OEM vs ODM: Which is The Smarter Choice for Start-up
You may have heard about the ODM vs OEM types of suppliers. Differentiating these two may be confusing, and you may not get clear definitions from internet sources. The two terms are vital in the industrial world, and they are common types of cooperation models.
In this article, you will learn the difference between OEM vs ODM, the pros, and cons, and why we need OEM or ODM Service.
What Does OEM Meaning?
In supply chains, OEM stands for original equipment manufacturing. It’s a type of contract or outsourced manufacturing. It means that the production factory can manufacture products according to the specifications and clients’ preferred designs. Producing products that conform to customer specifications.
People think that an OEM factory is suitable for customizing products, but that’s not the case. If you have product descriptions for a new product, you can say that you are dealing with OEM products.
Before letting any OEM manufacturer handle your product design, you should do a lot of research and learn about its development.
After researching product development, conduct market research, engineering, and design uniqueness, for instance, if you have a smart glass idea that you’d like to start, you need more information, especially about the dimensions.
After all these specifications, you will need to hire a designer to create an appealing glass design. You need to analyze the demand for the products and raise the capital to start the production if it’s worth it.
At this point, the only thing remaining for the production to start is the OEM. After coming up with a design and all product specifications, you should let an OEM handle the manufacturing processes.
From the illustration above, there are many OEMs responsibilities during manufacturing. Through OEM, the assembly and production lines ensure timely delivery, high quality, and affordable costs. These benefits are fit, especially for people who produce large volumes of products. Suppliers attest to the positive impacts of this manufacturing process.
Here Are Some Advantages Of OEM Service
- With OEM, you gain full control of all your intellectual properties. You will own all intellectual property rights. You will be in a better bargaining position with your suppliers, and you can switch them easily. Your product specifications will also be protected from copyright infringements.
- You can quickly get quotes from manufacturers because you will have detailed specifications and designs. However, it can be disadvantageous for small business owners because they have to provide accurate details to the manufacturer.
- When choosing a production company, keep in mind that not all companies have in-house resources for production processes. They cannot afford to hire third parties; hence, the best alternative can be an ODM.
- Changing suppliers is not easy because you need to change the entire supply chain.
- Since it is not transparent about the cost of purchasing components, it isn’t easy to negotiate a slow price increase.
- Since sub-suppliers are not disclosed, they may be replaced without resorting to the buyer. Material or process changes may have a serious impact on product quality.
- If your sales volume is high, the supplier may want to compete with you.
Why OEM Service?
Constructing a factory is a risky and costly investment in which you cannot control the risk factors. Furthermore, you need to factor in human Resources where you have to hire and manage thousands of workers. Most companies have a policy of distributing professional works to major companies to avoid such risks and inconveniences.
Companies whose primary business is on R&D outsource foundry companies to produce and assemble their products. Examples of innovative companies are Apple, Nintendo, Microsoft, and IBM. Examples of foundry companies are Foxconn, Flextronics, Pegatron, and Inventec.
OEM Scenario 1
Your company provides all the product design-related material, drawings, specifications, and sometimes tooling design to the OEM. The OEM manufactures your product according to your design.
OEM Scenario 2
Your company is purchasing products from the manufacturer, but the manufacturing company has either developed the product themselves beforehand or acquired the rights to the product from a third party.
You can understand better by reviewing this ODM OEM illustration:
What Does ODM Stand for?
ODM stands for Original design manufacturing, and it’s a type of contract manufacturing process. There is a contrast between OEM vs ODM, but the scope of ODM is broader. With that said, OEMs are responsible for manufacturing processes while ODM majors in product development services and other product lifecycle services. The scope of these services depends on the capacity of ODMs.
For instance, you have an idea for a tablet company and done enough market research. After finding the opportunity to sell them at a low price in India, you have new features that you’d like to add to the phone, but you have no technical specifications. You only need a tablet that meets your specifications; hence an ODM is the only place where you can get the help you need.
