ODM, OEM, CM – Which type of manufacturer should you pick for your project?

10/22/2021
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Section 1

Overview

Contract manufacturing is a great solution for companies who do not have a full-service manufacturing and development team. It allows them to outsource their manufacturing operations to a producer that is well equipped to handle it. Having the right supplier with the right capabilities and the correct partnership model is crucial when starting a new project.

When choosing a supplier for your product, you may have come across acronyms such as OEM, ODM, and CM. These three acronyms each stand for a type of outsourced manufacturing business model – and the differences between the different models (primarily related to product design responsibilities) can significantly impact your choice of a manufacturer. Each of them— OEM, ODM, or CM — lets you exert a different level of agency over manufacturing, and each has their strengths and weaknesses. Some manufacturers may be operating using a combination of two (or more) manufacturing models simultaneously.

Section 2

So, what do these abbreviations mean?

In general, the key difference between the following manufacturing models is the ownership of the product design and intellectual property rights.

 

Type of contract manufacturing / Criteria

ODM

OEM

CM

Product design

Owned by the supplier

External design usually owned by customer

Fully owned by the customer

Product modification

The customer can usually request only basic changes

The customer gives input on specifications

The customer defines specifications

Tooling and other IP

Belongs to the supplier

Usually only external design owned by buyer

Belongs to the buyer

BOM

Customer has little to no control

The customer has limited control or input

Fully controlled by the customer

Category specialization

Specialized in a certain category

Specialized in a certain category

Wide range of product categories

Table 1: A quick comparison of ODM, OEM and CM manufacturing models.

 

  • Original Design Manufacturer (ODM)– the product design is owned by the supplier, and the customer may just be tweaking the design slightly, or buying straight off the shelf and labelling the product with their logo/brand. The design, tooling and other IP belongs to the supplier. For example, a company might look to buy an existing kitchen appliance from a supplier specializing in that category (e.g. kitchen blenders) and then look to customize that slightly with their own color scheme, logo or small modifications to the overall design. This would be an ODM project (“What Is an OEM, ODM, and JDM?”).

 

  • Original Equipment Manufacturer (OEM)– a new product is developed by the factory based on a design from the buyer but using the supplier’s existing category expertise, supply chain, etc. The IP belongs to the buyer, in most of the cases, usually as long as they are paying for the development, tooling and their contracts are in order (“China Manufacturing Contracts: Not So Simple”). To continue with the example above, in case the customer wanted to create an entirely new design of kitchen blender (shape, function, technical specs), they would pay a supplier with a background in kitchen appliances with experience in manufacturing blenders, to open new tooling and develop a new model owned by themselves. This would be an OEM project (“What is an Original Equipment Manufacturer (OEM)?”).

 

  • Contract Manufacturer (CM)– in contract manufacturing, the customer has full ownership of the design and BOM, and the manufacturer is solely responsible for manufacturing to the customer’s drawings and requirements, not for the product design or development. Pure contract manufacturers do not have their own product range or specific, narrow product specialities – rather than having their own products they market, they focus on providing a service – manufacturing, and providing products to customers in a wide range of categories. In this case, the IP clearly belongs to the customer, as they are the ones conducting product design, development, and evaluation. As an example, here, Foxconn manufacturing phones for iPhone is acting as a contract manufacturer, as it is responsible solely for the manufacturing side of the business – design and development is coming from Apple (hence the infamous “Designed in California” label on many of Apple’s products). Foxconn is not adapting an existing smartphone design or architecture to produce these products, they are not selling Apple a product, they are providing a service – electrical manufacturing – based on their expertise in that field (“Implementing Manufacturing and Supply Chain Materials Management”).
Section 2

1. Original Design Manufacturer (ODM)

1.1 Advantages

Under an ODM model suppliers can generally:

