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What do ODM and OEM mean, and what is the difference between them?
1. What is OEM manufacturing?
OEM or Original Equipment Manufacturing refers to a system where a manufacturer supplies materials or labor to create a product for a company or brand.
It means that the brand owner does not produce the product directly but entrusts the manufacturer to process and produce it with its brand trademark. Brand owners are responsible for designing and developing new products and controlling sales channels.
Suppose you’re about to put together the items, designs, plans, manufacturing techniques, and branding ready to go. In that case, you only need a production facility and a labor force to help produce and sell the items. In this case, OEM manufacturing is the best choice.
2. OEM: Original Equipment Manufacturer
An Original Equipment Manufacturer is a supplier method wherein the product is produced based on your design and details. It explains the relationship between a supplier and a buyer. An OEM transaction is regarded as a kind of sales and purchase relationship.
If we investigate the buyer’s perspective, it is an outsourced production based on market behavior. From the supplier’s perspective, it is a transaction in which the buyer’s brand products are manufactured following their specifications. The buyer as well is responsible for sales.
3. Example of How OEM Manufacturing Works
Apple has designed a new line of a watch. They have finalized designs, branding, market research, and product testing and need each watch to endure long.
Apple company finds a supplier in China that caters to OEM services and contacts them about their services.
For example, it’s Foxconn.
The OEM (Foxconn) has previous experience working with technological clients and can mass-produce a luxury range of watches with long time endurance.
Apple company provides the designs, manufacturing requirements, branding, logo designs, and, if required, packaging requirements.
4. Pros and cons of OEMs
1）Pros of OEM
Low production cost, high profit
OEM components or parts cost less than those that a startup or the buying company would have produced. An OEM manufacturer’s streamlined procedure allows for high production numbers. They have a wide-ranging supply chain or network.
If your preference is an original equipment service, they can produce high-quality products at a low price or competitive cost. As a result, you can sell the goods for the going rate, which will boost your sales profits and revenue.
Experience and expertise
When it comes to experience, OEM manufacturers with a long track record are at a distinct advantage. They are familiar with every detail and the ideal staging strategy for your goods. They know when to take the initiative and can quickly resolve problems.
Due to their years of experience working with various clients, they know how to handle each requirement and detail. Even before you say what you’re thinking, they can offer or recommend solutions, and their prices are fair.
Protection of your intellectual property rights
You have total control over your intellectual property with OEM. The manufacturer is prohibited from using your concepts or goods for personal gain; otherwise, they risk violating your copyright.
You hold all rights to your product because it is your intellectual property. This indicates that you are in a stronger negotiating position with your suppliers. You can change your provider if they refuse to follow the terms you both agreed upon.
Save operational costs on your business
Outsourcing will help businesses save money because they don’t need to invest in equipment or manufacturing facilities. Operating costs, such as those associated with purchasing raw materials and other production expenses, will be minimized if not entirely avoided.
However, some OEM manufacturers do not have the whole machines in their production process. Therefore, they employ the services of other companies too.
You can save time
You will save a ton of time after your product is mass-produced, allowing you to launch your business as quickly as possible. You can work on other crucial business tasks while you wait for the orders to arrive.
2）Cons of OEM
Quantity mode in orders
The manufacturer will want a minimum quantity of orders for OEM before beginning production. The cost or pricing may change depending on how many orders are placed.
Quality control is the permanent pain of OEM. The buyer’s choice of OEM production and technology is different, driven by interests, regulatory oversight, and other factors. OEM factories in the processing of products inevitably have a variety of quality problems.
It depends on whether the OEM factory or the buyer should invest more money constantly in technical research, development, and quality control.
Over-reliance on OEM and the market position are easily impacted. In the absence of sufficient competitiveness of the brand or products easily copied by imitation, over-reliance on OEM, although short-term gains, can be huge.
But as more and more manufacturers, including processing parties involved in the market competition for similar products, the buyer’s original market position is easily replaced. Such factors like the impact, timely changes in business strategy, and seeking ways to reduce costs seem very urgent and necessary.
5. ODM: Original Design Manufacturer
ODM or Original Design Manufacturer is a production technique in which the customer commissions the manufacturer to offer all services, from post-production maintenance through production and design, as well as all necessary research, development, and design. The purchaser is responsible for sales. The purchaser usually also licenses its brand and allows the manufacturer to produce products bearing that brand.