An ODM is ideal because you can help create new specifications and product designs here. All you need to do is give them the idea of the design you want, and they can also show you their existing product lines, and you can choose from them. Either way, your manufacturing needs will be handled well, and you can specify that you want a brand name on your products. That way, the products will look like you are the manufacturer.
Here Are Some Advantages Of ODM Service
With ODM, there is no need for huge investments because ODM will handle the product development process. You can save a lot of capital because you don’t need to control the tooling costs.
ODM will handle all the technical resources needed for the success of the product manufacturing process. That way, you don’t have to worry about expertise or resources that meet your design specifications.
Many suppliers are switching to ODM due to these widespread benefits. Despite these benefits, there are some cons of ODM. ODM Services Cons:
- You don’t get the protection of intellectual rights, unlike OEM. Due to this factor, you may find yourself in a contractual disagreement.
- For instance, you may find that an ODM demands a particular sales volume or needs a high price on a product. Some of these cases are risky, and you may find yourself in a billion dollars lawsuit. When dealing with OD, Mrs, you need to be careful because due diligence is something called due diligence, and you need it as a supplier or a business person. According to procurement and business law, this is a crime that can cost you a lot!
- Changing suppliers is difficult because they have the design.
- The buyer is taking a risk-how to ensure that the supplier does not steal the design from another company? For example, Amazon may ban your product and you may have to pay a fine.
- If your sales volume is high, the supplier is likely to compete with you.
- If you give them inspiration and ask them to change an existing product, and they think it is promising, they may continue to do it without you…
- It may be difficult for you to negotiate favorable terms (payment terms, liabilities, etc.).
Why ODM Service?
There are two scenarios in which ODM can be adopted.
Company brands have a variety of sales and marketing channels. However, they don’t have R&D capability. Such companies will outsource services from an R&D specialist company to produce their products according to the design and specifications they want.
A brand company has R&D capabilities. However, products with low profits are not economically viable for the company to invest substantial time or labor in completing them. The company will choose a single type of such low-end products from an existing product of another company. All the company does is modify the current product a little and resell it as their brand. A good example is the international trade market.
There are standard products such as beer bottle sleeves, which already exist in various companies. A company only has to make a few modifications to the existing product. This is an ODM model.
What is OBM?
An OBM stand for Original Brand Manufacture. The OEM factory operates its brand, or the manufacturer creates its product brand, produces and sells products with its brand.
Since the foundry must have a complete marketing network to support OBM, the cost of channel construction is very high, the energy spent is much higher than that of OEM and ODM, and it often conflicts with its own OEM and ODM customers.
OEM vs ODM Suppliers Comparison
You may have noticed earlier that there is the main difference between the two regarding their product development life cycle. The difference is evident when you look at importers’ businesses. There is a vast difference in costs, lead time, and intellectual property ownership for importers.
The illustration below shows more details about ODM vs OEM comparison.
Differences Between OEM vs ODM
|Price per unit||no difference||no difference|
|Development time||1-8 months||1-4 weeks|
|Lnjection molds Tools||paid by buyer||paid by ODM|
|Production Time||No difference||No difference|
|Product Design||Provided by Buyer||Provide by ODM|
|Product spec sheet||Provided by Buyer||Provide by ODM|
|IP Ownership||Owned by buyer||Owned by ODM|
Working with ODM suppliers
Choosing an ODM manufacturer is quite simple. You only need to look for suppliers who have products that you can sell in your market.
In most cases, you can make some changes for the ODM products.
Here are some examples of changes:
- The customer’s logo on the product
- Change the color of the material
- Different material types, such as replacing PU
It is usually impossible to make some other changes:
- Different sizes (especially molds)
- Different functions or performances-for example making a blender with a catching gripper
Working with OEM Suppliers
To find a good OEM supplier, you usually look for a manufacturer with already produced products similar to what you need. Here are the reasons:
- They know the assembly process
- They already have a supply chain (buy materials and components)
- They already know the main risks and test procedures to be aware of.
