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.
- Unpack manufacturing in detail in our full length Modern Manufacturing Guide 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
- Marketing
- 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:
- R&D
- 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 andspecially 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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FAQs
What is the advantage of OEM manufacturing? ›
Benefits of OEM products
Owing to economies of scale, OEM products significantly reduce the cost of production. Moreover, the company purchasing these products can use them to build systems without running their own factories. Another advantage is that you can have the best-of-breed components built into your system.
An Original Equipment Manufacturer or OEM is a company that manufactures and sells products or parts of a product that their buyer, another company, sells to its own customers while putting the products under its own branding. OEMs commonly operate in the auto and computer industries.
What is the basic difference between ODM original design manufacturer and OEM Original Equipment Manufacturer? ›COMPONENTS AND COMPLETE PRODUCTS: OEM OR ODM? OEM products are sold by the manufacturer based on the buyer's specifications. ODM products are finalized or are pre-designed products that are sold under the brand name of the purchasing company. ODM products are complete and finished products, unlike OEM products.
What are the benefits of ODM? ›Benefits of ODM include:
If any special tools or moulds are required, the supplier pays for them. Usually faster to market than OEM. Your company isn't responsible for paying for new tools or equipment required to manufacture. Save time and money on R&D because it has already been done for you.
Because they are made in the same way as genuine parts, OEM parts tend to be more reliable than aftermarket parts and last for longer. Warranty. OEM parts should come with a warranty to protect you if the part is defective or doesn't work properly. The specific warranty will differ by manufacturer.
Is it better to use OEM parts? ›High-quality aftermarket parts are as good as OEM parts, or in some cases, can perform better. You really do get what you pay for, and the higher the cost, the better the build or materials. There are hundreds of manufacturers to choose from, so be sure to ask your mechanic about your options.
What are the disadvantages of OEM parts? ›Typically original equipment manufacturer parts are more costly than the average body shop part since there is such a demand for them. They can take longer to get and in turn, your vehicle will take longer to repair.
Why do manufacturers purchase OEM from other brands? ›Products from an OEM are normally cheaper thanks to economies of scale. As the company partners with others to manufacture goods in large numbers, both the price and production time are significantly reduced.
What is the risk of OEM? ›Original Equipment Manufacturers (OEMs) are always exposed to business critical risks from unforeseen supply chain vulnerabilities and disruptions. These can include quality failures, financial risks, supply chain interruptions, IT failures, cybersecurity breaches, and product defects among others.
Which is better OEM or original? ›OEM parts are just as reliable as genuine parts, but you get them for a better value. Aftermarket. Once a car is built, companies can manufacturer parts that will work for that vehicle. To do this, they buy the rights to make the parts.
Is Apple an OEM or ODM? ›
Apple is the OEM. Apple designs its products, but Apple outsources the majority of iPhone manufacturing production to contract electronics solutions providers. Both EMS and ODM.
How do I choose an OEM manufacturer? ›- Complex Custom Products. Your OEM supplier can prove their capabilities by providing evidence of producing complex products. ...
- Number of Products Produced per Year. ...
- Production Capacity. ...
- Manufacturing Capabilities.
ODM or Original Design Manufacturer, which is also known as White Label, is the production of goods that are created entirely according to their own original design.
What is an example of Original Design Manufacturer? ›ODM (Original Design Manufacturer)
Since the ODM designed the product, it owns the “rights” to it. Example: Consumer electronics like phone cases and chargers are examples of ODM-created products, which are more common in the food industry (think of the term “generic” and “store brand”).
ODMs, like Quanta Computer, Compal Electronics, Wistron and Inventec do not sell products on the open market under their own brand names. 2. An Original Design Manufacturer (ODM) business model is different than electronics manufacturing service providers (EMS) like Sanmina, Celestica, Elcoteq.
Why are OEM parts so much more expensive? ›Why are OEM parts so expensive? OEM parts are more expensive, because they're designed specifically for your make and model. Since the parts are only designed for one kind of car, they have to charge more for each unit to make a profit. Aftermarket parts that fit many different vehicles can cost less.
Do dealers always use OEM parts? ›Yes. The dealership is one of the best places to purchase auto parts. Most auto dealerships only sell standard OEM manufacturer parts. Best of all, they can use your VIN number to find the correct part for your car or truck.