The most significant difference between an ODM and OEM is that OEM only performs production. At the same time, the ODM manufacturer does everything from design to production on its own, and the purchaser directly labels the product.
The most significant advantage of doing so is that the purchaser reduces its research and development time.
6. Example of How ODM Manufacturing Works
A client works in the music industry and has found a gap in the market.
With their knowledge of the market, they contacted an ODM. Their idea was to create a guitar that anyone could play, even if they had never learned how, and the design painting looked wild, so boys were going to like it.
The ODM receives information about the new guitar idea. So, they requested a meeting with the interested client to discuss the idea and the demand for this product in more detail.
In the meeting, the client shares and explains why there is a need for that specific product. Also, they explained what would be attractive to boys in terms of color choices and guitar styles.
The ODM took this market insight and created a cool, wild, easy-to-play guitar. Their design team works on the final design’s style, painting, and specifications.
Now the ODM can sell this product to the client. The client may rebrand if they wish, or they can sell directly to the consumer.
7. Pros and cons of ODMs
1) Pros of ODM
There is no need for R&D
You will merely inspect and evaluate the product. You can begin placing orders and negotiating terms with the manufacturer if the item is accepted based on your qualifications. Both time and money are saved.
Another benefit is that you don’t need that much money to start a business because you don’t have to build a factory or start from zero with the goods. You can reduce operational costs as a result.
Maximum use of capital
ODM can be simpler and more direct to achieve the product from the PPT to the end of the process, and only need to pay capital. In the rapidly changing market competition, the grasp of the opportunity is fundamental.
High return on investment, cost savings
ODM provides the core technology, and R & D experience can effectively improve the product’s market competitiveness to maximize the return on investment without excessive investment in R&D. Also, production can significantly save costs and expenses.
2）Cons of ODM
No intellectual property rights
Since you only buy the product from the maker, you don’t have complete control over it. They may insist that you abide by agreements when you sell their product.
Competition and limitation
ODM has a freer OEM authority; if it cannot effectively limit the patent, it is easy to be imitated by the OEM factory. It results in the leakage of some of its ideas and plans, which seriously damages its interests.
You have fewer alternatives for payment periods or options with ODM solutions. You will have to agree to everything according to the company’s rules unless you have a contract and a steady stream of orders.
8. The main difference between the two lies in
While ODM manufacturers create the parts or finished products before manufacturing them, OEM manufacturers produce products based on customer designs. OEM sells services, while ODM sells products.
If you think about establishing your brand, you need to consider the factors and considerations below:
1）Different cooperation methods
OEM cooperation refers to the utilization of brand producers’ key core technologies in designing and developing new goods and managing sales channels. The entrusted manufacturer only manufactures according to the brand’s technical information and requirements.
The ODM cooperation method is as follows: The manufacturer is entrusted by the buyer to offer all services, including R&D, design, production, and post-maintenance.
2）Different copyright ownership
OEM products are produced by processing companies other than the brand under the brand’s requirements and are sold under the brand’s name or trademark. The brand owns all technical property rights, including design rights.
The external trademark and name of ODM products belong to the brand. The design property rights belong to the commissioned manufacturer.
In layman’s terms, OEM means with other people’s technology and brand, the factory is only responsible for production. ODM means the factory’s products are affixed to other people’s brands.
9. OEM or ODM,which is best for your business?
Depending on the size of your company, OEM and ODM are both necessary and beneficial. However, more and more businesses and producers are striving to switch to the ODM approach today. The key reason is that it will significantly benefit their supply chains and develop new technology.
When deciding between OEM and ODM models, the following five factors must be considered:
- The type of goods or products that you want to sell and introduce in the marketplace
- The resources/money you have, market target, and sales goals
- Size of your company
- How much are you willing to invest
- Your total budget resources and product allocation
Both OEM and ODM are helpful to purchasing companies, regardless of your decision. The method used in developing and creating products is the only important difference. Therefore, finding a reliable ODM and OEM manufacturer is essential to reaching your objectives, goals, and targets.
