OEM (Original Equipment Manufacturing) and ODM (Original Design Manufacturing) are two of several models through which product businesses outsource product manufacturing to third-party contract manufacturers. OEM is a manufacturing model where customers provide specialized manufacturers with custom product designs. The supplier works with their existing technology and components to create a unique finished product that the customer can market exclusively. In ODM, on the other hand, the customer orders an existing product from the manufacturer that produces it, then brands it and markets the product as their own (This is also known as private label manufacturing).

In this article, we will examine what is OEM vs ODM manufacturing, exploring these models' characteristics, applications, benefits, limitations, how these factors can influence your business, and which type of manufacturer to work with based on your project’s or company’s needs.

In the OEM model, specialized manufacturers, known as original equipment manufacturers (OEMs), produce finished products or components according to a customer’s specifications.  The purchasing company then retails the products under their brand name. A key distinguishing characteristic of OEM vs other outsourced manufacturing models is that OEMs are generally specialized manufacturers that focus on specific products or product categories. The manufacturer contributes their know-how and existing technology to the final product design, in contrast to contract manufacturing, where the customer is responsible for the whole product design, or ODMs, where the supplier is providing it.

Customers using OEM models usually have sufficient engineering and financial resources to produce unique designs and fund their tooling and manufacturing rather than buying off-the-shelf products or parts. OEM manufacturers also commonly produce parts that will be used in other products. For example, car companies rely on various OEM manufacturers to create components and systems, such as automotive seats, console controls, etc. The manufacturers have the know-how in specific applications and product areas but produce parts to the customer’s specifications. The customers may be brands such as Volkswagen, Ford, and GMC for example.

What is an example of OEM manufacturing model?

In OEM, the customer provides the design and specifications of the product and holds IP rights to these. The following is a typical example of an OEM scenario. A company that markets and sells air conditioner (AC) units contracts a manufacturer that specializes in this product to manufacture theirs. The company designs the unit, providing the manufacturer with industrial and electronic designs and other AC unit parameters. The manufacturer uses their existing facilities, tooling, material suppliers, and supply chain to manufacture and deliver the AC units to the company according to the designs and specifications. The company then markets and sells the units as their own.

Advantages of OEM

Some of the unique advantages of OEM are as follows:

• The customer has significant control over product development. They can provide new designs and stipulate extensive specifications such as working technology, size, material, build, and many others, enabling them to create custom products.
• The customer also has more control over quality assurance, product testing, and certifications.
• The IP rights to the portion of the design the customer provides belong to them and cannot be used in other products without their express permission.
• Being specialized manufacturers, OEMs offer advanced manufacturing expertise. They also have established supply chains, access to high-quality suppliers, and established quality procedures and testing.

Disadvantages of OEM

The OEM model also has some inherent limitations:

• The customer is responsible for the complex tasks of creating the product design, product specifications, etc. This requires time, money, and access to engineering resources.
• Time to market is significantly longer than readymade products, as the manufacturer needs to create the product according to the customer's specifications. This may require the production of new tooling and extensive testing of the finished product.
• As the customer is highly likely to use some existing parts, technologies, or equipment from the OEM supplier, They don't wholly own the product IP. This mixed IP ownership model can be complicated in case of conflict or the need to move a project to a new supplier.
• As the design is built around the common-use parts and tools of the OEM, it may not be easy to switch the production directly to a second OEM without additional development or retrofitting of the design. 

Fig 1: OEM Contract Manufacturing Process

ODM is a manufacturing model in which a company orders the existing product of a manufacturer, brands it as its own, and markets and sells the product. In this model, the manufacturer is called the original design manufacturer. They design, manufacture, and sell specific products to brands and retailers and hold all the IP rights to the products. Generally, the customer ordering the product can only requeq rst minimal alterations to the product, such as color changes, logo additions, and slight design modifications like changing button style, adding different accessories, etc.) that don’t impact the product’s tooling (as this is owned by the supplier and used for different customers). The key distinguishing characteristic of ODM is that the products are either ready-made or have a fixed design that the customer does not alter.

From solopreneurs looking to get into the retail business to large corporations, various levels of business utilize ODM. Typical ODM products include low-end consumer electronics, plumbing fittings, domestic appliances, basic machinery, furniture, and fast fashion. Private label businesses make up the majority of ODM customers.