  • Manufacture an existing product without requiring much in the way of design or technical input, as the product offered is generally already on the market.
  • Can request minor alterations to an existing design, by personalizing a product with branding, color, and logo, adding a simple feature, altering the overall design slightly (e.g. creating a new handle shape, changing button design, etc.)
  • Allows for quick, surface-level differentiation and speed to market.
  • Leverage economies of scale and an existing supply chain to reduce the buyer’s cost
  • The fastest time to market, as development lead time is very limited
  • Generally lower MOQ requirements, as the supplier is often producing the same product for multiple buyers

As the product belongs to the supplier, the work the buyer needs to do is generally limited to the marketing and operations side. The factory should (key word being “should”) be able to produce and ship a functional product with little input from the customer.

1.2 Disadvantages

By choosing an ODM model, the customer is sacrificing control over the product, and is limited in their capability to differentiate in the market. Typical issues with ODMs include:

  • Opaque– as the supplier is selling you an off-the-shelf product, buyers typically have very little visibility into the product manufacturing, including BOM, firmware or software design, etc.
  • Limited Supply Chain Flexibility - you don’t have a say in the choice of component suppliers – ODMs will want to use existing relationships due to cost and cash flow advantages and this can compromise product quality / function.
  • Minimal Control over IP- The product belongs to the supplier and they are free to sell this to any and all. Generally, minor design improvements and tweaks will also not be considered as the IP of the buyer unless specifically stated in a contract with the manufacturer
  • Minimal Product Differentiation – because you are buying a product that is off-the-shelf, the amount of differentiation that can be created with existing products on the market is limited. Cookie cutter products means buyers may struggle to maintain good margins without a strong existing brand or marketing capabilities.

Working in an ODM model means giving up control over the product and IP in exchange for an investment-light, agile choice for going to market.

1.3 Typical ODM Customers

Home goods, low-end consumer electronics, LED lighting and household appliances, and other industries where low cost and speed to market is more important than design or functional differentiation. Mature product markets often use an ODM cooperation model to reduce investment in R&D and product tooling.

Gravel Bike

Fig. 2: Gravel bike

Bikes are an example of a consumer good that can be OEM or ODM – there are off the shelf, low-cost options for online retailers, smaller brands and others. There are also factories that produce custom designed models for larger or higher-end brands or companies.

Client Company Relationship

Fig. 3: ODM/OEM Client company relationship (“OEM vs ODM: Which Is The Smarter Choice 2021”).

Section 3

2. Original Equipment Manufacturer (OEM)

2.1 Advantages

As a general rule, an OEM:

  • Has an established, mature supply chain of parts and necessary components that can be applied to new products to shorten development cycles.
  • Has experience in both design and manufacturing of products in the specified category.
  • Provides relatively quick time to market due to their expertise and supply chain.
  • Has lower costs due to leveraging supplier’s existing supply chain and category expertise, possibly including some common-use components.
  • Allows for higher levels of customization and thus much greater product differentiation possibilities.

The OEM model allows for greater freedom of design and greater differentiation, which can often help support stronger margins, while still leveraging a supplier’s existing supply base and experience for cost savings and fair speed-to-market. There is greater investment and customer involvement required, but it allows for a buyer to stand out from the crowd more.

2.2 Disadvantages

When planned poorly:

  • IP Leakage— suppliers are often players in the same industry with ODM customers and potentially selling under their own brands – the temptation to apply the designs and technology developed with OEM customers to other projects or their own product line is great. IP leakage is a real risk.
  • Training your future competitor– many companies have leveraged their experience and scale acquired from OEM business to launch their own brands and take on and take over their former customers. Home appliances, consumer electronics and other fields are filled with examples of this phenomenon (“When Your Contract Manufacturer Becomes Your Competitor”).
  • Greater investment but limited control- An OEM project will require more input and support on the part of the customer compared with an ODM simply because of the need to hand over the product design and monitor development, as well as invest in tooling, prototypes, etc. At the same time, OEMs may still dictate the supply chain decisions, control certain technical information and limit customers’ ability to direct the project fully. Taking your prototype to mass manufacturing can take a lot of time, refraining you from capitalizing quickly on very niche or time sensitive products.