Are used OEM parts going to affect the worth of my car? ›Some people think that by sticking only to OEM parts will increase the vehicle's value because the car is more or less original. But the truth is, using OEM parts unfortunately won't matter too much when it comes to value. Nor will using non-OEM parts void your vehicle warranty.
Are OEM products reliable? ›OEM products are going to match what's being replaced and that guarantees function and quality. You'll be getting the same performance you expect and need from your equipment with an OEM replacement part because it was designed and tested under the same rigorous manufacturer standards.
What happens if you use aftermarket parts instead of OEM original equipment manufacturer quality parts? ›Aftermarket parts often offer a cheaper alternative without sacrificing quality. Not all aftermarket parts are of equal quality, and using anything other than OEM parts may void your warranty, so it's important to know all of the details that apply to your situation.
Does OEM cost more? ›
Price: The price of OEM parts is nearly always higher than the price of comparable aftermarket parts. The Balance and Edmunds report that for bodywork, the cost of OEM parts is usually about 60 percent higher than aftermarket parts.
What are the pro and cons of OEM? ›OEMs provide service that aligns with their warranty standards. An OEM also will have a track record of service that demonstrates your preference for their service. The drawbacks of OEM service are cost and inflexibility. Typically, OEM service is expensive because much of the risk mitigation is built into the price.
What is the competitive advantage of OEM? ›OEM companies work directly with their customers. Because of this, they're better prepared to produce products that perform exactly as their customers need them to. This often leads to sturdier, longer-lasting parts than aftermarket manufacturers can provide.
Can insurance company deny OEM parts? ›Can Insurance Dictate Which Types of Parts You Use? Put as simply as possible, every vehicle owner has the right to determine how they want their vehicle to be repaired, and that includes whether they use OEM or aftermarket parts.
Is it better to buy directly from the manufacturer? ›“In general, it's a good choice to buy directly from a manufacturer,” Dave Llorens wrote in an article for Business 2 Community. “The pricing will be better, it will be easier to get warranty replacements, lead times will be more reliable and you can be more confident that you're getting what you ordered.”
Is Tesla an OEM? ›While it still may be almost-certain that EVs can take the auto industry by storm, the investment case in EV OEMs such as Tesla, Lucid, Rivian, and others, and ICE leaders transitioning to EVs, looks bleak at the moment.
Why is it cheaper to buy from a manufacturer? ›Purchasing a product directly from the manufacturer means, you are eliminating the middle person i.e. retailer or wholesaler who buys products at a low price and adds extra margin while selling. Thus, you are avoiding those extra expenses by purchasing directly from the manufacturer.
Is OEM the same as manufacturer? ›OEM stands for original equipment manufacturer. In the business world, this means a company that makes a product to be sold by another company under its own name. For example, an OEM computer manufacturer might make computers for a brand like Dell or Lenovo, who then sell the products under their own brand names.
What is the warranty on a OEM? ›OEM (Original Equipment Manufacturer) warranties are designed to protect the end user from unplanned costs due to premature component failures. These guarantees are one of the best ways to maximize the value of your equipment investments, and ensure that any deficient parts are replaced quickly and efficiently.
What are 5 examples of OEM? ›- Software. A software company that makes an operating system for computers and mobile devices.
- Auto Parts. A manufacture of tires that are mostly sold on new vehicles.
- Electronics. A popular brand of car stereo that are offered as standard or optional equipment on vehicles.
- Energy. ...
- Fashion.
Why is Apple an OEM? ›
An original equipment manufacturer (OEM) typically describes a company that designs a product, but then licenses it out to a manufacturer (contract manufacturer) to produce. As an example, the Apple iPhone was designed by Apple and then licensed to Foxconn to produce the product.
What is the biggest OEM company? ›Volkswagen AG, Toyota Motor Corp, Stellantis NV, Mercedes-Benz Group AG, and Ford Motor Co are the top 5 automotive OEMs in the world in 2021 by revenue.
Is Samsung considered OEM? ›OEM stands for “original equipment manufacturer”. In the smartphone industry, this term refers to companies who manufacture their own phones in their own factories. Some examples of Android OEMs are Samsung, LG, and NUU Mobile.
