• Introduction
• ODM, OEM and CM Manufacturers
• What Do the Terms OEM, ODM and CM Mean?
• The Basic Differences Between Each Manufacturing Type
• Looking at the Manufacturer Types in More Depth
• Original Design Manufacturer (ODM)
• Original Equipment Manufacturer (OEM)
• Contract Manufacturer (CM)
• Other Contract Manufacturer Types
• Which Manufacturer Type is Right for You?
• Takeaways
• Komaspec’s Contract Manufacturing Solutions
• Frequently Asked Questions
• Works Cited

When choosing a contract manufacturing supplier for your product, you may have come across acronyms such as OEM, ODM, and CM. These three acronyms each stand for a type of outsourced manufacturing business model – and the differences between the different models (primarily related to product design responsibilities) can have very significant consequences for your IP, your investment and your control over the product. It’s important to understand what the implications of picking each type of manufacturer are before making a supplier choice. Choosing the wrong supplier can means months of time and tens of thousands of dollars lost – best to do your homework first.

If you’ve been looking for a contract manufacturer for a product for your business, you may have come across the acronyms ODM, OEM and CM.

These three acronyms each describe a business model or mode of cooperation for third-party or contract manufacturing:  

• OEM – Original equipment manufacturer
• ODM – Original design manufacturer
• CM – Contract manufacturer

Each model is fundamentally different, primarily in terms of how much responsibility the manufacturer takes for design, but a manufacturer may in fact offer all three types of services. There are, however, also other important differences in the way each model or type of manufacturer handles a contract manufacturing project.

The differences in the way each type operates will impact the choice of the best one for your project.

Some Initial Areas of Confusion

Rather confusingly, the term “contract manufacturer” is used as an umbrella term to refer to all the different types of manufacturer that production can be outsourced to as well as to one particular outsourcing manufacturer type. We’ll explain in more depth in the contract manufacturer section later in this article.

Another thing to note is that, in reality, some manufacturers may be operating using a combination of two (or more) manufacturing models simultaneously.

Here’s a quick explanation of how these different manufacturing models work.

Original Design Manufacturer (ODM)

The product design is owned by the supplier, and the customer will be tweaking the design slightly, or buying straight off the shelf and labelling the product with their logo/brand.

• The design, tooling and other IP belongs to the supplier. 
• For example, a company might look to buy an existing kitchen appliance from a supplier specializing in that category (e.g. kitchen blenders) and then look to customize that slightly with their own color scheme, logo or small modifications to the overall design. This would be an ODM project.

Original Equipment Manufacturer (OEM)

A new product is developed by the factory based on a design from the buyer but using the supplier’s existing category expertise, supply chain, etc. 

• At least a portion of the IP belongs to the buyer, in most of the cases, usually as long as they are paying for the development, tooling and their contracts are in order.
• To continue with the example above, in case the customer wanted to create an entirely new design of kitchen blender (shape, function, technical specs), they would pay a supplier with a background in kitchen appliances with experience in manufacturing blenders, to open new tooling and develop a new model owned by themselves. This would be an OEM project 

Contract Manufacturer (CM)

In contract manufacturing, the customer has full ownership of the design and BOM, and the manufacturer is solely responsible for manufacturing to the customer’s drawings and requirements, not for the product design or development. Pure contract manufacturers do not have their own product range or specific, narrow product specialities – rather than having their own products they market, they focus on providing a service – manufacturing, and providing products to customers in a wide range of categories. 

• The IP clearly belongs to the customer, as they are the ones conducting product design, development, and evaluation. 
• As an example, here, Foxconn manufacturing phones for iPhone is acting as a contract manufacturer, as it is responsible solely for the manufacturing side of the business – design and development is coming from Apple (hence the infamous “Designed in California” label on many of Apple’s products). 
• Foxconn is not adapting an existing smartphone design or architecture to produce these products, they are not selling Apple a product, they are providing a service – electrical manufacturing – based on their expertise in that field.

