In light of the ongoing pandemic, the eCommerce space has grown with increased online spending habits. As a result, businesses looking to profit will undoubtedly come across the acronyms OEM (original equipment manufacturer) and ODM (original design manufacturing) quite often.
These terms refer to two types of cooperation models used in the industrial world that suppliers commonly adopt and are essential to understand. Over the years, both models have provided solutions to businesses by catering to customer needs using technical and visual customization options.
However, depending on the nature of your business, there can be a difference between using one model over the other. Here we will explain each type, its benefits, and which one may fit you better.
What is the OEM model?
OEM refers to a contract that deals with outsourced manufacturing in a business supply chain. The model works around the idea that a production factory manufactures a client’s designs according to product specifications.
Once a company has completed the product development, market research, and design engineering phases, OEM manufacturers are usually employed at the last stage. They are fit for businesses that don’t have the manufacturing infrastructure to carry out intricate product detailing or deal with large sales volumes.
Moreover, using OEM services can be helpful as they offer manufacturing information such as dimension and product sizing analysis. Furthermore, by outsourcing the manufacturing stage, businesses can alleviate this responsibility and benefit from high-quality products in a timely and cost-effective manner.
Pros and Cons of choosing OEM
Here are some advantages of using an OEM service:
- Full intellectual property rights over designs and product research.
- Freedom to switch and negotiate suppliers and their rates.
- Ability to alter designs based on industry trends.
- Lower cost and responsibility in the manufacturing stage.
Here are some disadvantages of using an OEM service:
- It can be disadvantageous for small business owners who find difficulty in resources and capital to complete all the prior stages of product development before the manufacturing stage.
- Most OEM manufacturers have minimum order requirements that need to be met.
- Can run into manufacturer differences with avant-garde designs.
What is ODM manufacturing?
The ODM model is a type of outsourced manufacturing. The difference is that the scope of an ODM’s service is broader. They are usually involved with the product development stage and provide other services in a product life cycle.
ODMs operate by working together with clients throughout the product life cycle, including the research and development stage. They are usually employed by small and medium-sized companies that need technical expertise and additional input on design and product specifications.
In addition, ODMs are also useful because they deal with the manufacturing stage, ensuring that designs are carried out without any communication error.
Pros and Cons of choosing ODM
Here are some advantages of using an ODM service:
- ODMs provide the technical skills and resources that smaller businesses might not have in-house. This saves a lot of time and money, especially for companies that deal with a diverse product line like furniture.
- They ensure high-quality products by controlling all aspects of a product life cycle.
- They require a lower start-up capital than OEM services.
Here are some disadvantages of using an ODM service:
- Most ODM’s will possess large percentages, if not all, of the intellectual rights to product design and property.
- If an ODM has other clients in the same industry, businesses can have difficulty differentiating their products from competitors or potentially infringing intellectual property rights.
- While requiring lower start-up capital, they often have higher price competition and, thus, lower profit margins.
Why do we need OEM or ODM services?
Creating in-house manufacturing infrastructure and hiring a suitable skill set is a risky and costly investment. Moreover, running a factory means managing a separate business, including managing the hundreds of additional employees, optimizing resource allocation, and ensuring product quality control.
Businesses that can benefit from OEM services primarily focus on innovation and R&D. It is practical for them to outsource the manufacturing stage to reduce responsibility, time, and costs.
In addition to the difficulties faced in the manufacturing phase, small and new businesses may also find other stages of a product life cycle complex. This includes the management of resources, design tuning and modifications, market research, and manufacturing.
Alternatively, hiring in-house product development and market research teams can be very expensive and time-consuming. This is where ODM services come in to help make up for the lack of technical and/or skills needed to bring ideas to life.
ODM services can also be fit for bigger eCommerce businesses that need the additional resources or labor in helping alleviate some workload on the need for the production of new designs. They can also be helpful for companies that have established sales and marketing channels but lack the R&D infrastructure.
Differences between OEM and ODM
The main difference between the two models is their input in a product development life cycle. As a result, businesses using either service will experience dramatically different costs, lead time, and products’ intellectual property rights.
You can think of modern ODM services as essentially private labeling. The main concept here is that clients work with a range of product templates that can be re-branded with a company’s logo, color, and packaging.
While this lowers risk and saves time and money as there is no need to invest large amounts of money into product R&D, most ODM manufacturers will also work with other companies in the same industries, making products significantly price competitive. As a result, It can be common for ODM clients to spend large amounts of money on marketing and sales.
On the other hand, OEM companies help manufacture products exclusive for businesses, as well as allowing clients to exercise full intellectual rights on their designs, such as remodeling and improvements.
Nonetheless, while this freedom allows businesses to stand out from competitors and help build brand value, the resources needed and the time it takes can be crippling for many young and new companies.
So which one is better for you?
For those looking to start their own eCommerce business, ODM is the safer, faster, and better choice. Most companies in the eCommerce space start with small capital and are partnered with online retailers like Amazon and eBay through fulfillment based models as a result.
Furthermore, because most SMBs (small and medium businesses) don’t have their own product design and research departments, it can be hard to develop a sellable and distinguishable product feature. This can make private labeling a better way to generate some capital before potentially moving into OEM operations.
Where do I find OEM or ODM suppliers?
Now that you know which one is better for you, there are three ways in which you can find OEM or ODM suppliers.
Choosing a company with a proven track record can help smoothen and simplify communication processes. In addition, using reliable e-retailers like Alibaba can lower the risks of working with an online supplier. You can usually find their information on their websites or reach out to them for more specific requirements.
On-side trade fairs and wholesale markets
If you find online suppliers risky or uncomfortable, you can also visit factories within your city physically. This can prove to be more convenient as you can see the products for yourself and ensure the end quality.
Many big international companies are moving into Southeast Asia from China. So, you may well see a wide range of local ODM and OEM manufacturers to choose from if you run an eCommerce business in this region.
Lastly, using a professional sourcing agent can help expedite the searching process. These agents/ fulfillment partners usually have the information and networking needed to determine which eCommerce store will best suit your company’s needs.
While each model has its advantages and disadvantages, there is no question that they both serve helpful in any business’ product development life cycle.
Countries like China have proven the usefulness of OEM and ODM services in the eCommerce supply chain by reducing risk, time and costs in developing products.
It is crucial to understand which service best suits the needs for your idea execution, and choosing the right one can help you grow your business.
After choosing an OEM or ODM service, the next step is to start looking for a fulfillment company to help store, sell, and deliver these products. Fulfillment companies like MultiB2B also have networks with retailers in the US, such as Amazon, Walmart, and eBay, and use advanced warehouse management and logistical technology to remain ahead of the competition.