What Do ODM And OEM Mean? // ODM vs. OEM vs. Contract Manufacturing Defined
Three acronyms frequently surface as pivotal players in the intricate product development and manufacturing landscape: ODM, OEM, and Contract Manufacturing. Each of these terms represents a distinct manufacturing model, catering to the different needs and strategies of various businesses throughout the product development lifecycle. Understanding what ODM (Original Design Manufacturing), OEM (Original Equipment Manufacturing), and Contract Manufacturing entail is not just about getting acquainted with industry terminologies; it’s about comprehensively grasping how each model can shape the trajectory of a product from conception to market.
In this blog post titled “What Do ODM and OEM Mean? // ODM vs. OEM vs. Contract Manufacturing Defined”, we aim to unravel these concepts, clarifying their meaning and how they differ. This exploration is crucial for entrepreneurs, business owners, and anyone involved in the product development and manufacturing sector, as the choice between ODM, OEM, and Contract Manufacturing can significantly impact your product’s quality, branding, cost-effectiveness, and market relevance.
We’ll delve into the world of ODM, where manufacturers produce and design products, allowing businesses to select and brand existing product designs. In contrast, we’ll explore OEM, where manufacturers produce products based on a company’s design and specifications. Additionally, we’ll discuss Contract Manufacturing, a broader concept encompassing various aspects of production outsourcing.
Join us as we dissect these manufacturing models, providing insights into their advantages, challenges, and best-fit scenarios for different business needs, whether deciding on the level of control over product design, considering cost implications, or assessing market entry strategies, understanding the nuances of ODM, OEM, and Contract Manufacturing is a vital step in making informed, strategic decisions for your business.
When looking for a manufacturer for your products, there are three basic types of manufacturing arrangements: Original Equipment Manufacturing (OEM), Original Design Manufacturing (ODM), and Contract Manufacturing (CM). So, what are the Benefits of ODM, OEM, and contract manufacturing? After running Cosmo for over seven years and working with hundreds of factories in almost every conceivable arrangement, we have learned that our clients have very different expectations of how they expect to work with a manufacturer. These three categories cover almost every arrangement with factories that our clients and we have worked with.
The simple definitions are:
OEM – Original Equipment Manufacturing // When a factory makes a product but customizes it based on a client's design
ODM – Original Design Manufacturing // When a manufacturer designs and produces it in-house and sells it to a client with little to no modifications
CM – Contract Manufacturing // When a Client fully develops the product in detail and hires a manufacturer to make the product
What Does ODM Mean?
ODM stands for Original Design Manufacturer, meaning that the factory produces products based on designs provided by the Buyer, but these designs are loosely based on existing products.
When the Buyer works with the factory, the Buyer purchases items that the factory is already making. The Buyer is only expected to design or own the packaging and branding. In some cases, the Buyer won’t even change the branding or packaging and sell it as the factory provides; in other cases, the Buyer may request minor cosmetic changes, such as color adjustments and the addition of logos. Of course, there is a gray area between OEM and ODM, depending on the extent of customizations made. However, to keep it simple, ODM is essentially a company that takes an existing product and adds its customizations.
Trade shows such as Global Sources and the Canton Fair are great examples of ODM manufacturing. Each factory has elaborate booths to showcase its designs, allowing potential buyers to purchase them as-is or with customization, and then sell them in their respective countries. China has long been a leader in ODM manufacturing, while other countries have lagged. Most manufacturers outside of China tend to be Contract Manufacturers, which we’ll discuss later in this article.
The primary concern with ODM is intellectual property and ownership of the product design, including customization. For the most part, since the factory did all or almost all of the design, they own the intellectual property (IP), while the Buyer owns the copyrights to the branding. This can create a massive issue if you fear a manufacturer selling your product. Fortunately, there are ODM agreements that can prevent factories from using your customizations and branding, but likely not prevent them from selling the same or similar products.
What Does OEM Mean?
OEM Stands for Original Equipment Manufacturer, which means that the factory produces a product based on designs provided by the client.
When you enter into an OEM arrangement with a factory, the client is expected to provide a detailed product spec sheet and product design for the factory to make. Various degrees of OEM exist, ranging from using a product that the factory already manufactures with significant customizations, such as changes to shape and dimensions, to designing a nearly new product from scratch. If you create a new product that does not already exist on the market, your arrangement is likely to be a contract manufacturing agreement.
Custom molds or other tooling must be created for many OEM projects to make the item. These must be made before production starts, and the Buyer almost always pays for the cost. Sometimes, the manufacturer will cover the cost of the molds and include them in the sales price.
Since the Buyer is also designing the product and creating the product spec sheet, they are more likely to own the Intellectual property. In addition, since the Buyer is also paying for the tooling and molds, they own those parts of the production, and they can have contracts that prevent the manufacturer from using them for other clients.
What is Contract Manufacturing?
Contract Manufacturing is broad and generally a step beyond OEM manufacturing. For example, the Buyer has a new product not on the market and contracts with a manufacturer to produce the item. An example is Apple, which designs every aspect of the iPhone but contracts Foxconn to manufacture it. In Apple’s case, like many other buyers, Apple is also designing and sourcing components separately and sending them to Foxconn to be used in the final product.