The key difference between the different manufacturing models is the ownership of the product design and intellectual property rights. There are other important basic differences as well.

This table gives a quick overview of the fundamental differences between ODM, OEMs and CMs:

Table 1: A comparison of ODM, OEM, and CM manufacturing models

Looking at the main advantages and disadvantages associated with each type of manufacturer as well as some typical use cases may help you understand which type will better suit your business.

ODM products are cheap to produce, they’re quick to get to market, and there are other benefits in the production process as well. When ODM products are chosen well, they can also be very successful.

ODM products are also referred to as “white label” or “private label” products.

ODM Advantages

The main advantages the ODM model offers to suppliers are:

• Simplicity – Very little is required in the way of design or technical input because the product is generally already on the market and proven in use.
• Personalization – Products are not unique, but they can be branded with the hiring company’s colors or logo. Small design alterations are also possible, such as changing accessories or parts like handles or buttons. Altering the overall design slightly does allow some market differentiation.
• Speed to Market – Even with branding and personalization, speed to market is much faster than where products need to be developed and tested.
• Reduced Cost – The buyer can take advantage of reduced costs owing to the supplier’s experience, developed supply chain and economies of scale. Avoiding product development also reduces costs.
• Lower Minimum Order Quantity Requirements – Minimum order quantities are often lower because suppliers produce the same product for multiple buyers.

With the supplier handling most aspects of production, the work the buyer needs to do for a product launch is reduced to the marketing and operations side. The factory should be able to produce and ship a functional product with little input from the hiring company.

Fig. 1: ODM example

ODM Disadvantages

The main disadvantage of the ODM model is that the hiring company has limited opportunity to differentiate in the marketplace. There are, however, other disadvantages as well.

Typical problems with the ODM model are:

• Minimal Product Differentiation – Because products are all made from the same fundamental design, the amount of differentiation that can be achieved on the market is limited. The buyer may struggle to maintain good margins without a strong existing brand or good marketing capabilities.
• Lack of Insight Into Production – The buyer typically has very little visibility into how production takes place, such as into what kind of quality control procedures are followed.
• Limited Supply Chain Flexibility – The buyer doesn’t have much visibility into or control over the supply chain and bill of materials. Usually, the ODM makes all choices for matters such as materials, parts and components, or even firmware or software design. ODMs will want to use existing relationships due to cost and cash flow advantages, while this may compromise product quality or function.
• Minimal Control over Intellectual Property- The product design belongs to the supplier, and they are free to sell the same product to any other company. Minor design improvements and tweaks also won’t be the intellectual property of the buyer unless specifically stated in the manufacturing contract.

Typical ODM Customers

Home goods, low-end consumer electronics, LED lighting and household appliances are all examples of product categories that are often manufactured by ODM suppliers. ODM products are also often simple, branded merchandise type goods like t-shirts, mugs or phone cases.

Mature product markets often use the ODM model, as do industries where low cost and speed to market are more important than design or functional differentiation.

Fig. 2: Gravel bike

In some cases, complicated products are made by ODM manufacturers.

Bikes are an example of a consumer good that can be OEM or ODM. There are off the shelf options for low-cost online retailers, smaller brands and other similar businesses. At the same time, there are also factories that produce custom designed models for higher-end brands and businesses with more demanding customers.

Why Choose an ODM in Brief

Using the ODM model provides an investment-light, fast way to go to market, but it means giving up control over the manufacturing process and intellectual property rights.

Fig. 3: ODM/OEM client company relationship

In the OEM manufacturing model, the customer takes responsibility for product design. They then work with a manufacturer that has experience in the relevant product category to produce a product.

OEM Advantages

The big advantage that OEM manufacturing offers over ODM manufacturing is:

• Product customization – Being able to use your own unique designs means that you can create a product that stands out in the market. Products that are different to competitor’s products may fetch a higher price and/or see increased demand.

The other advantages that OEM manufacturing offers are advantages over CM manufacturing. CM manufacturing also allows the hiring company to produce products from their own designs, but the domain experience an OEM has gives certain advantages.

