OEM-ODM as a service sector

This article explores what the definitions of OEM-ODM manufacturing are and how to understand the choices you must make in selecting partners. We review the services that OEMs and ODMs can offer and try to guide you towards selecting the type of service provider that best fits your business model. Whether you’re an international brand trying to grow your product range, or you’re a startup company looking to bring your first product to market with help from a manufacturer, we aim to cover the basic understanding you’ll need, to navigate these complex decisions.

In the wider manufacturing environment, electronics manufacture has grown into a key and standalone sector, offering customers specialisation options for optimum fit for their product and developing refinements of service description that can be bewildering.

However, in choosing an OEM relationship you need to understand the Venn diagram that defines the industry, and the varied factors are neither simple nor regulated to conform to a common vocabulary. The exponential growth of the electronics sector in particular, increasing connectivity and data linkages, certification and regulation and huge growth in demand for products has caused accelerated development of this terminology in this area.

Defining some terms

At a guess, you’ve got terminology confusion. You’re not alone.

Ask any two experienced manufacturing outsource managers for the definitions of OEM/ODM service provision and you’ll get at least three answers. Ask them the relative advantages that each offers and things will get more confused. While these terms are useful shorthand, their definitions are fuzzy, which causes confusion.

Some of this confusion probably originates with the substitution of English words into an originally Dutch phrase:- onder eigen merk. Translated to English, this means ‘under own brand’. But this clarity has been lost in reapplying the phrase with subtly different meanings, as words have got swapped, leading to wide interpretation in the definitions.

Please note: We have not fully analysed the nature and range of terminology used in the space – this is a simplified review to get the major categorisations clear and understood – much deeper analysis is covered elsewhere.

So let’s see if we can agree on a definition that at least we all understand – even if it’s not universally accepted by others and doesn’t worry about Dutch origin phrases, but works with common, current understanding of the nature of product, development and manufacturing services. How about we start with some clear and simple assumptions;

Product development and manufacturing involves a spectrum of services – and you’ll use a spectrum of providers (including yourself and your own in-house team) to deliver these. For the purposes of this discussion, let’s assume that this is a unique product concept/solution that you own exclusively – as opposed to an existing product you’ll buy and re-brand (more on White Label later);

  • First there’s the problem-market-ideation loop, which most products go around many times before crystallising into a market-test ready state
  • Next there’s the ideation-refinement-MVP/prototype loop, where the idea and solutions to the identified problem begin to take tangible form
  • That’s followed by the development-prototype-detailing operations, where the product takes something like its final market aspect and gets embodied in cosmetic, functioning and user handleable things.
  • After that, the product is ready for prime time and it will get to manufacturing partners to take over (some or all of) the preparation for making – build instructions, inventory management, production line setup etc.
  • Then there’s the mass production preparation-testing/QA-validation loop – leading to pilot build (pre-production) and then mass production; product testing and validation and QA process setup
  • Ongoing production, QA, inventory management, change control, warranty, customer returns, end -of-life and the detail of ongoing mass production is the final, ongoing stage

 

So far, so easy enough to agree. But where the ODM/OEM relationships sit on this spectrum is hotly debated by people who care.

Some assume that YOU, as the product originator and owner of the concept/solution/IP are the Original EQUIPMENT Manufacturer (OEM). We are going to go out on a limb and say “NO!” – that ownership defines the OBM – Original BRAND Manufacturer.

Some say that an OEM will only make PARTS of your product, but not the ‘whole’. Maybe, but that seems too restrictive.

So here’s OUR take on this:

Any contract service provider who helps you with (1)-(3) above is offering Development and/or Design Consultancy services.

If that service provision runs on through (4)-(6) then that’s an Original Design Manufacturer (ODM) provider, who is working under Private Label for you. And they will do the same for others, including your competitors – and potentially for their own products too.

Any contract service provider who helps with (4)-(6) and has little or no input in (1)-(3) is an Original Equipment Manufacturer (OEM) – whether they’re making some parts for you to assemble OR making all the parts for you to assemble OR making all the parts and assembling them for you.

…and then, if the service provider is the design OWNER (so you’re buying their product to sell on with your branding) and you have little or no input into the product development, they’re operating as an ODM offering White Label service provision.

Original Design Manufacturers (ODM)

The range and capabilities of ODMs is constantly increasing, and they usually provide manufacturing services for multiple clients and in large volume. Sometimes these clients are even competitors with each other and with the ODMs own products – but they tolerate the situation because they see the ODM they use as unequalled and trustworthy, with their particular IP.

