If you are new to the world of e-commerce and sourcing from China, you have likely seen the acronyms OEM, ODM and OBM used with frequency. It is important that you form a basic understanding of each of these as you continue to build your business.
Each of the three refers to manufacturing within your specific product industry. The differences lie in three core areas – design, engineering and manufacturing – based on the specifics of the customer. This means a range from zero outsourced – OBM – to fully outsourced – ODM.
Here are all three in detail. As a guide, we are going to use a common product to help explain each of the three manufacturing systems – a chef’s knife – conveniently sourcable with Sourcing Nova.
We plan to conclude with what is probably the most important aspect of this piece – Why does this matter to me as a retail business owner? The answer may surprise you.
OEM – Original Equipment Manufacture
The OEM factory will take customer’s instructions and designs to build their chef’s knife accordingly. The factory will have zero input in any element or step outside of moving from raw materials to a finished product.
The factory will need the absolute fundamentals to create the customer’s chef’s knives – CAD drawings, engineer’s data and specific instructions down to the color of the handle and rivets holding the blade in place. The manufacturer is not allowed variation from this.
If there is a need for certain processes and the manufacturer lacks the necessary elements, there will be some outsourcing. For example, raw steel would need to be combined with chromium and nickel for blade steel, and the manufacturer may not have a crucible for this. This keeps the OEM process under a single manufacturer and streamlines the process for the customer.
OEM – The chef’s knife manufacturing process
You have everything necessary for your new chef’s knife. You have the idea, design, plans and processes necessary to produce the knives in mass already in place. The three things that you do not have are the raw materials, facility and labor.
In this case, you or your sourcing agent can find an appropriate facility to manufacture the knives for you.
Advantages of OEM
The OEM has great advantages for those who wish to have 100 percent control over the design and process. An OEM product is only limited to the design and budget.
Disadvantages of OEM
OEM often requires heavy investment in research, development and resources before a viable product can be created for mass production and sale.
ODM – Original Design Manufacturer
An ODM manufacturer will have the ability in house to design products. The customer will choose a product design, add a personal brand name, package and sell products as their own brand. Consider OEM as a process while ODM is the product.
ODM allows you to start with a basic design and build from that using the current products the manufacturer has previously created. Some people consider ODM as ‘private label’ and is very popular within many product spheres.
The customer will focus their time, energy and investment capital on marketing and sales since the product is complete.
ODM – The chef’s knife manufacturing process
You have done extensive research into a niche chef’s knife market and have found there is a need for a certain length and handle style that many chefs are looking for but cannot find. This is the only information you have or need for ODM.
The manufacturer will share with you some of their current chef’s knives and how their line can be built to what you want. You can select a variety of color options for the handle and find the best stainless steel percentages for your knife. When the final prototype is to your liking, you can place an order for a chef’s knife with your specific brand name.
ODM keeps the research and design process out of the equation entirely. There is no need to restart from scratch. Take what is already there, make improvements or changes and sell as your own.
Price competition is exceptionally tight and as such, tight profit margins. There is often very little differentiation between product designs. Exceptional creativity is necessary for the best possible market share.
OBM – Original Brand Manufacturer
The OBM manufacturer has 100 percent of the production – design to marketing – in its control. They own the brands and products.
The OBM will outsource a limited percentage, if any, of their processes. OBM is suited to very high end and specialized products that require 100 percent of the design, engineering and manufacturing under a single manufacturer.
OBM – The chef’s knife manufacturing process
An OBM chef’s knife manufacturer will develop every part of the knife starting with the absolute basics – the stainless steel, handle material, rivets and final shape. From there, the manufacturer will assemble and market their knives to customers.
With OBM, you have 100 percent control of the entire process from start to finish. This means you have direct control with customers and no middle man to cut into profits. You are free to set both prices and MOQ as you please.
Maintaining your brand can be a full time job. It is easy to copy and make minor adjustments to a brand before relabeling. Creating OBM and keeping it viable until profits is a real struggle, requires time and considerable investment – something many entrepreneurs do not have initially.
The purpose in providing this information
It is acceptable to question which of the three processes is best for you and your chef’s knife, but there is more to it than what we have covered thusfar. Sourcing Nova has your best interests in mind at all times, and we want to be 100 percent transparent when discussing topics.
Make determinations on the particular manufacturer
It is important for you to have quality manufacturing. This is why we look at each of the three manufacturing systems. Here are some fundamentals:
- OEM – These are often small manufacturers, make cheap quality products, lack a decent design capability, have variable batch runs and even violate property rights.
- ODM – These manufacturers provide stellar product options, show potential defects and shortcomings of a chef’s knife prototype. As an example, your prototype may be a beautiful look and design but causes unnecessary fatigue when used for extended times. The manufacturer can identify and adjust for these design shortcomings with ease.
- OBM – These manufacturers consider their reputation as vital to success. This means the products will be top notch, made with the better raw materials and offer stable quality. The customer’s intellectual property is important as well, and they will protect it accordingly.
Make determinations on cost
The manufacturing costs in China follow a simple pattern of OBM>ODM>OEM.
If your product has tight competition, low profit margins and highly labor-intensive, the OEM manufacturing may suit you best. For example, bamboo straws and t-shirts fall into this particular category.
However, if you are capable, and willing for that matter, to pay higher prices for better quality, wish to have a knife that will rival European manufacturers and stay in a high end market with good profit margins, OBM is your best decision. Sourcing Nova uses OBM manufacturers for customers who are looking for a better quality chef’s knife.
ODM is the balance point between ODM and OBM.
Looking to the future
For the new seller, inexpensive is their goal. A more experienced seller looks to a stable manufacturer and will not change because of price differentials.
Again, OBM is a viable option. The current Chinese government is pushing entrepreneurs on both sides of the value chain. Those manufacturers who do and have their own brands get support from state agencies.
The same manufacturers often are able to funnel significant amounts into their R&D, and if they have a viable product brand, qualify for tax benefits. The government gives manufacturers tax breaks when portions of profits are funneled into R&D. This lessens tax burdens and provides benefits that are seen across the board. The manufacturers are able to reduce production costs with the tax deductions. This allows movement into more development and even marketing.
The current pandemic has shuttered the doors of many small OEM companies while the ODM and OBM have continued to provide quality products for a global market.
There have been changes in policies with making purchases from Chinese manufacturers. Buyers selecting products with the support of the government have a much better quality than products from manufacturers without governmental support.
The most stringent of changes has been the environmental protection that has plagued China for years. Those manufacturers who pollute wantonly without proper checks are sanctioned and often forced to close doors. As an example, the government pushed the wig manufacturing industrial cluster to investing in sewage equipment or substantial R&D. The expressed purpose is to curb pollution from the manufacturing processes associated with wig making.
There are serious fines and fees for failing to reach appropriate standards for pollution control with closure under governmental force as a last resort.
Research and development
The Chinese government is also pushing more and more research and development, particularly in the technological industrial clusters. This means if you are looking to technology for sourcing, there will be ever increasing quality coming from China.
The last policy change is for the consumer. Industries designed around health and well being have gotten considerable backing from governmental officials. Industrial clusters focusing on sports, the outdoor sports in particular, health care, smart household and automotive have strong support and stellar supply chains.
There is quite a bit of understanding necessary for OEM, ODM and OBM. Of these choices, which suits you and your business model the best? Do you have a product idea, and are looking to springboard into a business? Let us know in a comment below. We love to hear from our customers.