Is Samsung an OEM? ›OEM apps. In the mobile industry, original equipment manufacturer (OEM) refers to companies or people who manufacture their own phones in their own factories. For example, some of Android's OEMs include Samsung, LG, and NUU Mobile.
Is Sony OEM or ODM? ›ODM Original Design Manufacturer
This is why Original Design Manufacturer is a gigantic business. The global ODM and EMS business is expected to cross $734 billion by 2026. Most well-known brands such as HP, and Sony have a large portion of their products both designed and made by ODM manufacturers in Asia.
- Determine what kind of supplier. ...
- Read reviews. ...
- Communication. ...
- Ask for a sample. ...
- Online supplier marketplaces. ...
- The third party middleman. ...
- Small Suppliers vs. ...
- Potential challenges when working with Indian suppliers.
- Number One Rule. ...
- Noting Follow-Up Response Time. ...
- Are They Asking YOU Questions? ...
- Request a List of References. ...
- Weighing Tooling Cost vs Part Cost. ...
- Lead time.
Tier 1 suppliers are manufacturers that deal directly with OEM companies. These are often major companies in their own right. You may recognize names like Bosch or BASF. Though Bosch is primarily a tier 1 supplier for the automotive industry, they're also well known for their own power tool product lines.
What is private label vs OEM ODM? ›The products an ODM creates are often rebranded by a buyer as private label products and are sold for a profit. Unlike an OEM, who relies on a client brief and product design to manufacturer items, an ODM often designs and develops products independently, or in collaboration with a client.
Is white labeling considered manufacturing? ›White labeling or white label manufacturing is a process whereby a retailer, someone who wants to purchase a product for resale, contracts with a manufacturer of the product who agrees to sell that product to the retailer for rebranding using the retailer's unique brand and packaging designs.
Which is better white label or private label? ›
Private label products cost less upfront but carry similar quality standards to their original manufacturers, whereas there's a higher upfront cost for manufacturing with white stock products like Nike shoes without any exclusive rights.
What are the 3 types of manufacturers? ›When we're talking about the three types of manufacturing we're ultimately referring to, make to stock manufacturing (MTS), make to order manufacturing (MTO), and make to assemble manufacturing (MTA). These three types of manufacturing are rather common among manufacturers.
What is the difference between Original Equipment Manufacturer and ODM? ›COMPONENTS AND COMPLETE PRODUCTS: OEM OR ODM? OEM products are sold by the manufacturer based on the buyer's specifications. ODM products are finalized or are pre-designed products that are sold under the brand name of the purchasing company. ODM products are complete and finished products, unlike OEM products.
What are 3 examples of manufacturers? ›- Apple. Total Revenue (in 2021): $365.8 billion. ...
- Volkswagen Group of America. Total Revenue (in 2021): $296 billion. ...
- Toyota Motor Corporation. Total Revenue (in 2021): $255.817 billion. ...
- Samsung. ...
- Foxconn. ...
- Daimler AG. ...
- Cardinal Health. ...
- American Honda Motor Co.
One of the main advantages with an ODM model is the low product development costs; since ODM develops their own design and manufacture accordingly, they do not require much in terms of technical input.
Is Samsung an ODM? ›Global Smartphone ODM Market Report 2022 - Featuring Apple, Motorola, OPPO and Samsung - ResearchAndMarkets.com | Business Wire.
What is the advantage and disadvantage of OEM? ›OEMs provide service that aligns with their warranty standards. An OEM also will have a track record of service that demonstrates your preference for their service. The drawbacks of OEM service are cost and inflexibility. Typically, OEM service is expensive because much of the risk mitigation is built into the price.
What is OEM and why is it important? ›An original equipment manufacturer (OEM) provides components for the finished products of another company, known as a value-added reseller (VAR). In the computer industry, OEM may refer to the company that buys products and then incorporates or rebrands them into a new product under its own name.
What is the best company's competitive advantage? ›...
Examples of Competitive Advantage
- Access to natural resources not available to competitors.
- Highly skilled labor.
- Strong brand awareness.
- Access to new or proprietary technology.
- Price leadership.
These factors allow the productive entity to generate more sales or superior margins compared to its market rivals. Competitive advantages are attributed to a variety of factors including cost structure, branding, the quality of product offerings, the distribution network, intellectual property, and customer service.