An ODM is, by our definition above, a Contract Manufacturer who offers full spectrum services in developing, designing and manufacturing products. They can be partly or fully responsible for performing your Research & Development for your products, often drawing on wider experience and connectivity than the brand owner (you) can access. You can benefit from employing the design capabilities of such suppliers because of their lower labour costs, so you will not have to take on fixed overheads for what may be transient development tasks (in your business). This setup allows you to focus more on sales and on the marketing of your product, as the ODM takes away the burden of R&D.

It also integrates the product into the Contract Manufacturing process very early, so your manufacturer has greater ‘ownership’ of the process and issues, reducing the input and planning drive that you need to provide. Downside – you cannot move to another Contract Manufacturer, as you simply don’t hold a lot of the information that will be needed – even if you have rights to the design.

There are other potential benefits in using the services of an ODM. They can significantly reduce the development time for the products and they can drive the often needed shifts in concept and user experience, based on their greater general product experience. They can more easily integrate the product into their own manufacturing processes, to reduce the early production friction.

However, heavy reliance on outsourced product development is likely to result in design inflexibility, or very high costs for engineering and product changes. It also creates the risk of specification surprises downstream, as the supplier makes changes that they don’t necessarily inform you of or give you any choice in.

In principle, this setup allows you to focus more on your core business strengths – if they are more in the marketing and customer experience than in the engineering. This will result in lower overheads for you, as you will not need to expand your team and its skills into the detailed engineering of the product, but can draw on an experienced team without needing to own it.

This has the disadvantage that you will not have such close, hands on control of product designs or specifications, manufacturing processes, QA etc, if you have handed the development process entirely to the ODM. This may or may not be important – it depends heavily on the technical complexity of the product and the rate of update/iteration that can be expected.

Original Equipment Manufacturer (OEM)

As we have indicated already, OEM is essentially an interchangeable term with Contract Manufacturer.

OEMs are set up to produce their customers components and assemblies, at prices that result from mass production advantages that you cannot achieve in-house. By handing responsibility to sector specialists, you benefit from deeper experience in their specialisations – so you don’t need expertise and equipment in-house for the astonishing range of services that even a basic manufacturing process calls upon.

OEMs operate on the basis that you, the customer, own the design and use their services to  add value to your products when they are sold – and that their services are invisible in the market and presented as part of your capability. In this way, you can outsource services that have little strategic value to your business, so you’re able to focus on the areas where you add the greatest value.

The main advantage of employing an OEM is that you retain creative control over your product design. Using an OEM, there will also be little to no intellectual property restrictions that may prevent switching to a different manufacturer in the future, if needed – and you are the owner of the manufacturing package that enables and informs the process.

This portability of your manufacturing package is a benefit in solving problems in the relationship as the OEM knows they keep your custom only when they perform well and remain competitive.

But it is also a huge advantage when you need multiple sources for manufacture – to handle volume, to address regional in-market issues and to provide supply chain insurance.

But it’s critical to recognise that the costs involved in being the design authority, responsible for every detail of the product and its components, specifications, change control and QA/assembly instructions are costs that must be borne by you, directly.

Choosing between OEM and ODM

When deciding where you are comfortable on the OEM – ODM continuum, your decision is likely to be driven by the availability of resources. If your company has an established Research and Development budget, along with a well thought through and realistic development-production-go-to-market plan, then using an OEM is a good fit. If time and resources are scarce, then ODM may be the route to go to launch a possibly more limited and simple product.

Your choice of the OEM/ODM route can depend very heavily on the nature of the technology you are developing. If you have great plans in development of the market presence of a relatively simple product, with little or no unique IP, then an ODM (White Label) route may be exactly what you need.

For example, if you have a market need for a USB car charger, you may choose to rebrand an existing product from an ODM (White label) supplier and go to market fast – differentiating your product by market approach, branding and accessories.

You may choose to appearance-alter an existing product, giving the supplier an industrial design image from which to develop a housing that makes your product unique in the market – but primarily differentiated by aesthetics. This would be an ODM (Private Label) product, as you would likely own the ‘look’ and the tooling that makes it, though not the core product information such as PCB assembly data, schematics, software etc.

Alternatively, you may have a unique take on how such a charger works, making your competitive edge primarily technical. So you’ll likely undertake much of the R&D yourself – within your own team – as this is where growth of your enterprise value partly lies and you need to retain the knowledge base in-house. In this case you’ll most likely perform much or all of the engineering design in-house and use one (or several) OEM suppliers to make the parts and assemble/test the product. The more unique your product, the more trade-secret or patented IP it contains, the more likely you are to not allow significant design aspects to be performed outside your core team. This is key to building long term value.