10. OEM and ODM FAQs
1）Why are OEM and ODM important?
OEM and ODM are both important because they carry YOUR BRAND. Branding is a marketing strategy manufacturers, or sellers use to captivate potential customers or enhance the satisfaction of their current customers.
For example, what’s the BRAND you always remember when talking about a smartphone? APPLE!
Whether you choose OEM or ODM, it still refers to one thing: your BRAND. Why?
It sets your brand apart from others.
Each store has unique brand characteristics, so how you label and market it to set it apart from other stores is crucial for its long-term success. You might stand out from your competitors if you brand your store effectively.
Private label branding enhances user satisfaction and trust.
When you begin to label products, you give them a higher standard of quality than your customers. How?
Once the products’ quality and price exceed their expectations, customers will have a better user experience. They will have more confidence in the brand and be more likely to make repeat purchases and stick with it.
Branding drives huge free traffics to the store.
This promotes user loyalty. When you implement coupons during the holiday season and other marketing campaigns, customers who are already loyal to you will be eager to share with their friends on social media. This generates a ton of free traffic.
The Brand brings higher profit.
Branding gives your product an edge to sell more and be recognized in the market. There are so many products you can buy from different sellers online, and most of them only come from one supplier. But you choose one based on the brand’s appeal and what others say about it.
2) Is OEM safe?
OEM service is legal and safe. If you do not use other companies’ intellectual property to create your brand, your OEM manufacturer will protect your interest through a contract. To ensure quality and risk-free service, you must hire only a trustworthy and reliable OEM manufacturer.
3) Is OEM cheaper than ODM?
OEM is more expensive because you pay for all the related expenses in all stages of your product development. For example, the buying company must shoulder the cost of injection molds and tools to follow the order blueprint.
The manufacturer must also adhere to global product standards for safety and consumer protection. The cost of OEM/ODM is determined by several factors and where you’re getting it. The ODM and OEM difference in China and other countries is the cost which is 20-50% cheaper.
Another factor is the type of product that you want to produce. Is it technically advanced or just standard? Is it multifunction or basic? The more advanced the product is, the more it is costly. Plus, the quantity or volume of orders varies because bigger orders get more discounts.
4) How do I know if my ODM is legit?
You can verify the company or manufacturer by checking on the Chinese Bureau of Commerce using their unique business registration number. You can also hire an agent to do a background check for the company. You can also use apps like Nuna to see all the details or information of the manufacturer.
5) What should you consider when you use OEM or ODM?
Selecting the right type of supplier
When you have selected the type of supplier, you already know the OEM/ODM difference and its risks. When selecting a manufacturer in China, learn the geographical area to find your product niche and focus only on that specific location.
Reliability and capacity
If you want a good-term relationship with a manufacturer, you’ll want it to be reliable and capable of providing consistently excellent service. When hiring a supplier, check if they can mass-produce the required volume.
Most likely, if you hire a small manufacturing company, their capacity may not be sufficient to produce large volumes if they only outsource part of the process to create the product. For example, if a supplier does not have complete equipment in their factory, they will hire a third party to do it for them.
Seller and buyer communication
Not all Chinese manufacturers can speak English or other languages. The language barrier can be an obstacle, so set your expectations. Therefore, most foreign companies hire an agent to mediate and communicate on their behalf to ensure understanding.
Put everything in writing that both parties can agree on. Lines of communication, such as email, WhatsApp, or company contact numbers, should be open for updates and inquiries. When your manufacturer replies all the time, you’ll be okay with getting in touch with them.
Resolving conflicts and issues
In the middle of the process, some issues and conflicts can arise. Before you close a deal with your manufacturer, cite some scenarios and ask how they will resolve them.
Find a supplier that is open to resolving issues proactively and willing to adjust, especially if the problem is due to their diligence.
Satisfaction, Qualification, and Timetable Commitment
Your satisfaction matters when deciding to proceed with the partnership and choosing your manufacturer.
You are delighted with the product presented, whether OEM or ODM; the next step is to evaluate their safety standards and other qualifications.
Regarding timetable commitment, if your supplier agrees to produce it at a specified time, they must update you accordingly at every stage. Ensure that the delivery procedure is in order because delays in shipping can be frustrating and unpredictable too.