The OEM & ODM Practice
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Traditional sourcing practices are outdated. Advanced technology, digitalization, and IT infrastructure empower especially retailers to engage in e-sourcing rather than playing a passive role within the supply chain. The shift affects all participants and everyone is challenged to respond by transforming operational processes. As result, you find many manufacturers who offer value added services to retailers which had been solely offered to distributors or wholesalers such as OEM / ODM, freight forwarding, consolidation, warehousing …. But what do OEM and ODM actually mean?
OEM stands for Original Equipment Manufacturing. An OEM product is made according to the buyer’s product specification. That means, any product with customized design, material, dimensions, functions, and colours can be classified as OEM. There are some who say OEM means a product that is designed entirely based on the buyer’s specification, while others classify even the slightest modification of an existing ODM product design, as OEM. Most agree that the primary definition of an OEM product is a product for which tooling (injection molds) must be produced before production can start.
ODM stands for Original Design Manufacturing. That means, there is an existing design which is developed by the manufacturer. As consequence the ODM product can either be the result of the supplier’s own research and development (R & D), or ODM products are (legal or illegal) replica of another product or brand. In this context the term private label or white label is common to describe ODM products which can be branded with the buyer’s logo. The so called white labeling practice has become very popular among retailers, especially among those who use online marketplaces such as Amazon. The concept of ODM and private labeling is that the supplier provides a template product that the buyer can brand with the own logo. Hence, you save time on money as you don’t have to go through product development processes, nor do you need to invest in expensive injection molds and other tooling.
On alibaba.com, made-in-china.com and many more you find suppliers who claim to offer OEM services. That simply says that suppliers are willing to make products according to the buyer’s design, basically every supplier in Alibaba and other sourcing platforms can make OEM products. Hence, retailers are not required to go out and search for suppliers that actually state that they offer OEM products, it can be taken for granted. It is more challenging to find suppliers that offer ODM products.
The sourcing platforms list a tremendously high number of suppliers and it is easy to get mistaken by product listings in various supplier directories, and assume that all suppliers have all these products. First of all, factories make orders, they don’t have stock waiting for buyers. Second, product listings can fall within any of the following three categories:
Customer Products
These designs may be owned by existing customers. The product is only shown to demonstrate what they have made in the past but the supplier may not have a fixed spec sheet, or even the design drawings of the product.
Demonstration Products / Fake Products
Some suppliers upload images of products that they never manufactured. Hence, the buyer must pay for the tooling, in which case it is questionable if the product can even be classified as an ODM product. That said, it can be acceptable, if it is a digital design created by a supplier to showcase what they can make. However, it is not acceptable if that is not the case.
Supplier Developed Product
Some suppliers invest in product R&D and tooling but his is only a small part of all listed products on the major supplier directories. If you go down this route, keep in mind that the supplier will have a lot of leverage, as is their intellectual property (IP).
ODM products are quite common in developed industries such as electronics, machinery and other hardware that is costly to develop. Hence, you find ODM products such as kitchen appliances, LED lighting and so on developed by Chinese manufacturers. In general, ODM products are less common in low cost industries, that are more design rather than function focused such as apparel, accessories and jewelry.
Actually, there is no strict category of ODM suppliers. Generally said, all manufacturers have started off as OEMs, making products based on their buyer specification. Hence, some suppliers have invested in own ODM products, while others simply upload for reference only products to sourcing platform pages. That is alright, you just need to be aware of it in order to avoid critical mistakes.
One of the biggest issues in ODM is the question:
Is the ODM product the intellectual property (IP) of another company? As mentioned before, listed ODM products are not actual ODM products but photos of goods made for other buyers in the past. In case those product designs are the IP of a buyer you should not use brand names and trademarks that you don’t own. Additionally, you should check on amazon.com if you can find similar products on the market already. Keep in mind that not every product or function can be patented. There are many cases where only the brand name is the IP, even if the product itself was designed by another customer. You won’t be able to patent a T-shirt but you can patent a new LED light bulb. Another advice, go into further detail, search for patents or ask the supplier to show documents proving that they own the patent for the ODM product. Keep in mind that a Chinese patent is only valid in China.