The terms ODM, OBM, OEM terms designate alternative setups of manufacturing operations. The difference between these production strategies lies in the degree of outsourcing of design, engineering, and manufacturing operations that a brand owner implements (from no outsourcing, i.e. “OBM”, to full outsourcing, i.e. “ODM”).
ODM (Original Design Manufacturing)
This is an arrangement by which a manufacturer provides pre-production services, as product concept development, design, and engineering and manufactures the final products using the buyer’s label.
In this case, the buyer focuses on the marketing and sales activities only and outsources the other supply chain, design, and engineering activities to a specialized third-party provider.
Under an ODM production strategy, the original design manufacturer (ODM) designs, engineers and manufactures a product, with the brand of another company that is focused on the marketing and sales activities of the product.
An original design manufacturing agreement allows a company not interested in running design, engineering, and manufacturing activities to market products shifting all these engineering and design activities to a specialized third-party provider. ODMs is becoming a widely used production strategy in the latest years, and Chinese companies have gradually gained significant shares in such a market.
ODM is convenient under the following circumstances:
- lower labor costs in specific countries (example, engineering costs per hour may range from 20 USD to 200 USD comparing India to Western Europe)
- end market is closer to the ODM manufacturer than the selling company, making local manufacturing more convenient from a logistics perspective
- the original design manufacturer owns licenses or patents, or just the necessary know-how, to execute the design and the required engineering activities
- availability of local raw materials that save inbound logistic costs
- localization laws (example: Saudization) or other legal constraints that require local content for sales in specific markets.
ODM is used in multiple industries but is very popular in consumer electronics.
OEM (Original Equipment Manufacturing)
OEM is a production outsourcing setup where a buyer (which is the owner of a brand name) provides the design, the product specifications and any other production detail to a manufacturer that executes the production or the assembly.
With OEM, a company basically outsources only the manufacturing of the product to a third party.
A clear example is the production of iPhones, where any high-end engineering and design activity is executed in the US, including the production of critical components, whereas the assembly is outsourced to specialized Chinese providers that operate at scale and contribute to lowering the production costs.
OBM (Original Brand Manufacturing)
Under OBM, the manufacturer owns the brand and is fully responsible to design, engineer, manufacture, and market the product. In this case, there is limited to no outsourcing of production and engineering activities.
ODM is a production strategy used for lower technology products, OBM, on the contrary, is the only option for highly sophisticated products that require full integration of the design, engineering and manufacturing activities.