ODM vs OEM vs Contract Manufacturing // Complete Guide

When looking for a manufacturer for your products there are three basic types of manufacturing arrangements,  Original Equipment Manufacturing (OEM), Original Design Manufacturing (ODM), and Contract Manufacturing (CM). SO what are the Benefits of ODM vs OEM vs contract manufacturing? After running Cosmo for over 7 years and working with 100’s of factories in almost every conceivable arrangement, we have come to learn that our clients have very different expectations or how they expect to work with a manufacturer. These 3 categories cover almost every arrangement with factories that our clients and ourselves have worked with. 

The simple definitions are: 

• OEM – Original Equipment Manufacturing // When a factory makes a product but customizes it based on a clients design
• ODM – Original Design Manufacturing // When a manufacturer designs and produces it in house and sells to a client with little to no modifications
• CM – Contract Manufacturing // When a Client fully developed the product in detail and hires a manufacturer to make the product

What Does ODM Mean? 

ODM stands for Original Design manufacturer, which means that the factory makes products that the buyer designs but based loosely on existing products. 

When the buyer works with the factory, the buyer is purchasing items that the factory is already making. The only thing the buyer is expected to design or own is packaging and branding. In some cases, the buyer won’t even change the branding or packaging and just sell it as the factory provides, in other cases, the buyer may request minor cosmetic changes such as color, and additions of logos. There is a gray area between OEM and ODM based on how much customizations you do, but to keep it simple ODM is simply preaching an existing product.  

Trade shows such as Global Sources and the Canton Fair are great examples of ODM manufacturing. At each of these Factories have elaborate booths set up to show off the factories’ own designs that potential buyers can purchase as-is or with the customization and sell in their respective countries. China has long been the leader of ODM manufacturing with other countries far behind. Most manufacturers outside of China tend to be Contract Manufacturers which we’ll discuss later in this article

The biggest issue with ODM involves intellectual property and who owns the product design even with customization. For the most part since the factory did all or almost all of the design, then they own the IP while the buyer owns the copyrights to the branding. This can create a  huge issue if you are afraid of a manufacturer selling your product. Fortunately, there are ODM agreements that can prevent factories from using your customizations and branding, but likely not prevent the sell the same or similar products. 

What Does OEM Mean? 

OEM Stands for Original Equipment manufacturer, which means that the factory makes a product based on designs that the client provides. 

When you enter into an OEM arrangement with a factory, the Client is expected to provide a detailed product spec sheet and their own product design to the factory to make. There are various degrees of OEM that exist, ranging from using a product that the factory already makes with significant customizations such as changes to shape and dimensions, or to full-on designing a nearly new product. If you are creating a new product that does not exist on the market, then your arrangement will likely be contract manufacturing 

With many OEM projects, it is necessary to create custom molds or another tooling to make the item. These have to be made before production starts and the cost is almost always paid for by the buyer. In some cases, the manufacturer will pay for the molds and include the cost of the sales price. 

Since the buyer is also designing the product and created in the product spec sheet they are much more likely to own the Intellectual property. In addition, since the buyer is also paying for the tooling and molds, they own those parts of the production and they can have contracts that prevent the manufacturer from using them for other clients. 

What is Contract Manufacturing? 

Contract Manufacturing is a fairly broad term and is generally a step beyond OEM manufacturing in which the buyer has a new product that is not on the market and contracts with a manufacturer to produce the item. An example is Apple which designs every aspect of the iPhone but contacts Foxconn to do the assembly. In Apple’s case, like many other buyers, apple is also designing and sourcing components separately and sending them to fox con to be used in the final product. 

The IP for contract manufacturer is more simple since the buyer designs all aspects of the product they should have total ownership of the IP Rights. Although this does need to be enforced with a contract, patents, and trademarks which are up to the buyer to acquire. 

Is ODM the Same as Private Label? 

The short answer is Yes. 

Private label, also called White Label,  is the practice of buying already made products and simply adding a logo or colors to the product. This is a very common practice for FBA and other eCommerce sellers and is one of the easiest ways to start in retail. 

Check out our Private Label Beginners Guide

ODM vs OEM 

There are a few factors that you need to factor in when comparing to the two such as development time, ownership of intellectual property, tooling cost and more.