At the extreme end of this IP route, you can still OEM outsource the entire manufacturing service – but split the tasks between unconnected providers – one building your PCB assemblies and another programming them, for example. You can go so far as to use various sub assembly OEMs in building the elements of your product in isolation from each other, with final assembly being in-house. All options should be considered

But most products are not like this – the owner/brand has a small group of technical or performance steps that bring an advantage to the product, compared with competitors – and exploiting those advantages is more about cost control and speed than it is about IP and secrecy. Most products are small step advances on something that already exists – often advances over a product that you already make and market. You neither want nor benefit from advanced R&D – you need skilled people to perform reliable executions of largely or fully understood steps – and you need these to happen quickly, on a well managed budget.

It’s also worth noting that selection of a group of great OEM tooling, component and assembly providers will de-facto give you accessible and extensive technical, design and process support from a huge knowledge base. A typical OEM supplier will want you to succeed and will work hard to make that happen, assisting in any and all stages – if you ask them to;

A plastic mould, die cast, forging, extrusion, pressing (etc.) tooling supplier will have seen components and assemblies like yours before. When you present your parts for quote, ask for their skilled critique and be open to advice – they will very likely save you money and heartache by sharing their experience.

A capable PBC and PCB assembly supplier will always be happy to perform a BOM, schematic and PCB engineering review, to advise about design issues (RF, layer count, materials selection, component specs, component end-of-life and more).

A Contract Manufacturer looking to perform your assembly tasks will ALWAYS have a view as to what works best, what changes will ease their tasks or improve reliability etc.

A contract QA company will be eager to help in setting up your inspection processes and equipment – because that’s part of their service and also because getting you to do it the way they believe is best will make their life easier and their service more effective. Drawing on wider experience to get ready for the things that can and will go wrong will make your process more anti-fragile, while costing you very little

There definitely are disadvantages to the ODM route. You don’t get the protection of IP rights, unlike using OEM supply chains. This factor can lead to contractual disagreements – so rights and responsibilities must be really well defined at the outset.

Commonly, ODMs demand predictable sales volumes and will seek contractual take-or-pay clauses. When dealing with ODMs, you must undertake very thorough due diligence, with professional assistance. Procurement and business law and contract best practice can be expensive to get right – and can be much more expensive to get wrong.

And we have barely begun to discuss the burgeoning range of TLA (Three Letter Acronyms) in the space. Thorough review would be the subject of a text book, not a post like this. Here’s a few commonly used terms that might confuse, if we don’t clear up the meanings;

EMS (Electronic Manufacturing Service)

EMS suppliers are usually a division or part of an OBM, making the term redundant or of questionable use – however, it IS used, so its meaning needs to be clear. EMS companies and manufacturers are companies which manufacture and populate PCBs to make PCB assemblies, encompassing services from design, through manufacture, testing and validation. EMS providers can also carry responsibility for warranty and customer returns of the products they make for OEMs, ODMs and OBMs.

In addition to manufacturing services they provide, EMS providers also offer procurement and logistics support, sourcing bare board PCB and components and providing testing and QC, calibration and programming services, delivering finished and warranted product to the OBM they support or are part of.

Some large EMS providers are Mitsubishi, Honeywell, LG Electronics, Panasonic, and Hitachi.

CEM (Contract Electronics Manufacturer)

Specialising in electronics manufacturing through PCB assembly and often associated electromechanical assembly (box build), CEM providers supply finished electrical sub assemblies used by OEMs in finished products.  These electronic components/sub-assemblies are generally used in products branded by the OBM who owns them, being only part of the final product. Due to the issues in manufacture of the sub-assemblies they create, CEMs are usually highly certified. They provide customers with expertise in regulations and industry standards, utilise advanced technologies, and have sophisticated inventory management systems, to handle large numbers of components.

It is arguable that CEMs are simply a subgroup of OEMs, specialising in electronics and cable assemblies to the exclusion of more mechanical work. The term isn’t really useful, but it is increasingly used. It’s covered by the term OEM and many CEMs perform box build services, reducing the differentials to near zero anyway!

Joint Development Manufacturer (JDM)

Yet another outsourcing method/definition is Joint Development Manufacturing (JDM), presented as a fine balance between OEM and ODM: key aspects are designed and manufactured by the outsourcing company, where design and manufacture of simpler sub-assemblies, as well as the final assembly process, are undertaken by the JDM. This can create an adaptive partnership between the originating company (OBM) and the JDM – requiring collaboration from beginning to end.

One scenario is that a brand or OBM has a design concept, but lacks the design expertise to complete the design in-house. A JDM approach offers the OBM substantial control over the process and output, but access to the design and manufacturing capabilities needed for a successful product.

The term is in increasing use, but it can be argued that it is simply a particular case of a well constructed ODM relationship.

Overall, remember that these terms are widely used, but they lack common definitions – so talk to potential suppliers and make sure you’re singing the same song!