There is also an alternative that many people overlook: use CM (contract manufacturer). Contract Manufacturer: similar to OEM, but the supplier is typically open to manufacturing a wider range of products. This is a particularly good idea if your product does not require a specialized process.
A professional CM can bring the following benefits:
- Able to optimize the production process.
- They only focus on production, not distribution; So they can’t sell the product to your competitor.
- Their relationship is easier to manage.
What Is the Difference Between OEM and ODM?
The main difference between the OEM vs ODM is how product development is conducted. As the customer, you have to consider the differences in time, costs, and IP ownership.
As a consumer or business owner, it’s essential to understand the terms and differences between them to create a successful business.
OEM vs ODM Which should I choose?
It depends on your needs. Do you already have a finished product design ready for manufacturing? If so, an OEM is the right partner for you.
If you are considering developing a product or are already in the process, we generally suggest working with an ODM partner. We believe that getting your manufacturing partners involved right at the beginning of the process is a best practice you should follow.
Note: If you want to sell on Amazon, choose ODM. ODM is the more popular model for selling on Amazon since you don’t require the resource-intensive requirements to run an OEM model. A startup should utilize the ODM model to learn the business ropes without huge risks.
How to Start Your OEM and ODM Business?
The section above has explained OEM and ODM’s importance and why every business needs them to thrive. OEM and ODM are the only ways for a company to actualize their ideas. Both small and big companies need them. However, it may be a bit more difficult for small businesses/startups to identify or find reliable manufacturers.
OEM and ODM’s bet benefit is lowering production costs, which maximizes profit. This is a significant factor for small businesses and startups, which can’t risk high production costs and have a minimal profit margin. Such a situation would quickly kill the company. The section below focuses on teaching you how to identify and find a reliable manufacturer.
Where Do I Find OEM Or ODM Suppliers？
There are three primary ways to find OEM and ODM manufacturers.
- B2B websites
- On-site trade fairs or wholesale markets
- Sourcing agents
Online B2B Websites
Finding a reliable supplier online offers convenience and is more economical for small businesses and startups. The biggest ODM China manufacturers you can contact online are Alibaba, Made in China, and Global source.
The suppliers explain their services details to potential customers. Some of the services they provide are OEM, ODM, Customizing. All this information is listed on the product listing page.
Some even offer private label services where a business can have manufactured products with their brand name or logo. If a manufacturer doesn’t provide such information on the client listing page, you can contact them directly to give you the information. Social media platforms have many suppliers where you can check out a variety before reaching out to them. However, most are wholesale websites, so be specific in your search.
Offline Trade Fairs or wholesale markets
You may find it unreliable to find suppliers online. Another option is physically visiting wholesale markets in your locality to identify suitable suppliers. This is advisable if you are in the big manufacturing countries such as China. Meeting a supplier physically is convenient, and you are assured of quality since you can see the products for yourself.
It also helps you reduce the risk of dealing with a middle man who often scams online customers. If you live far from China, you can invest in a trip to a trade fair. It will cost you, but it will be a one-time and worthwhile investment since you will find a reliable supplier who can become a life long partner for supplying your business.
However, it would be best if you were prepared to encounter some challenges, such as the language barrier, travel, and accommodation expenses.
Additionally, you should know where the wholesale markets are located. They are in Shanghai, Guangzhou, and Shenzhen. Therefore, you will need to make a detailed plan before your trip. It is good to look at the bright side too. You will be spoilt for choice among the many OEM China and ODM suppliers. Prices will be more competitive and friendly.
New importers mostly prefer sourcing agents. However, ensure you engage a professional sourcing agent. The agents have many resources and information on the best supplier or manufacturer to meet a client’s needs.
Like supplyia sourcing: Their services include: guiding you to choose a suitable manufacturer, negotiating prices, following up on production, ensuring high or standard quality is met, testing the products, and arranging for shipment. As a customer, this is very convenient for you since you don’t have to get your hands dirty. However, it comes at a cost that is worthwhile if you can afford it.
How to Identify The Right ODM & OEM Supplier？
Whether you find a supplier offline or online, there are key indicators of finding a suitable manufacturer that you should follow:
- The quality and price of a product should match.
