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OEM vs. ODM: Which is best for your business?

13 Jun, 2022 | Business Tips

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If you’re a manufacturer, you need to make a lot of decisions about your products, production, and materials. All these decisions will be heavily influenced by the manufacturing model you choose.

The question is, then, which manufacturing model should you select? Original Equipment Manufacturer (OEM) and Original Design Manufacturer (ODM) are two popular choices, and both models come with their own set of risks and benefits. If you’re not sure which model is the best fit for your manufacturing business, this article will help you make an informed decision.

 

What is OEM?

OEM stands for Original Equipment Manufacturer, and it describes a  manufacturing process where products are specified by your customers. OEMs are ideal for businesses – especially startups – who have researched product design and specs, but lack the funds or expertise to run a production factory.

Companies can outsource manufacturing either domestically or internationally to places where skilled labor is in abundance – like China, for example. Thanks to OEM, businesses can get products manufactured that are tailored to their requirements, without actually being responsible for the production.

Clients usually work in tandem with OEM manufacturers to see that production quality meets their standards. These clients hold intellectual property rights, and the OEM isn’t able to resell produced goods to another party.

Apple uses OEM manufacturing

Apple is perhaps the most  popular example of an OEM.  This may come off as a surprise to many, but Apple outsources the manufacturing of its products – such as iPhones – to a Chinese company called Foxconn.

Apple is a big player in the technology industry, and its motto is “Think Different.” To live up to its slogan, Apple invests a lot of time and resources into R&D. Thanks to the OEM model, Apple focuses on innovation, and Foxconn takes care of the manufacturing. Apple also hires other OEMs to create subcomponents that are then used by Foxconn for production.

In this way, Apple retains its intellectual property and keeps their designs between themselves and the licensed manufacturer.

Benefits of OEM

From the client’s point of view, the OEM model provides them with complete control over their products’ intellectual property and customization. With OEM, products can be manufactured to match your exact specifications. This can help differentiate your product from the rest of the competitors – which is exactly why Apple prefers this method.

As a manufacturer, you don’t need to spend massive amounts of money on product R&D, since the client takes care of that. There can be times when you have to upgrade your hardware to sustain production, but you can cover such costs by including it in your price or charging an up-front amount for this.

Disadvantages of OEM

The downside of being an OEM manufacturer is that it can be resource-intensive. You have to  constantly adjust your manufacturing equipment and processes to match your clients’ needs. Even after incurring heavy expenses to optimize your manufacturing, you’re only able to sell to a handful of clients that license you for production.

The biggest risk is losing your OEM client. If that happens, you need to recalibrate your production process to match a new client’s requirements.

As an OEM client, you can spend more resources on research and development to create unique products. You also need to make sure your designs don’t get stolen by your competitors — who could possibly imitate and sell at a lower price. Because of this, your contract with OEM developers should include clauses that restrict them from reselling or using your intellectual property for others.

 

What is ODM?

ODM stands for Original Design Manufacturer. Unlike OEM manufacturers, they aren’t dependent upon their clients to get product specifications.

ODM manufacturers have a broader scope of work; they perform the R&D and design, manufacture products, and then sell them to their clients without their own branding. Clients can then alter the product by adding their own branding elements and resell it as their own product.

ODM is ideal for businesses that want to enter the market quickly and don’t have the time or resources to extensively conduct R&D. Instead, they can source products from ODMs and rebrand them as their own.

ODM manufacturers are also called “white label manufacturers” because they allow other parties to brand their products. “Private labels” are similar, but a little different — they allow buyers to rebrand and sell products with a greater degree of customization.

Many fashion retailers use ODM

ODM’s are very common in the fashion industry. Many brands import clothes from countries where it’s available for cheaper – such as Bangladesh – and resell them after adding their branding.

I’m sure you’ve worn the exact same pieces of clothing on multiple occasions — and the only difference was the logo. ODMs are also very common in electronics. For example, if you search for “car chargers” on Amazon, you’ll find many similarly-designed products from different companies.