• Speed to Market – An OEM can manufacture products faster than a CM because they have an established supply chain and because they have experience of producing the same type of products. Parts, components and materials can all be sourced quickly, and production processes are quick to arrange. Components may be common to other products, for example, or certain production processes may simply be replicated from other products.
• Reduced Costs – Having an established supply chain also reduces costs. Production processes are more efficient to arrange, which reduces costs as well.
• Reduced Overall Involvement – Having an experienced production partner may reduce the overall level of involvement the hiring company needs to take in manufacturing.

Fig. 4. OEM example

OEM Disadvantages

Here are the disadvantages to ODM manufacturing:

• Slower and More Expensive than ODM Manufacturing – Speed to market and costs are less favorable than with ODM manufacturing
• Intellectual Property Leakage - OEM suppliers often act as ODM suppliers for other players in the same industry. In some cases, suppliers may take designs or elements of them and sell them as or within their own ODM products.

Otherwise, OEM suppliers may even become direct competitors, going on to sell goods in the same market as the hiring company. Many manufacturers have used the experience and production capacities acquired in OEM business to launch their own brands and take on their former customers. Home appliances, consumer electronics and some other fields are filled with examples of this phenomenon.

Have a look at this article - When Your Contract Manufacturer Becomes Your Competitor.

The temptation to apply the designs and technology developed with OEM customers to other projects or their own product line is great. IP leakage is a real risk with OEM suppliers.

When compared to CM manufacturing, OEM manufacturing offers the following disadvantage:

• Greater Investment, But With Limited Control Over Production - An OEM project requires more input from the customer than an ODM project because of the need to create designs, monitor product development and invest in tooling and prototypes. At the same time, however, the OEM will most likely still dictate the supply chain decisions, control much of production and limit customers’ ability to direct the project in other areas.

Typical OEM Customers

Consumer electronics brands like Vizio or Skullcandy are examples of OEM customers. They have their own designs and technology, but they use existing electronics manufacturers to produce their products. An automaker that uses an external supplier for electronics or electrical components (a car radio or light indicators) is another example of an OEM customer.

Fig. 5: AMD Ryzen computer processor

Chip fabrication is another type of OEM business model.

Many chips are designed by so-called “fabless” companies that focus on chip architecture, marketing and sales while the actual manufacturing is done by third-party foundries like TSMC or Samsung. The customer provides specifications and design based on the supplier’s existing architecture / capabilities, and the fabricator then manufactures according to that.

Why Choose an OEM in Brief

The OEM model allows for greater freedom of design and greater differentiation in the marketplace than the ODM model. Although more time and money will need to be invested, this will often support stronger profit margins.

As we said at the start, the term “contract manufacturing” has two meanings. Firstly, it’s used as a catchall term to describe any manufacturing company (OEM, ODM or CM) that a business outsources its own production to. Secondly, the term contract manufacturing (CM) is also used to refer to one particular type of manufacturer.

Contract Manufacturers as a Type of Manufacturer

Contract manufacturers (CMs) are manufacturers that generally aren’t category-focused in the same way as ODMs or OEMs. You can approach a CM with a product in a category the company has not manufactured in before, and it will design a production process from scratch. CMs usually don’t own their own business lines or intellectual property, and they don’t design new products. Instead, they simply offer manufacturing as a service to hiring companies.

The customer provides the design, and the contract manufacturer provides the labor, facilities and manufacturing know-how to produce that product.

CM Advantages

With a contract manufacturer, you get:

• Product Customization – As with OEM manufacturing, you can approach a CM manufacturer with designs for a unique product that will be different to your competitors’. Again, unique products attract attention and may see increased profit margins and increased sales.
• Greater Supply Chain Input – Contract manufacturers are more likely to be willing to take consigned parts, work with customer designated suppliers, provide greater detail on part specifications or otherwise be more transparent and accommodating with regards to the supply chain.
• Control Over Subsystem and Subcomponent Manufacturing – As with supply chain input, contract manufacturers are more likely to allow control over the cost, quality and lead time of subsystems and subcomponents.
• Complete Ownership of Intellectual Property Rights – Using a manufacturer that has no competing business greatly reduces the potential for conflicts of interest and loss of intellectual property.
• A Simpler Business Relationship – Where ODM and OEM relationships may have complications associated with tooling or intellectual property rights, CM relationships tend to be much simpler.

