's what the two terms mean. Unpack ... 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Writtenby Melanie 11monthsago Categories BusinessTips CompanyNews Customers Other Partners Product Training Menu BusinessTips CompanyNews Customers Other Partners Product Training Writtenby Melanie June1,2021 7MinuteRead Asamanufacturer,youwilllikelyseetwoacronymsusedalotwhenreferringtopotentialbusinessmodels.TheseareOEMandODM,andthere’salotofdiscussionthesedaysaroundwhichiswhich–andwhetheroneisbetterthantheother.OEMstandsforOriginalEquipmentManufacturer,andODMstandsforOriginalDesignManufacturer.Here’swhatthetwotermsmean.UnpackmanufacturingindetailinourfulllengthModernManufacturingGuidehereUnderstandingOEMversusODMOriginalEquipmentManufacturers(OEM)sellhighlycustomisedproductsdesignedtosuitaclient’sspecifications.Meanwhile,OriginalDesignManufacturers(ODM)producetheirownproductsandessentiallyleasethemouttoclientsonaprivatelabelorwhitelabelbasissotheydon’thavetoinvestinbuildingtheirownconsumerbrand.OEMandODMaretwomanufacturingbusinessmodelsOEMexplainedindetailAnOEMisatypeofmanufacturercapableofcreatingaproducttoacustomer’sprecisespecifications–oratleastasclosetospecasthemanufactureriscapableof,givenanyequipmentorsupplyrestrictions.OEMsareavitalpieceoftheproductdevelopmentpuzzleforcompaniesthathavealltheskillsandresourcesrequiredtoideateaproductandperformtherequiredmarketresearch,butlackthemanufacturingcapacitytoproduceit(especiallyatscale).Essentially,OEMsallowabusinesstoproduceaproductandgetittomarketwithoutneedingtobuild,staffandrunafactory.Dependingontheclient’srequirements,anOEMmayproduceawhollycustomnewproductoraproductfromtheOEM’srangethathasbeenheavilycustomised.OEMsalsosometimesofferguidanceonproductdesigntoensuretheendresultcanactuallybemanufactured.Inanycase,theclientgenerallyretainstheirintellectualpropertyrightsasitistheirdesign,andwouldonlygiveuppartsoftheirIPiftheyhavehadtorelyontheOEMformorethanjustmanufacturing.Additionally,OEMsmayproducesub-components,fortheirclientstousewithintheirownmanufacturingprocess.WhattheOEM’scustomerdoes:ProductdesignMarketresearchMarketingProducttestingWhattheOEMdoes:ManufacturestheproductOEMversusContractManufacturing(CM)ContractManufacturing(CM)isastepbeyondOEM.WhileanOEMmayofferproductstobecustomisedormayotherwiseguideandhelpintheproductdesignstage,aCMisjustthat–amanufacturerforhire.IfyourunyourbusinessasaCM,clientsapproachyouwiththeirproductspecsandallyouarerequiredtodoisproducetheproduct.TheclientretainsallIPrightsbut,inreturn,mustprovidealldesignrequirements. ApplerunsanOEMmodelandemployFoxconntomaketheirphonesExampleofanOEMbusinessApple’srelationshipwithFoxconnisoneofthemostwell-knownexamplesoftheOEMmodel.AppleisamultinationalcorporationwithhugeR&Dresources,butitlacksamanufacturingcomponent.Instead,AppleoutsourcesitsmanufacturingtotheChinesecompanyFoxconnwhichthenbuildsproductssuchastheiPhone.AppleretainsitsIPandreceivesahigh-qualitymanufacturedproduct.Inaddition,ApplealsofrequentlyengagesotherOEMstoproducesub-componentsthatarethensenttoFoxconn.ODMexplainedindetailOriginalDesignManufacturersworkdifferentlyfromtheirOEMcounterpartsinthattheytypicallydoalotoftheproductdesignworkin-house,andinasenseleaseouttheirproductsforotherbusinesses(clients)tosell.CompanieswilloftenuseODMsaseitherawaytogetanideatomarketveryquickly,withlessR&Dcost,orbecausetheyseeanopportunityintheODM’slineofproductsanddecidetoapproachtheODMtoleasesomeofthem.Inthesecases,theproductsareactuallytheODM’s,andtheyhavesimplybeenalteredinsomeway–usuallyjustrebranded,butsometimesslightlycustomisedinotherways–tosuitthebrandthatwishestosellthem.Thisisalsoknownaswhitelabelmanufacturing. Thatsaid,notallODMsoperateexclusivelyaswhitelabelmanufacturers.Someofferacustomproductserviceforclientswhohavegreatideasbutlacktheresourcestodesignthem.Forexample,ifaclienthadanideafor,say,anewfootwearitembutcouldnotdesignitontheirown,theymightapproachanODM–almostlikepitchinganewbusinessidea.Ifaccepted,theODMwouldmanufactureittobesoldasaprivatelabelproduct(seebelow).Inthiscase,mostoftheIPrightsremainwiththeODM.WhattheODM’scustomerdoes:ProductideationSpotsanewmarketopportunityfortheirbrandWhattheODMdoes:R&DProducttestingProductmanufacturingWhiteorprivatelabelofferings AsanODMmanufacturer,youcanofferwhitelabelorprivatelabelproductsDoODMsofferwhitelabelorprivatelabelproducts?First,somedefinitions.It’scommonfortheterms‘whitelabel’and‘privatelabel’tobeusedinterchangeably,andwhiletheyarecloseindefinition,they’retechnicallydifferent.What’sthedifferencebetweenwhitelabelandprivatelabel?Whitelabel: Ifyouofferwhitelabelproducts,youaredesigningandproducinggenericproductsthatclients(i.e.retailers)canpurchasefromyouandre-sellundertheirbrand.YoucontroltheIP,multipleclientsmaypurchasethesameproduct,andcustomisationislimited–typicallyonlythebranding.You’rebasicallyproducingacompleteproductwithablanklabel,hencethename.Privatelabel: Ifyouofferprivatelabelproducts,it’sbasicallythesameaswhitelabellingexceptmoreexclusive.Whenyouengageinaprivatelabelmanufacturingcontractwithaclient,youareofferingyourproducttothemexclusivelyforre-sellingandyouwilllikelyofferagreaterdegreeofcustomisation.Aswe’vehinted,youcangeteitheroftheabovefromanODM.Inbothcases,theODMdoesmostoftheproductdevelopmentlegworkandretainsthemajorityofIPrights.Itis,afterall,theirproduct.Whenclientswanttotakeadvantageofamarketopportunityquicklywithoutminimalup-frontinvestment,theymayopttobuywhitelabelproductsthataremarket-readymoreorlessinstantly.However,theirproductmaylooklikeacloneofsomeoftheircompetitorsdependingonhowmanybusinessesintheirareaalsopurchasethesamewhitelabelproduct.Ifaclientfeelstheyhavealittleextratimeto‘getitright’,asitwere,theymightchoosethemoreexclusiveprivatelabeloptionandoptforanextradegreeofcustomisation–withtheaddedadvantageofexclusivity.Ofcourse,iftheyreallywantheavycustomisation,theymaylookinsteadtoanOEMinsteadofanODM.Learnmoreaboutmanufacturing: WhatisGoodManufacturingPractice,andwhyisitimportant?TheprosandconsofbecominganOEMTherearecostbenefitstobeinganOEM,fromaproductdevelopmentstandpoint.Oneofthebigprosisthatyouwillhavefewifanycostsassociatedwithresearching,designingandtestingnewproducts–clientswillbringtheirideastoyou,andyoujusthavetobeabletomakethem.Additionally,youmaynotneedtoupgradeyourfacilityyourselftoproducecustomproductsforbigclients.Alotofthetime,OEMspassonthecostofnewtoolingandmouldingequipmenttotheirclientsintheformofup-frontfees,orbybuildingthemintotheirpricing.Ofcourse,thismaymeantheyhavemoreleverageoveryourfacilityandcandemandthatyouonlyusetheequipmenttoservicetheirneeds,buteveninthatscenarioyou’regettinganupgradethatyoupaycomparativelylittlefor.Theflipside,however,isthattherearealotofOEMsonthemarket.TheglobalhealthcareOEMmarketaloneisworthUS$250billion,with40%offacilitiesresidinginNorthorSouthAmerica.Thatmeans,rightoutofthegate,youwillhavestrongcompetitioninalotofspecialistnichesandwillneedtoworkhardertodifferentiateyourselfandgrowyourcustomerbase. TheprosandconsofbecominganODMAsanODM,youwillbeabletoproduceahighlycost-effectivefacility.Becauseyougettochooseyourownproducts,youcanalsoselectandbuildequipmentandprocessesthatbestincreasetheefficiencyofproducingthoseproducts.Asyoubecomemoreexperiencedand,perhaps,specialised,youwilllikelybeabletocontinuetoimprovethisefficiencywithfurtherupgradessuchasautomationand speciallydesignedmanufacturingsoftware.Anotherwaytoincreasecostefficiencyistogetreallygoodatsellingyourwhitelabelproductstoclients.ODMswithwhitelabelopportunitiescanfindthemselvesexpandingrevenuerapidlycomparedtoothermanufacturersastheyareabletooffermarket-readyproductstoahostofbrandswithoutreinventingthewheelforeachcontract.Ofcourse,itallcomesatacost–andthat’soneofthemajorconstopointout.Theup-frontcostsofbecominganODMcanbesteep.Sellingyourownproductsmeansdesigningthem,whichmeansgoingthroughthecostlyR&Dprocessinordertofindmarketopportunitiesandproduceproductsthatyoucancapitaliseon.Thencomesthemarketingbudget,asyouseekoutclientstopurchasethoseproducts.Whichisrightformymanufacturingbusiness?Thisis‘howlongisapieceofstring’question,andyou’llneedtoidentifytherightpathforyourcircumstances.Ononehand,theOEMbusinessmodelenablesyoutobuildaspecialisedfacilitycapableofproducinghigh-qualitygoodsforpotentiallymajorbrands.Bytakingthispathyoucanbecomeanexpertinyournicheandfindyourbusinessassociatedwithsomeofyourindustry’smostbelovedproducts.Ontheotherhand,theODMmodelismoresuitedforbusinesseswithexpertisethatgoesbeyondmakingproducts,andhavebigideasfortheirownuniquewaystocapturemarketattention.Thisoftensuitscompaniesthatalreadyhavegreatproductideasbutdon’tnecessarilywanttoinvestthemarketingbudgetinbuildingtheirownbrand.TheycanpackageuptheiruniqueIPandsellitontoconsumersviathebrandstheyalreadyknowandlove.SourcesAlibaba.comGuidedImportsChinaSourcelinkSourcingHubJEMElectronicsThatCompanyecomdashFreightos.comMarketResearchFutureIntrepidSourcing Moreabouttheauthor: Melanie ArticlebyMelanieChanincollaborationwithourteamofUnleashedSoftwareinventoryandbusinessspecialists.Melaniehasbeenwritingaboutinventorymanagementforthepastthreeyears.Whennotwritingaboutinventorymanagement,youcanfindhereatingherwaythroughAuckland. Morepostslikethis TheCompleteGuideToCalculatingTotalManufacturingCosts Tocalculatetotalmanufacturingcostyouaddtogetherthreedifferentcostcategories:thecostsofdirectmaterials,directlabourandmanufacturing... IsBetterInventoryKeyToManufacturingSuccess? Manufacturingisrelativelyuniqueinthesensethatamuchhigherlevelofinventoryprecisionisrequiredtosuccessfullyscaleup. DigitalManufacturingandtheSmartFactoryin2022 ThisarticlewasupdatedinDecember2021toreflectchangingconditions,pricesandtrends.Fromoperationalintelligencetoadditivemanufacturing,... 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