What is the difference between CM and OEM?

Section 1

Overview

Contract manufacturing is a great solution for companies who do not have a full-service manufacturing and development team. It allows them to outsource their manufacturing operations to a producer that is well equipped to handle it. Having the right supplier with the right capabilities and the correct partnership model is crucial when starting a new project.

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 significantly impact your choice of a full-service contract manufacturer. Each of them— OEM, ODM, or CM — lets you exert a different level of agency over manufacturing, and each has its strengths and weaknesses. Some manufacturers may be operating using a combination of two (or more) manufacturing models simultaneously.

Section 2

So, what do these abbreviations mean?

In general, the key difference between the following manufacturing models is the ownership of the product design and intellectual property rights.

 

Type of contract manufacturing / Criteria

ODM

OEM

CM

Product design

Owned by the supplier

External design usually owned by customer

Fully owned by the customer

Product modification

The customer can usually request only basic changes

The customer gives input on specifications

The customer defines specifications

Tooling and other IP

Belongs to the supplier

Usually only external design owned by buyer

Belongs to the buyer

BOM

Customer has little to no control

The customer has limited control or input

Fully controlled by the customer

Category specialization

Specialized in a certain category

Specialized in a certain category

Wide range of product categories

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

 

• Original Design Manufacturer (ODM)– the product design is owned by the supplier, and the customer may just 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 (“What Is an OEM, ODM, and JDM?”).

 

• 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. 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 (“China Manufacturing Contracts: Not So Simple”). 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 (“What is an Original Equipment Manufacturer (OEM)?”).

 

• 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. In this case, 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 (“Implementing Manufacturing and Supply Chain Materials Management”).

Section 3

Original Design Manufacturer (ODM)

1.1 Advantages

Under an ODM model suppliers can generally:

• Manufacture an existing product without requiring much in the way of design or technical input, as the product offered is generally already on the market.
• Can request minor alterations to an existing design, by personalizing a product with branding, color, and logo, adding a simple feature, altering the overall design slightly (e.g. creating a new handle shape, changing button design, etc.)
• Allows for quick, surface-level differentiation and speed to market.
• Leverage economies of scale and an existing supply chain to reduce the buyer’s cost
• The fastest time to market, as development lead time is very limited
• Generally lower MOQ requirements, as the supplier is often producing the same product for multiple buyers

As the product belongs to the supplier, the work the buyer needs to do is generally limited to the marketing and operations side. The factory should (key word being “should”) be able to produce and ship a functional product with little input from the customer.

1.2 Disadvantages

By choosing an ODM model, the customer is sacrificing control over the product, and is limited in their capability to differentiate in the market. Typical issues with ODMs include:

• Opaque– as the supplier is selling you an off-the-shelf product, buyers typically have very little visibility into the product manufacturing, including BOM, firmware or software design, etc.
• Limited Supply Chain Flexibility - you don’t have a say in the choice of component suppliers – ODMs will want to use existing relationships due to cost and cash flow advantages and this can compromise product quality / function.
• Minimal Control over IP- The product belongs to the supplier and they are free to sell this to any and all. Generally, minor design improvements and tweaks will also not be considered as the IP of the buyer unless specifically stated in a contract with the manufacturer
• Minimal Product Differentiation – because you are buying a product that is off-the-shelf, the amount of differentiation that can be created with existing products on the market is limited. Cookie cutter products means buyers may struggle to maintain good margins without a strong existing brand or marketing capabilities.

Working in an ODM model means giving up control over the product and IP in exchange for an investment-light, agile choice for going to market.

1.3 Typical ODM Customers

Home goods, low-end consumer electronics, LED lighting and household appliances, and other industries where low cost and speed to market is more important than design or functional differentiation. Mature product markets often use an ODM cooperation model to reduce investment in R&D and product tooling.

Fig. 2: Gravel bike

Bikes are an example of a consumer good that can be OEM or ODM – there are off the shelf, low-cost options for online retailers, smaller brands and others. There are also factories that produce custom designed models for larger or higher-end brands or companies.

Fig. 3: ODM/OEM Client company relationship (“OEM vs ODM: Which Is The Smarter Choice 2021”).

Section 4

Original Equipment Manufacturer (OEM)

2.1 Advantages

As a general rule, an OEM:

• Has an established, mature supply chain of parts and necessary components that can be applied to new products to shorten development cycles.
• Has experience in both design and manufacturing of products in the specified category.
• Provides relatively quick time to market due to their expertise and supply chain.
• Has lower costs due to leveraging supplier’s existing supply chain and category expertise, possibly including some common-use components.
• Allows for higher levels of customization and thus much greater product differentiation possibilities.

The OEM model allows for greater freedom of design and greater differentiation, which can often help support stronger margins, while still leveraging a supplier’s existing supply base and experience for cost savings and fair speed-to-market. There is greater investment and customer involvement required, but it allows for a buyer to stand out from the crowd more.

2.2 Disadvantages

When planned poorly:

• IP Leakage— suppliers are often players in the same industry with ODM customers and potentially selling under their own brands – 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.
• Training your future competitor– many companies have leveraged their experience and scale acquired from OEM business to launch their own brands and take on and take over their former customers. Home appliances, consumer electronics and other fields are filled with examples of this phenomenon (“When Your Contract Manufacturer Becomes Your Competitor”).
• Greater investment but limited control- An OEM project will require more input and support on the part of the customer compared with an ODM simply because of the need to hand over the product design and monitor development, as well as invest in tooling, prototypes, etc. At the same time, OEMs may still dictate the supply chain decisions, control certain technical information and limit customers’ ability to direct the project fully. Taking your prototype to mass manufacturing can take a lot of time, refraining you from capitalizing quickly on very niche or time sensitive products.

2.3 Typical OEM Customers

An automaker that uses an external supplier for electronics or electrical components (a car radio or light indicators) is an example of an OEM customer (“What Is Original Equipment Manufacturer (OEM)?”). Consumer electronics brands like Vizio or Skull Candy with their own designs and technology, but who leverage existing electronics manufacturers to produce their products, are also examples of OEM customers.

Fig. 4: AMD Ryzen computer processor

Chip fabrication is another type of OEM business model – many chips are designed by so-called “fabless” companies who focus on the chip architecture, marketing and sales, while the actual manufacturing is done by a third-party foundry like TSMC, Samsung or others (“Why the Right OEM Relationship Leads to Powerful Mobile Solutions”). The customer provides specifications and design based on the supplier’s existing architecture / capabilities, and the fab then manufactures to that spec.

Section 5

CM (Contract Manufacturing)

Contract Manufacturing (CM) is a catchall term that includes OEM and ODM manufacturing models, as well as standing on its own as an outsourced manufacturing business model.  CMs are generally not category-focused in the same way as ODMs or OEMs – they usually do not own their own business lines or IP, they do not design new products – they are offering manufacturing as a pure service to customers. Customers provide the design, the contract manufacturer provides the labor, facilities and general manufacturing know-how to produce that product.

3.1 Advantages

With a CM, you get:

• Greater transparency in the supply chain – CMs are willing to take consigned parts, work with customer designated suppliers, provide greater detail on part specification, drawings, etc.
• Greater control over subsystem and subcomponent manufacturing, including input on cost, quality, and lead time requirements.
• Complete ownership of the IP - the buyer provides the design and product specifications, and the contract manufacturer has no competing business which might generate potential conflicts of interest.
• A simpler business relationship – the two have no shared IP or product ownership – which means the buyer is freer to manage the relationship in purely business terms.

3.2 Disadvantages

The cons of working with a CM include:

• Greater investment in product design, development and tooling as the contract manufacturer generally does not have an existing system architecture or common use tooling.
• Longer new product development lead times (at least during initial set up) as products are being built from scratch rather than from an existing platform or supply chain.

3.3 Typical CM Customers

Companies in industrial equipment, automotive, consumer electronics, motorcycling and ATV, and other industries, in need for sheet metal parts, tubes, plastic components and more, to be used in their products. Alternatively, they may be asking a contract manufacturer to assemble a certain product based on those/other components.

Greater complexity or more niche markets often call for a contract manufacturer due to a lack of options for good-quality OEM/ODM suppliers, or a need for greater control over the product and supply chain. Customers with sensitive IP will often also utilize contract manufacturers to prevent IP leakage.

Fig. 5:  Bending sheet metal 

Manufacturing consists of a complex network of companies that provide a range of manufacturing services to established companies and startups. Often, industry players ditch acronyms such as EMS vs. OEM to describe their services. While that may well be the case for many, for many others who may be in the initial stages of research and development, knowing which is which or what can be confusing.

When it comes to manufacturing, acronyms do make sense. Knowing which manufacturer to turn to will depend on their specialty and your product. There, these specialist manufacturers produce, manufacture, contract or provide specific components or services that will deliver end-user solutions.

Acronyms represent different services offered by a particular manufacturer within the broader manufacturing environment. EMS provides electronics manufacturing services; OEM is an original equipment manufacturer. CEM is an electronic contract manufacturer and ECM is an electronic contract manufacturer. CM is a contract manufacturer and ODM is an original design manufacturer. That said, even knowing one acronym from another can lead to confusion. To help you decide, let's take a closer look:

What is EMS?

EMS is essentially a contract manufacturer in the electronics space. Similar to ECM, EMS can design, manufacture, test, ship, or repair electronic components and assemblies for OEMs. They may also be involved in product development, software design assistance, or other value-added services such as supply chain management, make-to-order configuration, and outbound logistics. Some EMS companies are large multinational corporations that manufacture components for companies such as Microsoft, Apple, HP, Sony, and Cisco.

What is OEM?

Original equipment manufacturers play multiple roles in manufacturing. OEMs may sell complete products or produce certain sub-assemblies or assemblies for other companies to use in their final products. They can focus strictly on research, development, and innovation of their own products and retain intellectual property (IP) rights. OEMs also contract with commercial and consumer electronics to produce a range of products, such as medical devices and auto parts. Ironically, it is not uncommon for OEMs to subcontract with CEMs or CMs to supply parts for their own products.

What is CEM?

CEMs are companies that contract to manufacture electronics for other companies. These contract electronics manufacturers typically provide full or partial manufacturing responsibilities to other OEMs serving industries such as communications, transportation, pharmaceuticals, defense, oil and gas, and computer industries.

What is ECM?

Like CEM, ECM is a contract company that manufactures electronic parts for other companies. They can manufacture individual components or entire components for a range of industries, or sell the manufactured parts to OEMs for marketing or to specific customers. In fact, Electronic Contract Manufacturer (ECM) is just another acronym for CEM.

What is CM?

As a form of outsourcing, contract manufacturing is essentially when your company hires another - a CM - as your company's factory. The manufacture of a product is based on the processes, labor, and materials required to produce the company's design. CMs are used in a wide variety of applications and are commonly found in the automotive, aerospace, defense, medical, food, and beverage industries.

What is ODM?

ODM, while similar to CEM or ECM, typically develops and owns IP for the products used in CEM. In other words, contract electronics manufacturers use custom designs and IP to manufacture various products, while ODMs develop their own dedicated IP for specific markets.