2.3 Typical OEM Customers

An automaker that uses an external supplier for electronics or electrical components (a car radio or light indicators) is an example of an OEM customer (“What Is Original Equipment Manufacturer (OEM)?”). Consumer electronics brands like Vizio or Skull Candy with their own designs and technology, but who leverage existing electronics manufacturers to produce their products, are also examples of OEM customers.

AMD Ryzen computer processor

Fig. 4: AMD Ryzen computer processor

Chip fabrication is another type of OEM business model – many chips are designed by so-called “fabless” companies who focus on the chip architecture, marketing and sales, while the actual manufacturing is done by a third-party foundry like TSMC, Samsung or others (“Why the Right OEM Relationship Leads to Powerful Mobile Solutions”). The customer provides specifications and design based on the supplier’s existing architecture / capabilities, and the fab then manufactures to that spec.

Section 4

3. CM (Contract Manufacturing)

Contract Manufacturing (CM) is a catchall term that includes OEM and ODM manufacturing models, as well as standing on its own as an outsourced manufacturing business model.  CMs are generally not category-focused in the same way as ODMs or OEMs – they usually do not own their own business lines or IP, they do not design new products – they are offering manufacturing as a pure service to customers. Customers provide the design, the contract manufacturer provides the labor, facilities and general manufacturing know-how to produce that product.

3.1 Advantages

With a CM, you get:

  • Greater transparency in the supply chain – CMs are willing to take consigned parts, work with customer designated suppliers, provide greater detail on part specification, drawings, etc.
  • Greater control over subsystem and subcomponent manufacturing, including input on cost, quality, and lead time requirements.
  • Complete ownership of the IP - the buyer provides the design and product specifications, and the contract manufacturer has no competing business which might generate potential conflicts of interest.
  • A simpler business relationship – the two have no shared IP or product ownership – which means the buyer is freer to manage the relationship in purely business terms.

3.2 Disadvantages

The cons of working with a CM include:

  • Greater investment in product design, development and tooling as the contract manufacturer generally does not have an existing system architecture or common use tooling.
  • Longer new product development lead times (at least during initial set up) as products are being built from scratch rather than from an existing platform or supply chain.

3.3 Typical CM Customers

Companies in industrial equipment, automotive, consumer electronics, motorcycling and ATV, and other industries, in need for sheet metal parts, tubes, plastic components and more, to be used in their products. Alternatively, they may be asking a contract manufacturer to assemble a certain product based on those/other components.

Greater complexity or more niche markets often call for a contract manufacturer due to a lack of options for good-quality OEM/ODM suppliers, or a need for greater control over the product and supply chain. Customers with sensitive IP will often also utilize contract manufacturers to prevent IP leakage.

Bending sheet metal

Fig. 5:  Bending sheet metal 

Section 5

4. Other Terms

EMS (Electronic Manufacturing Services) – a contract manufacturer in the electronics field that apart from making products for OEMs also offers support with a wide range of value-added services such as design, assembly, and logistics. EMS companies can be massive, and they manufacture products like Microsoft’s Xbox.

CEM (Contract Electronics Manufacturing) – similar to EMS suppliers, CEMs provide partial or whole electronics manufacturing services for other companies, often for OEMs that serve industries such as communication, transportation, and medicine.

Design House - as you may guess, the prime focus of a design house is electronics design. They usually offer a full range of electronics design services for both hardware and software, across a wide range of products end markets. They have been a crucial part of the contract manufacturing process for consumer electronics, in such categories as feature phones or smartphones.

