Every market in the manufacturing and retail industries is expanding, and differentiation is now the most important thing. Under these circumstances, focusing on planning and development and efficiently manufacturing through OEM is a method that is often adopted.
This time, we will explain in an easy-to-understand manner what OEM is, its difference from ODN, and its meaning, as well as the advantages and disadvantages of adopting OEM.
What is OEM?
OEM means that a company with manufacturing capabilities manufactures products for other companies’ brands. To begin with, OEM is an abbreviation for “Original Equipment Manufacturing (Manufacturer).”
Equipment means “equipment, equipment, equipment, equipment, equipment,” etc., and manufacturing means “manufacturing.”
In other words, in Japanese, OEM refers to the manufacturing of products under other companies’ brands, or the companies that manufacture them. The manufacturing company is sometimes called an “OEM manufacturer.”
Familiar examples of OEM
For example, many OEM products are used in apparel. Once we create a brand, decide on a clothing concept, design, and pattern, we outsource the manufacturing itself to an OEM. The finished garments are then sold by the company itself.
Convenience store companies also sell private brands. Seven-Eleven sells private brands under the name “Seven Premium,” Family Mart sells “Famimar,” and Lawson sells private brands under the name “Lawson Select.” This is because convenience store companies plan and develop products and outsource the manufacturing to OEM manufacturers.
Many smartphones are also produced by OEM.
As you can see, OEM products are everywhere around us.
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Difference with ODM
Speaking of OEM, there is something similar to “ODM”. Be sure to check the difference between OEM and ODM.
ODM is an abbreviation for “Original Design Manufacturing (Manufacturer)”. Literally translated, it means “manufacturing original designs.” In other words, ODM involves not only manufacturing but also design, that is, planning, design, and development stages.
The big difference is that while OEM mainly undertakes only manufacturing, ODM outsources not only manufacturing but also planning and design.
Another difference between OEM and ODM is whether the company in charge is the outsourcer or the trustee. In OEM, the outsourcing company often takes the lead in manufacturing the product, while in ODM, the outsourcing company proposes to the outsourcer and manufactures it, so the outsourcing company often takes the lead. You can say that.
However, in reality, even if the word OEM is used, the OEM manufacturer may be in charge of planning, and there may not be a clear distinction between OEM and ODM.
Familiar examples of ODM
Let’s look at a familiar example of ODM.
In the past, major mobile communication carrier companies sold feature phones, but the product planning itself was done in-house, and the basics such as functions and specifications were stipulated, and the specific design was carried out by domestic companies. We outsourced ODM to a manufacturer. Manufacturers contracted for ODM were racking their brains to see if they could come up with groundbreaking products that would sell while adhering to basic regulations. In fact, by having each ODM manufacturer compete from the design stage, we had the positive effect of coming up with a variety of ideas.
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Industries and examples where OEM is advanced
OEM manufacturing is progressing in a wide variety of industries, but OEM manufacturing has long been prevalent in the fields of automobiles, home appliances, food, cosmetics, apparel, and smartphones. We will introduce examples of OEM production in major industries.
Example of OEM production of automobiles
The automobile industry is dominated by OEM. Many Japanese automakers have OEM production vehicles. They are manufactured on an OEM basis and are differentiated by differences in emblems and front faces.
By manufacturing OEM vehicles, OEM outsourcers can expand their lineup without incurring additional costs.
Example of OEM production of apparel
Many of our apparel products are OEM manufactured. They are often mass-produced in factories in China and other countries, and major apparel manufacturers profit from this process.
OEM contract manufacturers receive orders from clients such as apparel brands and begin making samples. Once the sample is approved, we will begin production. OEM contract manufacturers also procure materials upon request. Many OEM manufacturers have overseas factories, and production often takes place across countries.
Example of OEM production of smartphones
For example, Apple’s iPhone is a classic example of OEM production of smartphones. Apple develops and designs the iPhone itself, but it outsources manufacturing to overseas companies. In the case of Apple, Apple takes the lead from the development and design stage, and both companies cooperate in manufacturing.
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OEM type
OEM comes in various types and patterns. Although there is no clear classification of types, it would be good to know what kind of patterns there are.
Is it the consignor or the trustee who owns the brand name?
Generally speaking, OEM is when a consignor entrusts the manufacture of its own brand products to a subcontractor. In other words, the owner of the brand is often the consignor.
For example, in the automobile industry, a car manufacturer named Company A outsources the manufacture of its own branded cars to an OEM manufacturer named Company B, and Company A sells the cars under its own brand. This is a typical OEM example.