Benefits of ODM

From a manufacturer’s standpoint, an ODM model allows you to choose the products you want to produce. This way, you’re able to select and build a facility with tools and processes that maximize the efficiency of producing those products.

Over time, you’ll gain the manufacturing experience necessary to improve efficiency through automation and specialized manufacturing software.

Once your sales improve, you’ll speed up the process and further cover the manufacturing cost. Through white labeling, you can manufacture and sell tried-and-tested products that perform well in the market — without having to reinvent the wheel.

As a client, the most significant advantage of opting for an Original Design Manufacturing (ODM) is that you don’t have to worry about product development. ODM saves a lot of time and money up front.

By using an ODM manufacturer, you can procure products at a lower cost. With an OEM model, on the other hand, you have to build the design and go through the hassle of finding the ideal manufacturer for product development.

Disadvantages of ODM

If you opt for the ODM model as a manufacturer, you’ll incur high up-front costs. You’ll also need to go through an expensive research and development process to find products with potential to sell. After the expensive R&D, you then need to search for clients who might want to purchase those products from you.

From the client’s perspective, ODM allows companies to get products at a lower cost; however, the lower cost comes with a catch – it often requires a minimum order quantity (MOQ).

Why do the manufacturers come up with this restriction? The concept of economies of scale suggests an inverse relationship between the quantity manufactured and the cost of manufacturing. Thus, if you produce more units, the overall cost of production decreases.

As the ODM manufacturers produce in larger quantities, they make products at a lower price per unit. However, more production also increases the risk of more unsold inventory. The minimum order quantity acts as a safeguard that reduces the odds of unsold stock.As a brand, it can also be challenging to create differentiation for ODM products. This is because your competitors can also source the same exact product from your manufacturer and offer it at a similar price.

 

Choosing between OEM and ODM

Criteria  OEM ODM
Definition Original Equipment Manufacturer — makes the products as specified by the buyer. Original Design Manufacturer — designs and produces goods which are leased to others in the form of white-label or private label products
Product design Provided by the client/buyer Designed by the ODM manufacturer
Product specifications Provided by the client/buyer Decided by the ODM manufacturer
Intellectual property ownership Intellectual Property is owned by the client/buyer Intellectual Property is owned by the ODM
Research & development Done by the client/buyer Done by ODM manufacturer
White labeling / Private labeling OEM manufacturers cannot sell what they manufacture for clients through white labeling or private labeling. ODM manufacturers offer their products to others through white/private labeling. The buyers can add their branding and resell.

Choosing OEM or ODM depends on resource availability and time constraints.

As a client, OEM is a good option if your company has plenty of resources to perform R&D, and come up with a strategic time-to-market plan. The OEM model empowers manufacturers to create specialized manufacturing units with cutting-edge technology to produce items that exceed industry standards. By choosing this mechanism, you have the opportunity to become a top player in your niche.

ODM may be the best choice for businesses that are running short on time and resources. The ODM approach is commonly used, for example, if you plan to start an FBA (Fulfillment by Amazon) business.

On the other hand, the ODM model is suitable for manufacturers who have great product ideas with no intention to invest in marketing to build their brand. Instead, they offer their products as either white label or private label to other businesses and let them resell with their own branding.

 

Improve your manufacturing with DEAR Systems

Whether you choose ODM or OEM, you’ll have to invest a large sum of money upfront to buy equipment and raw materials. To make the most out of your investment, you need to streamline your manufacturing process, minimize wastage, and maximize production.

DEAR Systems can help you optimize your manufacturing process. It provides you with a complete view of your entire production factory and allows you to create an advanced bill of materials for your subassemblies and inventory. It’s very important to get a bird’s eye view of all your raw materials and labor.

DEAR systems will also allow you to estimate your inventory levels and manufacturing costs. To ensure that production runs smoothly, DEAR systems automates reordering processes for your components. Plus, you’ll be able to generate extensive manufacturing reports to plan your production strategically.

If you’re interested in taking your manufacturing business to the next level, book a free consultation call with our experts today!

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