Section 6

5. Which type of manufacturing model is right for you?

When selecting the type of manufacturing model there are several important factors to consider:

  • Your industry and business model
  • Your level of focus on marketing, product development and differentiation
  • Your preferred level of control over manufacturing processes
  • Uniqueness and complexity of your product(s)
  • The level of sensitivity of your IP

The following graph summarizes the key points that help you decide which manufacturing model is appropriate for your business.

Which type of manufacturing model is right for you?

Fig. 6: Which type of manufacturing model is right for you?

We can also look at the example of an Amazon retailer and a branded company, as an exercise to see which manufacturing model would fit them.

 

Amazon Retailer

Branded Company

Many products

Fewer products

Speed to market critical

Balanced speed, pricing, and differentiation

Low design and development resources

High design and development resources

Low level of investment capital

High investment capital

Lower level of differentiation

Higher level of differentiation

Low level of IP

Sensitive IP

Weak brand differentiation

Strong brand differentiation

Based on the listed preferences we can assume that the Amazon retailer may prefer an ODM as it is participating in a highly price competitive market with low differentiation, whereas the branded company would likely choose an OEM or CM partner to achieve a higher level of control over the production, more control over IP and a highly differentiated product.

When we look at these models purely from the perspective of control over manufacturing and the speed to market, here is where they stand in relation to each other.

Section 7

6. Takeaways

  • The ODM model offers the fastest track to market, without the need to invest in product design and development. However, you will not own the IP or have the capability to exert control over the manufacturing processes.
  • If you have the potential to invest in product design and development, an OEM can help you manufacture your new product based on your requirements, while giving you the IP ownership and some degree of control over the manufacturing processes.
  • But if product BOM, design and IP control are key concerns, working in a pure contract manufacturer model may be the way to go.

6.1 Comparison Table

Features  

Manufacturing Model

 

ODM

OEM

CM

Provides ready-made products with customization options

X

 

 

Specialized in certain product categories

X

X

 

Customer provides input on design / product specifications

 

X

X

Producing product from scratch based on customer design requirements

 

 

X

Offers greater supply chain transparency & consigned component options

 

 

X

Greater transparency on subassembly and component specifications, cost, quality, etc.

 

 

X

Buyer needs to invest time & money in product design, research, and testing

 

X

X

Gives customers a say in the choice of material supply

 

 

X

Assumes manufacturing liability

X

X

X

Assume Product Design Liability

X

 

 

Provides customer control over product IP

 

X

X

Table 2: A comparison of ODM, OEM and CM manufacturing models.

6.2 FAQ Section

  • What does OEM stand for?

OEM stands for Original Equipment Manufacturer. It is a manufacturing business model in which a new product is developed by the factory based on a design from the buyer but using the supplier’s existing category expertise, supply chain, etc (“What is an Original Equipment Manufacturer (OEM)?”).

  • What does ODM stand for?

ODM stands for Original Design Manufacturing. It is a manufacturing business model in which the product design is owned by the supplier, and the customer may just tweak the design slightly, or buy straight off the shelf and label the product with their logo/brand (“What Is an OEM, ODM, and JDM?”).

  • What is an example of an OEM?

Chip fabs are an example of an OEM business model – many chips are designed by so-called “fabless” companies who focus on the chip architecture, marketing and sales, while the actual manufacturing is done by a third-party foundry like TSMC, Samsung or others (“Why the Right OEM Relationship Leads to Powerful Mobile Solutions”).

  • What is an example of an ODM?

A company might look to buy an existing kitchen appliance from a supplier specializing in that category (e.g. kitchen blenders) and then look to customize that slightly with their own color scheme, logo or small modifications to the overall design and sell it under their own brand name.

  • What is difference between OEM and ODM?

OEM is a manufacturing business model in which a new product is developed by the factory based on a design from the buyer but using the supplier’s existing category expertise, supply chain, etc. whereas ODM is a manufacturing business model in which the product design is owned by the supplier, and the customer may just tweak the design slightly, or buy straight off the shelf and label the product with their logo/brand.

Section 8

Works Cited