Whether you are in charge of a new product line, or are simply trying to bring costs down for an existing brand, your company probably has considered outsourcing all or part of a product’s manufacturing process to a third-party vendor. The hunt for a reliable vendor can get a little confusing at times when those vendors throw around terms like “OEM” and “contract manufacturer” without really being clear on what the difference is, and how the two relate.
And to be honest, most manufacturers are unclear on the difference themselves. This is all the more reason to get clear on what terms like “OEM” and “contract” mean when talking about third-party manufacturing: A savvy product manager will be able to find just what they need, and find it more quickly, if they understand the relationship.
OEM Stands for “Original Equipment Manufacturer”…But What Does that Mean?
The acronym “OEM” stands for “original equipment manufacturer.” Depending on industry, this can mean different things:
A Parts Manufacturer
In many industries, OEMs design and manufacture parts or sub-assemblies, which are then sold to other companies. This is common in computer hardware, as well as the automotive industry. So, while the computer on your desk might have a decal that says “DELL,” the hard drive inside is manufactured by Seagate, which is considered the OEM.
A Manufacturer That Sells an End Product
At the opposite end of the spectrum, some industries consider the OEM to be the manufacturer that owns the brand for a certain product. So Apple, for example, would be the OEM for typical Apple products such as iPhones and iPads. They own the designs and assemble the final product—even if other firms help to manufacture certain parts.
A Manufacturer That Sells Rebranded Products
Some industries are distributor-heavy. Sometimes a distributor will take an existing product and sell it under their own label, making them a private label distributor. The OEM, then, is the manufacturer that creates the product for the private label distributor.
A Manufacture with Equipment (but not Design) Capabilities
Sometimes, OEM is contrasted with “ODM,” which stands for “original design manufacturer.” The idea is that an OEM has the equipment and tooling in-house needed to create a product but will need to be given specs by the client/buyer. An ODM, on the other hand, has design and/or formulation capabilities in-house, and so can better assist clients who need design help—especially important for new products coming to market.
Because “OEM” can mean different things, you should be sensitive to what a vendor might mean when they use the term “OEM.”
Contract Manufacturing: Outsourcing Some or All of Production
A much more straightforward term to use for outsourced manufacturing capabilities is contract manufacturer.
A contract manufacturer produces products for another company, under the brand name of that company. This is usually done for a set number of individual items produced, a set time period, or both. Hence the name: The company responsible for the manufacturing is doing so as specified in the contract with the buyer. They do not intend to market and sell the product(s) themselves. On the other hand, the company hiring the contract manufacturer might sell the product under their label, or might provide some other added value before further sale.
The services provided by a contract manufacturer may go beyond just producing the product, of course. Indeed, some contract manufacturers are considered “turnkey,” meaning they handle most of the critical elements in getting a product to market for their clients. This could include:
- Design and/or formulation
- Formalized processes for the receipt, approval, and storage of incoming materials
- Processes for approval of new materials and components
- Supply chain management
- Packaging/bottling and labeling
- Processes and procedures for product documentation and records, including lot control
- Quality control procedures
- Storage
- Fulfillment and logistical support
OEM vs. Contract Manufacturers: What is the Real Difference? And What Do You Need to Ask?
Given the different ways that “OEM” is used, it’s not surprising that the role of an OEM often is not clear. In some instances, an OEM will outsource products of a product, or some of its parts, and thus use contract manufacturers. In others, the OEM is supplying the parts that are assembled into a whole and then branded.
What really matters for the relationship is not what names are applied, but what each party to the arrangement has control of. Who, for example, “owns” the branding on the final product? And who owns the designs/formulations?
Who Owns the Brand?
In an outsourced manufacturing situation, it should be your company’s brand on the product. A contract manufacturer might assist with bottling and labeling the product, but that should be done according to your brand guidelines. This should not be confused with OEMs that are acting more like channel partners, selling your product line under their own brand.
Who Owns the Designs/Formulations? IP Rights
In most cases, the buyer owns the designs or formulations that will then be used by the contract manufacturer. It is possible that the contract manufacturer helps the buyers with the design or formulation process. But the buyer still owns the rights to that design or formulation.
If You Need to Outsource, Look for a Good Contract Manufacturer
Outsourcing manufacturing of specialty cleaning products is especially common; if that’s the situation your company is in, then you will want to consider contract manufacturing. This is the most straightforward way of conceiving of your company’s relationship to the vendor.
Still, not all contract manufacturers do the same things, even if they specialize in the same range of products. When shopping for a vendor, it is worth asking what parts of the process they are comfortable with. What kinds of quality testing do they do? How much will they help with design and formulation? With bottling and labeling? With storage? Just how turnkey is the operation?
Asking these questions will get you to the right manufacturer, more so than worrying about what kind of label they carry—OEM, ODM, CM, or otherwise.