The IP for contract manufacturers is more straightforward since the Buyer designs all aspects of the product. Therefore, they should have total ownership of the intellectual property rights. However, this does need to be enforced through a contract, patents, and trademarks, which are the Buyer's responsibility to acquire.
Is ODM the Same as Private Label?
The short answer is yes. A private label, also known as a White Label, purchases pre-made products and adds a logo or colors. This is a common practice for FBA and other e-commerce sellers, and it is one of the easiest ways to enter the retail market.
Check out our Private Label Beginners Guide
ODM vs. OEM
Several factors need to be considered when comparing the two, including development time, intellectual property ownership, tooling costs, and others.
Intellectual Property Issues and ODM vs. OEM vs. Contract Manufacturing
Each of the three has completely different IP rights. ODM grants most IP rights, except for branding, to the manufacturers, whereas in Contract Manufacturing, all IP rights belong to the Buyer. OEM falls in between, with the Buyer owning the branding and some aspects of the design, while the manufacturer retains the rights to other aspects of the design that they created themselves.
It is also very challenging to patent ODM items, as they often consist of products already on the market. For instance, you can’t patent a baseball cap, but you can patent a sweatproof band on the inside that you developed, and it’s used in baseball caps.
Ultimately, buyers must acquire intellectual property, including patents and trademarks, before manufacturing. It’s also important to note that only contracts written in Chinese are valid in China, and you will be fighting an uphill battle should you sue a manufacturer in their own country.
The best way to protect yourself is to file the brand and design trademarks and patents in the market in which you will sell and use them to take down sales channels should your manufacturer or competitor use your IP
Who Creates the Product Spec Sheet?
For each of the three methods of working with factories, the expectation of who is to create the Product spec sheet varies:
OEM – Created by the Buyer, but may have help or guidance from the manufacturer
ODM – created by the supplier/factory
Contract Manufacturing – created by the Buyers
ODM vs. OEM product development time
Since each method requires a different level of work, the time it takes to produce a product once the designs are ready varies significantly.
ODM – 1 to 4 weeks
OEM – 1 to 6 months
Contract Manufacturing 3 – 12 months
With ODM, you use existing designs from the manufacturer with minimal customizations. As a result, you can move quickly and get a product in stock and ready for retail. This is one of the reasons ODM/Private labels are recommended for first-time buyers.
ODM can take anywhere from a month to considerably longer, depending on the degree of customization. For example, if you are getting a mold made for your product, you should expect it to take at least four weeks to produce. Additionally, you can expect to wait approximately 2 -4 weeks for the product spec sheet and design files to be created.
With contract manufacturing, you create all aspects from scratch, which can take considerable time and effort. This includes designing the product, setting up manufacturing, and sourcing components.
Once the manufacturing lines are set up for mass production, you can expect them to take roughly the same amount of time between all three. The main delays
Who pays the cost related to molding and tooling
ODM is paid for by the factory or supplier
OEM – Paid for by the Buyer
Contract Manufacturing – paid for by the Buyer
The Pros and Cons of ODM vs. OEM Manufacturing
The Advantages of OEM
Most suppliers are OEM factories, and it’s the easiest type of manufacturer to find
With OEM, you can design the product as you see fit, as long as it is technically feasible.
You own the intellectual property as long as you have the necessary contracts and protections in place.
You’ll have a product that is uniquely yours on the market.
The Advantages of ODM
In the short development process, you can quickly get an item into production and retail.
Most manufacturers can customize within a limited degree
There is no added cost relating to tolling or molds
The Cons of OEM
The Buyer must pay for all tooling and molding costs, which can be extremely costly, depending on the degree of customization.
It takes at least a month, and usually longer, to create a mold and do new tooling.
You need to provide all design files and format them in a way that can be understood by the manufacturer and read by the machinery.
The Cons of ODM
You can only buy what is already offered by suppliers
Your competitors have access to the same products that you do
You do not have any IP protections
You trust that your supplier is not infringing on someone else’s intellectual property.
Where to find OEM, ODM, and Contract Manufacturers
ODM is most common in China, and finding ODM suppliers outside of China can be challenging. Despite the recent trade war, China remains the leading manufacturer of all types, although several countries, such as India and Vietnam, are rapidly catching up. It can manufacture various products, but other countries, such as Vietnam, are well-suited for contract manufacturing.
Regarding Online resources, Alibaba and Global sources are the best for finding ODM and Private-label products. Global sources have a rigorous verification system to ensure quality and trustworthiness, while Alibaba offers the largest selection of suppliers, although many are questionable. Here are the best alternatives to Alibaba.
When sourcing from Vietnam or other countries, factories expect clients to provide their design files and not have existing products available. If you plan to do contract manufacturing or OEM, it’s perfectly fine to look outside of China. Still, I do not recommend sourcing ODM products outside of China, and I say this as someone with more than five years of experience sourcing and manufacturing in Vietnam.
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