CM Disadvantages

The disadvantages of working with a CM include:

• Greater Investment in Product Design and Development – The hiring company is responsible for the design and development of its products. This can be time consuming and expensive.
• Tooling and Manufacturing Process Development – The manufacturer will need to develop a production system from scratch. This may include the development of tooling or system architecture, and it may be time consuming.  
• Longer Lead Times – Contract manufacturing comes with the slowest lead time because product designs, the supply chain and production processes have to be developed from scratch.
• Greater Costs – The greater amount of input with contract manufacturing also leads to higher costs.

Typical CM Customers

Products that have a high level of complexity or that are sold in niche markets often call for a contract manufacturer due to the lack of availability of OEM or ODM manufacturers. Otherwise, contract manufacturers are used by companies that will gain from differentiation in the marketplace. In some cases, entrepreneurs or brands also create completely unique products that can only be produced by a contract manufacturer.  Customers that are sensitive over intellectual property rights will often also use contract manufacturers to prevent loss of intellectual property.

Some examples of industries that often use contract manufacturers are the automotive, consumer electronics, industrial equipment and motorcycling/ATV industries. Use can occur in any industry.

Fig. 6:  Bending sheet metal

Why Choose a CM - in Brief

• Contract manufacturing makes a good choice where lead times are less important and where there’s good potential to make higher profits with unique products.
• Time and financial investments are higher, but where this translates into higher profits, contract manufacturing makes a good choice.
• It’s also useful where intellectual property needs to be protected.

ODM, OEM and CM manufacturers aren’t the only contract manufacturer types that exist. Some other well-known examples are in the field of electronics manufacturing.

Electronics Manufacturing Services (EMS)

This is a contract manufacturer in the electronics field that offers a comprehensive range of services in electronics manufacturing. Apart from making products that are ordered by OEMs, EMS suppliers also offer services such as product design, manufacturing process design and assembly and logistics.

EMS companies can be massive, manufacturing products like Microsoft’s Xbox, for example.

Contract Electronics Manufacturer (CEM)

CEMs typically support OEMs and other manufacturing companies by providing partial or whole electronics manufacturing services based on requirements set out by a hiring company. CEMs are often used in industries with stringent requirements, such as the medical, automotive or defense industries.

Design House

Design houses focus on electronics design. They usually offer a full range of electronics design services for both hardware and software, across a wide range of products and markets. They have been a crucial part of the contract manufacturing process for consumer electronics, in high tech categories such as smartphones.

At a basic level, making a choice between hiring an ODM, OEM or CM manufacturer is relatively simple. The following graph summarizes the key considerations that underpin the reason for choosing each manufacturing model:

Fig. 7: Which type of manufacturing model is right for you?

In reality, businesses may need to look at their own position in more depth before they make a choice. Here are some of the important factors you might like to consider when you weigh up your company’s position and what will make a good choice for it:

• Your industry and business model
• How you handle marketing, product development and differentiation
• Your preferred level of control over manufacturing processes
• The uniqueness and complexity of your product(s)
• The level of sensitivity of your intellectual property

Every business is unique, and it’s a good idea to take some time to weigh up considerations of what you would like to achieve against how your business operates. It may also be a good idea to consider the long-term objectives of your business and what kind of partnership you might like to develop now to support those objectives.

An Example

We can look at an example comparison of an Amazon retailer and a branded company as an exercise in choosing the right kind of contract manufacturer.

Based on the list of preferences for each company, we can assume that the Amazon retailer will prefer to use an ODM. It is participating in a highly price competitive market with low differentiation.

