As a manufacturer, you will likely see two acronyms used a lot when referring to potential business models. These are OEM and ODM, and there’s a lot of discussion these days around which is which – and whether one is better than the other.
OEM stands for Original Equipment Manufacturer, and ODM stands for Original Design Manufacturer. Here’s what the two terms mean.
Not the manufacturing acronyms you were looking for? Read about MTS, MTO and MTA here.
Understanding OEM versus ODM
Original Equipment Manufacturers (OEM) sell highly customised products designed to suit a client’s specifications. Meanwhile, Original Design Manufacturers (ODM) produce their own products and essentially lease them out to clients on a private label or white label basis so they don’t have to invest in building their own consumer brand.
OEM and ODM are two manufacturing business models
OEM explained in detail
An OEM is a type of manufacturer capable of creating a product to a customer’s precise specifications – or at least as close to spec as the manufacturer is capable of, given any equipment or supply restrictions.
OEMs are a vital piece of the product development puzzle for companies that have all the skills and resources required to ideate a product and perform the required market research, but lack the manufacturing capacity to produce it (especially at scale). Essentially, OEMs allow a business to produce a product and get it to market without needing to build, staff and run a factory.
Depending on the client’s requirements, an OEM may produce a wholly custom new product or a product from the OEM’s range that has been heavily customised. OEMs also sometimes offer guidance on product design to ensure the end result can actually be manufactured. In any case, the client generally retains their intellectual property rights as it is their design, and would only give up parts of their IP if they have had to rely on the OEM for more than just manufacturing.
Additionally, OEMs may produce sub-components, for their clients to use within their own manufacturing process.
What the OEM’s customer does:
- Product design
- Market research
- Product testing
What the OEM does:
- Manufactures the product
OEM versus Contract Manufacturing (CM)
Contract Manufacturing (CM) is a step beyond OEM. While an OEM may offer products to be customised or may otherwise guide and help in the product design stage, a CM is just that – a manufacturer for hire.
If you run your business as a CM, clients approach you with their product specs and all you are required to do is produce the product. The client retains all IP rights but, in return, must provide all design requirements.
Apple runs an OEM model and employ Foxconn to make their phones
Example of an OEM business
Apple’s relationship with Foxconn is one of the most well-known examples of the OEM model. Apple is a multinational corporation with huge R&D resources, but it lacks a manufacturing component. Instead, Apple outsources its manufacturing to the Chinese company Foxconn which then builds products such as the iPhone. Apple retains its IP and receives a high-quality manufactured product.
In addition, Apple also frequently engages other OEMs to produce sub-components that are then sent to Foxconn.
ODM explained in detail
Original Design Manufacturers work differently from their OEM counterparts in that they typically do a lot of the product design work in-house, and in a sense lease out their products for other businesses (clients) to sell.
Companies will often use ODMs as either a way to get an idea to market very quickly, with less R&D cost, or because they see an opportunity in the ODM’s line of products and decide to approach the ODM to lease some of them. In these cases, the products are actually the ODM’s, and they have simply been altered in some way – usually just rebranded, but sometimes slightly customised in other ways – to suit the brand that wishes to sell them. This is also known as white label manufacturing.
That said, not all ODMs operate exclusively as white label manufacturers. Some offer a custom product service for clients who have great ideas but lack the resources to design them.
For example, if a client had an idea for, say, a new footwear item but could not design it on their own, they might approach an ODM – almost like pitching a new business idea. If accepted, the ODM would manufacture it to be sold as a private label product (see below). In this case, most of the IP rights remain with the ODM.
What the ODM’s customer does:
- Product ideation
- Spots a new market opportunity for their brand
What the ODM does:
- Product testing
- Product manufacturing
- White or private label offerings
As an ODM manufacturer, you can offer white label or private label products
Do ODMs offer white label or private label products?
First, some definitions. It’s common for the terms ‘white label’ and ‘private label’ to be used interchangeably, and while they are close in definition, they’re technically different.
What’s the difference between white label and private label?
- White label: If you offer white label products, you are designing and producing generic products that clients (i.e. retailers) can purchase from you and re-sell under their brand. You control the IP, multiple clients may purchase the same product, and customisation is limited – typically only the branding. You’re basically producing a complete product with a blank label, hence the name.
- Private label: If you offer private label products, it’s basically the same as white labelling except more exclusive. When you engage in a private label manufacturing contract with a client, you are offering your product to them exclusively for re-selling and you will likely offer a greater degree of customisation.
As we’ve hinted, you can get either of the above from an ODM. In both cases, the ODM does most of the product development legwork and retains the majority of IP rights. It is, after all, their product.
When clients want to take advantage of a market opportunity quickly without minimal up-front investment, they may opt to buy white label products that are market-ready more or less instantly. However, their product may look like a clone of some of their competitors depending on how many businesses in their area also purchase the same white label product.
If a client feels they have a little extra time to ‘get it right’, as it were, they might choose the more exclusive private label option and opt for an extra degree of customisation – with the added advantage of exclusivity.
Of course, if they really want heavy customisation, they may look instead to an OEM instead of an ODM.
- Learn more about manufacturing: What is Good Manufacturing Practice, and why is it important?
The pros and cons of becoming an OEM
There are cost benefits to being an OEM, from a product development standpoint. One of the big pros is that you will have few if any costs associated with researching, designing and testing new products – clients will bring their ideas to you, and you just have to be able to make them.
Additionally, you may not need to upgrade your facility yourself to produce custom products for big clients. A lot of the time, OEMs pass on the cost of new tooling and moulding equipment to their clients in the form of up-front fees, or by building them into their pricing. Of course, this may mean they have more leverage over your facility and can demand that you only use the equipment to service their needs, but even in that scenario you’re getting an upgrade that you pay comparatively little for.
The flip side, however, is that there are a lot of OEMs on the market. The global healthcare OEM market alone is worth US$250 billion, with 40% of facilities residing in North or South America. That means, right out of the gate, you will have strong competition in a lot of specialist niches and will need to work harder to differentiate yourself and grow your customer base.
The pros and cons of becoming an ODM
As an ODM, you will be able to produce a highly cost-effective facility. Because you get to choose your own products, you can also select and build equipment and processes that best increase the efficiency of producing those products. As you become more experienced and, perhaps, specialised, you will likely be able to continue to improve this efficiency with further upgrades such as automation and specially designed manufacturing software.
Another way to increase cost efficiency is to get really good at selling your white label products to clients. ODMs with white label opportunities can find themselves expanding revenue rapidly compared to other manufacturers as they are able to offer market-ready products to a host of brands without reinventing the wheel for each contract.
Of course, it all comes at a cost – and that’s one of the major cons to point out. The up-front costs of becoming an ODM can be steep. Selling your own products means designing them, which means going through the costly R&D process in order to find market opportunities and produce products that you can capitalise on. Then comes the marketing budget, as you seek out clients to purchase those products.
Which is right for my manufacturing business?
This is ‘how long is a piece of string’ question, and you’ll need to identify the right path for your circumstances.
On one hand, the OEM business model enables you to build a specialised facility capable of producing high-quality goods for potentially major brands. By taking this path you can become an expert in your niche and find your business associated with some of your industry’s most beloved products.
On the other hand, the ODM model is more suited for businesses with expertise that goes beyond making products, and have big ideas for their own unique ways to capture market attention. This often suits companies that already have great product ideas but don’t necessarily want to invest the marketing budget in building their own brand. They can package up their unique IP and sell it on to consumers via the brands they already know and love.
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Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.