Intellectual property issues and ODM vs OEM vs Contract Manufacturing 

Each of the three has completely different IP rights, with ODM giving most of the IP rights, except branding, to the manufacturers, while Contract Manufacturing all IP rights belong to the Buyer. OEM falls in between with the Buyer owning the branding and some aspects of the design while the manufacturer can own rights to other aspects of the designs that they made themselves. 

It is also very difficult to patent something that is ODM as they tend to be items that already exist on the market. For instance, you can’t patent a baseball cap, but you can add a sweatproof band on the inside that you developed yourself and patent that and its use in baseball caps. 

Ultimately the Intellectual property, patents, and trademarks are something that the Buyers need to acquire before manufacturing. It’s also important to note that only contracts written in Chinese are valid in China, and you will be fighting an uphill battle should you sue a manufacturer in their own country. 

The best way to protect yourself is to file the brand and design trademarks and patents in the market in which you will sell and use them to take down sales channels should your manufacturer or competitor use your IP 

Who Creates the Product Spec Sheet? 

For each of the three methods of working with factories the expectation of who is to create the Product spec sheet varies:

• OEM – Created by the Buyer but may have help or guidance from the manufacturer
• ODM – created by the supplier/factory
• Contract Manufacturing – created by the Buyers 

ODM vs OEM product development time

Since each method has a different degree of work the amount of time that it takes to make a product once you have the designs ready to go varies greatly

• ODM – 1 to 4 weeks
• OEM – 1 to 6 months
• Contract Manufacturing 3 – 12 months 

With ODM you are using already existing designs from the manufacturer with minimal customizations, as a result, you can move fast and get a product in stock and ready to retail quickly. This is one of the reasons ODM/Private labels are recommended for first-time buyers. 

ODM  can take a month to considerably longer based on the degree of customizations. IF you are getting a mold made for your product you should expect it to take at least 4 weeks for that to get produced. In addition, you should expect about 2 -4 weeks to create the product spec sheet and design files.  

With contract manufacturing you are completely creating all aspects from scratch which can take a considerable amount of time designing the product, setting up manufacturing and sourcing components. 

It should be noted that once the manufacturing lines are set up for mass production, you should expect that they will take roughly the same amount of time between all three. The main delays 

Who pays the Cost related to molding and tooling 

• ODM paid for by the Factory or supplier
• OEM – Paid for by the buyer
• Contract Manufacturing –  paid for by the Buyer

The Pros and Cons of ODM vs OEM manufacturing

The Advantages of OEM

• Most suppliers are OEM factories, and it’s the easiest type of manufacturer to find
• With OEM you are free to make the product as you see fit as long as it technically possible
• As long as you have the right contracts and protections in place You own the intellectual property. 
• YOu’ll have a product that is uniquely yours on the market. 

The Advantages of ODM

• The short development process, You can very an item in production and retailing quickly
• Most manufacturers can customize within a limited degree
• No added cost relating to tolling or molds 

The Cons of OEM

• The buyer has to pay for all tooling and molding costs, which depending on the degree of customization can be extremely costly. 
• It takes at least a month, and usually longer, to create a mold and do new tooling
• You need to provide all design files and format them in a way that can be understood by the manufacturer and read by the machinery.

The Cons of ODM

• You can only buy what is already offered by suppliers
• Your competitors have access to the exact same products that you do
• You do not have any IP protections
• You are trusting that your supplier is not violating the IP of someone else

Where to find OEM, ODM, and Contract Manufacturers 

ODM is most common in China and is actually quite difficult to find ODM suppliers in other countries. China, despite the recent trade war, is still the best at the manufacturing of all types although several countries such as India and Vietnam are rapidly making up ground. It can do manufacturing of all kinds, but other countries, like Vietnam, are good for contract manufacturing. 

In terms of Online resources, Alibaba and Global sources are the best for finding ODM and Private label products. Global sources have a great verification system to ensure quality and trustworthiness, while Alibaba has by far the largest selection of suppliers, though many are questionable. If you are wondering, here are what the best alternatives to Alibaba are.

When sourcing from Vietnam or other countries the factories expect the clients to have their own design files and do not have existing products available.  If you are planning on doing contract manufacturing or OEM then it’s perfectly fine to look outside of China but I do not recommend going outside of China for ODM products, and I say this as someone with more than 5 years experience sourcing and manufacturing in Vietnam