Home » Original Design Manufacturer (ODM):Introduction, Pros & Cons
ODM manufacturing allows you to make use of a supplier that can already produce the good you are interested in. Despite that only small changes to these existing products can be made, using existing product lines is cheaper and faster to set up than starting from scratch. Professional ODM manufacturers let you take part in their expertise and returns to scale.
The abbreviation ODM stands for “original design manufacturer”. It refers to companies that design products as well as manufacture them, which are then sold on to other companies who will rebrand the products as their own. These are often produced as so-called “white label” goods and are made in bulk amounts, allowing smaller companies to benefit both from the economies of scale and the expertise of the ODM manufacturing firm. It can be one kind of possible solution in the procurement or sourcing process, respectively.
ODM Manufacturing is commonly categorized into white label and private label. For suppliers offering white label services, they distribute their generic finished products to different retailers, who thereafter sell them under their own brand name. In contrast, private labeling services providers sell finished products that are produced and sold exclusively to a particular retailer. The difference between white label and private label is usually product specific and manufacturers offer both. Despite of this difference, the two terms are often and wrongly used as synonyms.
Both white label and private label allow you to benefit from much lower costs in bringing a product to market, letting you focus on other core parts of your business. ODM is similar to the term “OEM” or original equipment manufacturer but is not to be confused. With relying on an OEM, the manufacturer is often producing just a component based on your own company’s design and specification. Whereas with ODM manufacturing, you are usually buying a pre-designed and pre-produced product that you will go on to brand and sell as your own. OEM products are therefore typically less complete solutions than ODM products.
Market Share of Private Label Brands Worldwide in 2013
The biggest advantage of going down the route of ODM manufacturing–for both white label and private label–is that you do not have to spend time and money designing the product. This allows you to spend more effort on your core operations as well as benefiting from the skills and experience of the original design manufacturer. While you may have a strong knowledge of how to grow your business, the manufacturing side itself may be unfamiliar territory. By forming a partnership with an ODM manufacturing firm, you can benefit from the skills and experience of an established developer and manufacturer.
You also will generally benefit from a lower price. This lower price is compared to both producing it yourself as well as alternatively seeking out an OEM. Since you do not have to spend time and resources designing the product you minimize costs, but you can also take advantage of the economies of scale from the ODM manufacturing firm. It is highly likely that they are producing significant quantities to sell in smaller lots, so you can save money from the bulk production even if you are purchasing a low amount. Often you might even share the same supplier with very reputable other brands, which make use of the same supplier for a given product category.
Furthermore, you will save a lot of time by much quicker setup period. Both designing your own product as wells as arranging a custom production line can take a lot of time. By getting a basically ready product, you are not only able to spend more time on the branding and marketing of your product, but also able to move much quicker with respect of marketing and market testing. The technical aspects are taken care of by the ODM manufacturing firm, so that focusing and spending more effort on brand development, testing customer responses to different products and ensuring your product launches successfully become more rewarding.
However, despite the many advantages, there are also several disadvantages. You will not be receiving a unique product, which means there may be competing products on the market that are quite exactly the same. You will have to differentiate your product from competitors through the brand with product packaging and similar; otherwise, it will be a race to the bottom in terms of margins. Third party consulting companies can help you finding more unique ODM companies.
Additionally, white label and private label is only useful for certain types of products. If you want to sell unique goods which require a specialized design, or don’t want an off the shelf product, then you will not be able to benefit from ODM firms. An OEM firm may be more suitable in a situation like this, as they can turn your ideas into tangible goods. The ideal ODM or white label product is one which is quite homogeneous but marketing, price and design can make a big difference (think of the various brands of very basic food items as an example).
While ODM firms may be willing to alter a product to meet your specification (colors, sizes and similar), it may not be to the level you want or they may require higher minimum orders. The real flexibility should be tested by ordering samples.
Focus on building your brand by outsourcing the struggle
of realizing a product design to others.
Many different industries are able to take advantage of the ODM products. It is heavily seen within the cosmetics and food industry. Most supermarkets often have their own range of basic items, but in almost all cases they are sharing the same supplier with well-known brands and are simply rebranding it in their own name.
Elsewhere it can be seen in the electronic cigarette industry most recently for instance. Many small to medium sized companies operating in this niche seek out an ODM manufacturing firm to provide electronic cigarettes as well as e-liquid and simply brand the goods to match their own company. They do not need to invest in heavy machinery or research and development as it is all be taken care of by the ODM manufacturing firm, they simply get to benefit from the products. Good marketing is the key here.
Other general industries include other consumer electronics (all the power banks, phone cases etc.), clothing and medicine, with many products coming from a central source before being branded to a certain company. There are plenty of generic medicine products imitating aspirin, but not each brand is producing their own version of aspirin. It all generally comes from a select few manufacturers.
The perception on white label products is generally very positive in Western countries. Although the most important driver of their purchase for private label is lower price, they also believe that private label offers a good combination of quality and value. There are some differences with respect to countries that you should consider for your marketing efforts.
