Introduction
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.
What is OEM (Original Equipment Manufacturing)?
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.