What is an example of ODM manufacturing model?

ODM contracts vary. However, they are typically similar to the following scenario. A company approaches a manufacturer that produces a particular electric drill and orders a number of drills in specific colors. The manufacturer takes this order, makes the drills like they usually do but in the customer's color, adds the company’s logo, and delivers the drills to the customer.

In this scenario, the customer only specified the product color, logo, and possibly packaging design or other minor details. If the customer didn't request any alterations, and the manufacturer has premanufactured drills, they may even simply add the customer’s logo to the drills and deliver them.

Advantages of ODM

ODM manufacturing offers the following benefits:

• The customer (the business) saves time and resources on designing, testing, and certifying new products, as the products already exist on the market.
• Product time to market is significantly reduced as time is only spent on manufacturing instead of designing, prototyping, testing, etc. The manufacturer may even have the product stocked.
• Ordering products from an ODM manufacturer is relatively seamless and straightforward for the customer.
• There are high levels of cost transparency as ODMs typically offer fixed prices per product quantity.

Disadvantages of ODM

• There's minimal allowance for customization. A customer can only request minor alterations to the existing product, such as color changes, logo additions, and slight modifications of basic features.
• The customer doesn't hold any rights to the products. These rights belong to the manufacturer, so exclusivity may generally only be available with high minimum purchase volumes.
• The customer has little knowledge of or influence over the manufacturing process. They simply order the goods and await their delivery.
• Because the manufacturer produces the same products for multiple customers, the possibility of a business having a unique, standout product on the market is low.

Fig. 2: ODM Contract Manufacturing Process

To determine the best model for your business, it is imperative to understand the differences between OEM and ODM, as these differences can impact a business's operations, market positioning, and bottom line. You can achieve this by directly comparing them while considering certain factors.

Table 1: OEM vs ODM

Customer Involvement

Customer involvement is the most significant difference you'll notice when analyzing what is OEM vs ODM. In OEM, businesses can stipulate specific designs and specifications for their product. There is significant customer input on the engineering, quality, and testing side for everything from material selection and testing procedures to quality assurance operations.

On the other hand, ODM manufacturers are responsible for everything in the product development cycle. Depending on the manufacturer, the customer may have the right to request minor changes. They may also request proof of certain certifications and QA tests. OEM gives the business more control over the manufacturing process. However, this comes with additional responsibilities. In contrast, ODM relieves businesses of any manufacturing responsibilities but also eliminates control.

Flexibility and Scalability

ODM and OEM each offer unique forms of flexibility. OEM contracts are made at the beginning of the project, expressly stating specifics such as design, specifications, and quantity. The stakeholders agree on fixed costs and delivery timelines based on these specifics, thus making it difficult to make any changes mid-contract. Similarly, most OEM manufacturers only accept large production volumes. The flexibility they offer is related to product design - customers have much more leeway to customize the product, make changes to function, appearance, etc. 

ODM is even more rigid when it comes to design changes. However, what ODM lacks in design and manufacturing flexibility, it makes up for in production volume and manufacturer flexibility. Since they are almost constantly in production, ODM manufacturers can accept a wide range of production volumes. This flexibility business enables businesses to scale seamlessly. Customers can order a small quantity of products and progressively increase the amount as the business grows. The ODM model also allows companies to change manufacturers more easily, provided that there is another manufacturer with a similar product model or design.

Product Differentiation (Uniqueness)

The OEM model gives businesses design control, enabling them to maintain a level of distinctiveness in brand identity. This factor is particularly valuable in industries where customization and uniqueness give businesses an edge. Conversely, in ODM, a company can simply "slap on a logo" and have this as the only difference between their product and their competitors’. While businesses can request minor modifications, generally just surface-level changes to color or packaging. 

Fig 3: Example of Brand differentiation in OEM vs ODM using kitchen blenders

Product IP rights

Because the ODM manufacturer is responsible for the entire product development, from design and prototyping to manufacturing, they hold all IP rights to the product. The minor tweaks that a business may make are inconsequential in IP considerations. IP rights ownership varies in OEM, depending on the agreement between the manufacturer and the customer. Typically, the manufacturer owns rights to internal designs and tooling, while the business owns the rights to their designs and proprietary technologies.