Percent of Respondents Who Somewhat or Strongly Agree
(Source: Nelson Global Survey of Private Label, 2014)
Most ODM goods come form China for a variety of product categories. The ODM manufacturing industry is rapidly growing, the exact number of suppliers is difficult to estimate, though. While China’s manufacturing industry is acclaimed worldwide for its OEM solutions for several decades, the ODM sector is catching up more and more. Offering white label and private label products requires Chinese suppliers to create their own products, which makes developing their own product design skills necessary. According to market research firm IHS Technology, the ODM sector was among the main drivers of the overall electronics manufacturing industry in China, which enjoyed a 2% year-on-year volume growth in 2016.
As the world’s largest manufacturing powerhouse, China’s manufacturing prowess is expanding further. This time with a focused approach to innovative design and brand identity. For the past 10 years, traditional Chinese OEM manufacturers are transitioning to ODM, who through automated technology and operational sophistication are better equipped to undertake design conceptualization besides of the typical product assembly and production seen in OEM. The value added is usually seen as higher for ODM, because design and research and development (R&D) are taken over by the suppliers themselves. This is related to China’s general economic advancement. With enhanced operational capabilities, China’s ODM manufacturers are able to create industrial outputs from scratch based on their own design and sell them to companies which would brand them off as their own prior to the retail sale.
The majority of ODM contracts in China pertain to white labeling as there are usually more smaller orders, since it is more cost-effective, and they can sell to more customers since it’s not exclusive. This means you can make use of ready-made generic designed products at reduced costs, which are nevertheless available for further customization based on your specifications and branded with your own company logo. Some of the common product categories for ODM white label solutions in China are electronics, apparel and textiles, jewelry and accessories, and furniture and home products.
According to market research firm IHS Technology, China is experiencing marked improvement in its ODM production capabilities, with the proliferation of tier-two original design manufacturing (ODM) firms. Tier-two ODM firms (smaller firms) offer production capacities suitable for low volume orders, which their larger counterparts can no longer accommodate, with their hands full on large-scale project requirements.
Thus, the ODM industry in China is currently a saturated market dominated by both large-scale ODM manufacturers and smaller ODM firms–such as BYD, Hui Ye, Huanquin, Hongyu, Yulong, Pegatron, and Inventec, to name a few big ones. This competitive market gives you plenty of white label production company to choose from, scalable depending on your volume requirements.
In theory very simple: Print your logo on existing products –
the basic principle of ODM production.
The scope of work for ODM, both white label and private label, normally includes:
Cost estimation entails comparing prices offered by various suppliers for the final product. It helps you save costs for white label products including non-price aspects such as expected shipping fees, production turnaround time, supplier quality, product packaging and potential customization. Best possible prices for different price/quality levels based on prevailing market rates are likewise assessed for reference so that you can foresee the projected expenditures and adjust your costing and marketing strategy accordingly.
In manufacturing, delivering fast is a clear advantage over the competition. Thus, lead time assessment is critical to ensure that ODM products, regardless of volume requirements, are delivered strictly within schedule. However, it can often not be relied on the estimates from suppliers. Through lead time management, the time required to complete the entire supply chain process, from order placement to receipt of your shipment, can be significantly reduced so that your product can be made available to targeted consumer markets within the shortest time possible.
An ODM manufacturer’s quality of workmanship is best adjudged by scrutinizing actual product samples. Sample procurement thus allows you to verify the actual ability of a manufacturer to produce your desired product. This ensures that you work only with the best quality suppliers and avoid the risk of being defrauded by unscrupulous suppliers who make bold claims which may later be found ill-equipped to do so, as they often under-deliver or overpromise.
Supplier assessment gives you the opportunity to assess which among potential suppliers possess the requisite technical skills and experience in manufacturing your product, deliver orders in the desired quantity and meet timeframes, without quality loss. Thus, getting an overview about all relevant suppliers is important. A supplier evaluation procedure–including an on-site assessment and inspection of their licenses, local registration, testing agency certifications and product specific certifications and labor force–is imperative as it adds extra security because you learn about the detailed information on how their product is made.
Due diligence entails the conduct of an extensive background check on suppliers to ensure that they are strictly compliant with required certifications, industry standards, and regulations. It also includes a thorough review of the supplier’s track record, its past transactions with its previous clients and financial records to eliminate future surprises and give you the best indication possible if a partnership with a particular supplier is worth pursuing.
White label services offered by a third party manufacturing company ensure that your back-end requirements are met (design, quality, and production set up) so you can focus on the front-end (branding, marketing, sales, customer service, etc.) and grow your business. The scope of white label packages may vary and may either pertain solely to design, production or be inclusive of both. Either way, you can talk to the white label production company, and then it takes over discovering white label production companies and the coordination with packaging companies to create a packaging that best suits your business needs. Ideally they also take over extensive pre-shipment quality control and logistics/customs clearance needs, so that nothing can go wrong making use of the several advantages of ODM production.