The branded company, on the other hand, would likely choose an OEM or CM partner to gain a higher level of control over the production, more control over intellectual property and to produce a more differentiated product.

Here are some key takeaways in the comparison of ODM, OEM and CM manufacturers.

• ODM  - this model offers the fastest route to market without the need to invest in product design and development. However, you will not own the intellectual property for your product or be able to have any control over the manufacturing process.
• OEM - If you would like to invest in product design and development, an OEM can help you manufacture a unique product. You will also gain more control over intellectual property and the manufacturing process.
• Contract Manufacturing - But if product customization is key and control over the supply chain and manufacturing process is of high importance, working with a contract manufacturer may be the way to go.

Table 2: A comparison of ODM, OEM and CM manufacturing models.

At Komaspec, we have over 15 years of experience in contract manufacturing. We are a leading choice for companies looking for a China-based contract manufacturer. We provide services in new product development and also help customers to design products for efficient manufacturing. We have undertaken thousands of successful manufacturing projects as a contract manufacturer, and we provide service to a wide range of industries.

We would be happy to review your product designs with you and help you select a fabrication process that best suits your product’s needs.

What Does OEM Stand For?

OEM stands for original equipment manufacturer. It is a manufacturing business model in which a new product is developed by a factory based on designs supplied by the buyer.

The buyer capitalizes on the supplier’s category expertise, established supply chain and prior experience.

Look at - What is an Original Equipment Manufacturer (OEM)?.

What Does ODM Stand For?

ODM stands for original design manufacturer. It is a manufacturing business model in which a buyer orders a product for which the design is owned by the supplier. The customer may tweak the design slightly or simply buy a product straight off the shelf and label it with their logo or branding.

Look at - What Is an OEM, ODM, and JDM?.

What is an Example of an OEM?

Microchip fabricators are an example of an OEM manufacturer.

Chips are often designed by so-called “fabless” companies that focus on the chip architecture, marketing and sales while the actual manufacturing is done by a third-party microchip foundry.

Have a look - Why the Right OEM Relationship Leads to Powerful Mobile Solutions.

What is an Example of an ODM?

A company might buy an electrical item like a USB charger from a supplier specializing in electricals and with the designs for a type of USB charger. They will customize the design with their own color scheme, logo or by making other small modifications and then sell it under their own brand name.

What is the Difference Between OEM and ODM?

OEM is a manufacturing business model in which a new product is manufactured by a factory based on designs supplied by a hiring company. The hiring company takes advantage of the supplier’s existing category expertise, supply chain and other resources. With ODM manufacturing, the manufacturing company has its own designs for a product, and the hiring company just brands the product or alters it slightly.

• “Designing Air Purification Devices.” Unsplash, 7 Feb. 2020.
• “China Manufacturing Contracts: Not So Simple.” Harris Bricken, 31 Jan. 2021.
• “OEM (Original Equipment Manufacturer) Definition.” TechTerms.Com.
• Techopedia. “Original Design Manufacturer (ODM).” Techopedia.Com, 2 Aug. 2015.
• “Implementing Manufacturing and Supply Chain Materials Management.” Oracle Help Center. Accessed 9 Oct. 2021.
• Corporate Finance Institute. “Original Equipment Manufacturer (OEM).” Corporate Finance Institute, 29 May 2020. 
• Amax. “What Is an OEM, ODM, and JDM?” AMAX, 2 Sept. 2021.
• “OEM vs ODM: Which Is The Smarter Choice 2021.” Supplyia, 30 Mar. 2021.
• Vaccinium, Dmitrii. “Gravel bike.” Unsplash, 15 Dec. 2019.
• “When Your Contract Manufacturer Becomes Your Competitor.” Harvard Business Review, 1 Aug. 2014.
• Wiediger, Christian. “Photo by Christian Wiediger On.” Unsplash, 11 Sept. 2019. 
• Schick, Shane. “Why the Right OEM Relationship Leads to Powerful Mobile Solutions.” Samsung Business Insights, 29 Oct. 2019.
• “Bending Sheet Metal.” Pixabay.