How to Choose a Contract Manufacturer: OEM vs. ODM

In a recent post about the Manufacturing Request For Quote Process, we briefly touched upon the difference between an OEM vs. ODM. To review, Contract Manufacturers (CMs) can work for you on an OEM (Original Equipment Manufacturer) or ODM (Original Design Manufacturer) basis.  

An OEM manufactures your product based solely on the design data you provide. They do not design any of the product, and their responsibility is limited to just the manufacturing process.

The main advantages are:

• Your product and its accompanying documentation are close to being a commodity that can be quoted easily by any factory with the capability and capacity.
• You face few or no Intellectual Property (IP) or contractual restrictions that might prevent you from moving your product to a different factory if you need to.  

What might be viewed as the chief disadvantage is that you are required to provide a complete and accurate set of documentation sufficient to manufacture the product. To produce this you need access to experienced engineering resources and expertise, and this may prove expensive depending on where you are located.

When working with an ODM manufacturer, the CM will design some or all of the product to your high level specifications. This has the advantage of (usually) saving money and (depending on your product and the CM) taking advantage of a CM with a great deal of relevant experience. That being said, there are several disadvantages:

• IP ownership is an important consideration that must be worked out and agreed to. You of course want to retain all IP rights to your product even if the CM designed it, and the CM wants to both make sure they do not design your product for free, and that they do not inadvertently sign away pre-existing IP that they need to retain for their core businesses.
• Depending on the IP and contractual restrictions, you may not have the right to simply walk away from the CM, at least not until certain sales minimums or other requirements have been met. Again, depending on the specifics of the agreement, if you do move the product to a new CM, you may have to start all over from the beginning resulting in a large delay and additional expense before shipments from the new factory can start.
• Depending on IP rights and your ability to walk away, the CM may have you at a disadvantage and you may not get the best pricing.
• If the CM will be designing something new and different, they will not be able to give you a manufacturing quote until after they have completed the design, and they will not start the design process until they have been chosen and you have signed a contract with them.  This does not result in a secure bargaining position for you if you do not like the quoted manufacturing cost.
• If there is a quality or defect with your product, you will have limited ability to troubleshoot it and suggest changes that drive the quality.

There are exceptions to the rules of course and there are some products, even those that carry significant IP, which inevitably require at least partial-ODM CM. For example, a product which is 90% made up of a stock Android tablet cannot be economically designed and manufactured other than with an existing manufacturer of Android tablets. Designing a tablet from scratch is an ambitious undertaking and bringing it into production at an OEM CM that does not do tablets is likewise difficult and will result in an inferior product at a higher cost. For a product like this, partial- or full-ODM is the only practical choice.

If you do decide to move forward and seek an ODM relationship, the contract between you and the contract manufacturer must be very carefully negotiated.  Experience with these kinds of contracts is vital - obtaining a fair and productive agreement will be difficult if this is the first time you have negotiated a contract of this nature.

In general, when it comes to factory selection, we recommend that our customers plan to use a CM on an OEM basis, especially because our customers are bringing new and unique products to market that contain significant IP.  While the upfront cycles and costs may prove daunting, the long term benefits far outweigh the risks a company may encounter in an ODM set-up.