Product development timeline

ODM manufacturers have designed, tested, and readily available products and tooling. This eliminates the entire design, testing, and tooling preparation phase. The manufacturer may also have ready-made products available. These factors significantly speed up product time-to-market. Any minor alterations the customer requests will have minimal impact on the timeline. This speed allows private labels to obtain a sample and receive goods in a few weeks to up to three months, depending on the changes made (custom colors or packaging) and the time for shipment.

OEMs also offer relatively fast time-to-market, as these specialized manufacturers have tooling, supply chains, and suppliers for specific products. However, as customer designs are unique to them, they will often require further testing and custom tooling, increasing development timelines to 6 to 12 months for a typical electrical product or 3 to 6 months for a more straightforward product without tooling or extensive testing/certification requirements. OEMs, unlike ODMs, usually won’t have stock available as each design is specific to a customer.

Cost and cost transparency

ODMs take on the bulk of initial investment costs. They own the tooling and have covered design, testing, and certification. These costs may be amortized into the product, but as long as they are sold in big enough volumes, the cost per unit will be very low. Price scales directly with order quantity - the more you buy, the lower the cost.

Businesses using the OEM model have to spend that extra initial investment cost in designing and developing their product, which generally means the cost per unit for testing and tooling is higher for OEM projects. Cost per unit depends on volume but is also affected by the cost to run customer-specific tooling, equipment set-up, minimum order quantities for unique parts, etc.

Table 2: Comparing OEM vs ODM models

The next step is selecting the suitable model for your business. Factors such as the company's size, industry, specific needs, and strategic goals influence the choice between OEM and ODM. These factors can be broken down into cost, resources, IP rights, and time considerations. Many of these factors and considerations are interrelated and directly relate to a business's strategic goals, resources, and market dynamics.

When to use an OEM

When Design and Manufacturing Control are crucial

• Compared to ODM, OEM offers customers significant control over the product development cycle. This model gives businesses a say in the product's design, work principle, and materials.
• Depending on the contract, the company may also stipulate tests, certifications, and QA features for the product.
• This control is particularly vital for companies that produce critical products that can adversely affect the users if things go wrong.

When Brand identity and product differentiation are important

• OEMs allow businesses to create much more customized products with unique features, designs, functionality, and looks.
• This can be as simple as an extra cooking function, or as unique as Apple’s aluminum machined housings

When Intellectual Property is Crucial

• The OEM manufacturing model is the right option for IP-sensitive products, as it enables businesses to create and retain product or design-related IP.
• IP usually won’t extend to the full design if the manufacturer has used common tooling or parts, but it will cover any customer-designs or tooling

When to use an ODM

When Volumes Are Low

• Businesses with large production volumes can freely choose between OEM and ODM, depending on other factors, but for start-ups, new businesses or SMEs looking for limited production volumes, ODM offers the highest flexibility possible.

When Time-to-market is Key

• ODM offers a faster time to market than OEM, as the product is already developed and often certified for end market use
• They often have inventory of finished goods or parts in stock for rapid lead times.

When Cost is King

• The customer doesn’t need to invest upfront in new tooling or product design and testing
• The product development costs are spread over a number of customers, so the per unit development cost is lower
• Since the product is marketed widely, volumes and thus costs are generally lower

When Company Size or Capabilities Are Limited

• OEM projects requires engineering, design and financial resources that many companies lack
• With ODM, customers need to provide much less input and support to receive a finished product

Table 3: OEM vs ODM, Selecting the Right Model

The ODM and OEM models are widely used by various levels of businesses across numerous industries. These outsourced manufacturing models have different characteristics, benefits, and limitations, making each better suited to different businesses' needs, goals, and resources. The key difference between them is the level of customer responsibility, rights, and control involved in the product development cycle and manufacturing process.

ODM is a fast, low-cost method to get a wide range of product quantities. However, these come at the expense of control, IP rights, and product differentiation. Conversely, OEM gives businesses substantial control, relatively unique products, and the rights to their designs and technologies. For these benefits, companies have to spend more time and resources.

If you need the minimal responsibility that ODM offers but also the high levels of control obtainable in OEM, then turnkey manufacturing, another manufacturing model, may be the right option for you.

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