- Effective communication is vital for every relationship, a business relationship included.
- Be ready to face challenges and unexpected hitches. Have a positive attitude towards this, and meet them head-on.
- Complete ownership of factory qualification authentication.
- If using a new mold, find out if it can fetch back or not.
Warning: Big factories don’t mean the best quality; therefore, don’t always rush to do business with them. They are not always suitable for you, especially for a small business that requires a little stock. Choose a supplier, depending on your financial and product needs. Engage a factory that has good customer service and effective communication.
Choosing Between OEM and ODM in China and Its Processes
Here are seven main steps in the process of OEM China & ODM products. The may steps vary for different products.
- Creating a prototype or designing your product
- Finding a manufacturer in China
- Estimating the costs of the entire process
- Making a sample before production
- Choosing private labeling and packaging
- Starting mass production
I will focus on explaining ODM services in China. However, both have similarities. Some products, such as cosmetics, use both models.
- Step 1:
A factory identifies the most suitable formula for your needs and manufactures a pre-production sample to suit the customers’ needs. The customer receives the model to test and suggest modifications or give the go-ahead for massive production.
- Step 2:
After testing, the customer has to go to the factory for an in-house inspection. This is assuming they are satisfied with the sample and its pricing. Other factors the customer will be checking for are R&D capability, production ability, and workshops.
Cosmetics are used directly on the skin; therefore, quality cannot be compromised. As the customer, you must engage in reliable factories to ensure quality is met. However, some standard products don’t require an in-house visit to the factory, such as beer bottle sleeves.
- Step 3:
After conducting the in-house factory visit, the customer signs a contract with the factory. The factory charges the customer a deposit for massive production, which varies for different factories.
- Step 4:
Packaging designs and sourcing the packaging is the responsibility of the factory. This is usually a free service. However, the customer directs them according to the type of packaging design they prefer. The job is then handed over to a professional packaging factory to make a few samples to choose from before the contract.
- Step 5:
The cosmetic materials, ingredients, and packaging designs are confirmed. The factory engages the FDA for product testing and filing.
- Step 6:
The factory carries out product filling, packaging, and QC processes. The entire process takes between fifteen to twenty days to complete. After the manufacturing process is complete, the customer pays the remaining balance to the manufacturer.
- Step 7:
The factory arranges for the shipment if a sourcing agent isn’t involved. The shipping method is chosen depending on the delivery time and quantity of the goods.
At the beginning of differentiating between OEM and ODM models, we mentioned that they have similarities. Their main difference is how they develop a product.
OEM China focuses on manufacturing goods according to the customer’s preference on design and specifications. Therefore, it is entirely the customer’s responsibility to conduct research and develop the product they want. The project can take months to complete.
On the other hand, ODM China caters to all of these processes. This is an excellent advantage for the time factor since the project is completed faster. You also save a lot of money since you engage fewer people and at a shorter time frame. However, the customer doesn’t own the IP. The customer has to contend with the products and customizing the options provided by the model.
The choice of the best model between OEM vs ODM depends on the customer’s product, market, and goal. However, OEM’s are mostly recommended since you own the IP. ODM is the cheaper option, but owning IP is more important.
ODM vs OEM – FAQ
What does ODM mean?
Original Design Manufacturer. It is a company that performs the designing and manufacturing process of a product. The product is manufactured following individual specifications. Another company later rebrands the product for sale.
What is OEM service on Alibaba?
It is the supplier’s ability and goodwill to manufacture products according to the client’s preferred design. The best suppliers for OEM are Global sources and Alibaba.
Which is the smarter choice between OEM and ODM?
You save valuable time with ODM since you can get a final product without engaging yourself in the tiresome project process. In OEM, you have to develop the product yourself, for example, designing and finding a suitable manufacturer to produce your product development.
[…] does this, there will be low chances of reducing the price risks of OEM producing goods. You can start your OEM or ODM service after you understand how to choose OEM […]
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