On the other hand, the OEM contractor may make a proposal to the client saying, “We have designed a product like this, so would you be interested in selling it under your brand name?We will undertake the manufacturing.” This is a method similar to ODM, and is sometimes called ODM, but there are also brand forms like this.
Difference in technical level between the outsourcer and the outsourcer
If both the OEM contractor and the contractor have manufacturing technology, the one with the higher manufacturing technology may instruct the one with the lower manufacturing technology.
On the other hand, they may have the same level of technology. In that case, it would be an equal relationship. In either case, the relationship will change.
Will you outsource the entire amount or a portion?
When a consignor outsources OEM, not all products are outsourced. We may outsource some of our products to OEMs. In that case, the outsourcer will also be responsible for producing a portion of the product themselves.
Even when outsourcing OEM to multiple companies
When a contractor outsources manufacturing to an OEM manufacturer, it may seem like they are outsourcing to a single OEM manufacturer, but that is not always the case.
Even though they are OEM manufacturers, each company has different technologies and areas of expertise. Therefore, in some cases, suitable products are outsourced to multiple OEM manufacturers.
Private brand products are a type of OEM
As mentioned earlier, private brands such as convenience stores are an example of OEM. Private brands are created when the consignor is a retailer. We call it a “private brand” because we sell it in our own stores.
One of the benefits of private branding for OEM consignors is that they can develop products that reflect their strengths and sell them exclusively in their own stores. In addition, because we operate stores, we are fully aware of the customer needs of local residents at each store, which allows us to plan and develop products that perfectly match customer needs. Since it is not a product made by another manufacturer, it is a great advantage to be able to set prices freely and increase profit margins.
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OEM benefits
Because OEM has many advantages, it has been a popular manufacturing method for many years. Now, let’s take a look at what the benefits are.
Advantages for the outsourcer
- You can create your own original brand products while keeping costs down.
Generally, OEM production involves planning and developing the product in-house, outsourcing the manufacturing to the OEM, and then selling the finished product in-house. In other words, it has the advantage of being able to easily develop and sell original brand products without having to have a manufacturing department. This is also an advantage in the sense that you can sell your products while reducing costs such as creating and maintaining your own factory and reducing personnel costs.
- Can reduce inventory risk
The manufacturing industry involves inventory risk. Although it is good to mass produce OEM products, if they do not sell, there will be excess inventory and a loss. With OEM production, there is no need to increase the operating rate of the factory, so you can produce only the amount you want to sell, which reduces inventory risk.
- You can concentrate on development and sales
Currently, the market is almost saturated, and in order to survive, it is absolutely necessary to differentiate our products from those of other companies. By outsourcing only manufacturing to OEM, you can reduce all costs, freeing up time and costs to focus on development planning, design, and sales and marketing. If you conduct research and develop better products as a brand, you can expect to increase sales and contribute to branding, so this is a very productive activity.
- Improving name recognition
As mentioned above, if an efficient OEM production and sales format is created, the brand will become more widespread and the name recognition of the brand and company will steadily improve. It can be said that major manufacturers in the world are leveraging the power of OEM.
Benefits of being a trustee
- Expected to improve technical skills
For OEM contractors, they can expect to improve their manufacturing technology by developing products for other companies’ brands one after another and gaining experience. As we accumulate experience in this way, our technical capabilities will steadily improve and we will be able to receive more orders. If we can smoothly manufacture even difficult manufacturing projects, we will differentiate ourselves from other companies.
- Increase profits by increasing production volume
By increasing the number and volume of orders from OEM contractors, factory utilization rates will increase and profits will improve compared to simply manufacturing our own products.
- Increase sales without having your own inventory
The benefits of increasing the number and volume of orders go beyond simply improving profits. Being able to manufacture our products in-house without having to keep any inventory is a big advantage. A manufacturing industry with no inventory risk is possible.
Disadvantages of OEM
On the other hand, OEM also has disadvantages. We will introduce the consignor and the trustee.
Disadvantages of the outsourcer
- In-house manufacturing technology is not developed
In OEM, manufacturing is outsourced to other companies, so although it is a manufacturing industry, the company’s own production technology does not develop. It is possible to improve production technology by producing some of the products yourself, or by visiting OEM manufacturing sites and becoming deeply involved in manufacturing.
- It may even be more expensive to manufacture
In the long run, outsourcing OEM manufacturing can actually be costly. This is because depending on production volume and specialization, the production cost per product may be reduced. If you have your own manufacturing department, this may not necessarily result in cost reductions, so please be aware of this.
- The trustee may become a competing company in the future.
OEM is based on a contract between a consignor and a consignor, and as they are originally in the same manufacturing industry, they are competitors. Once the contract period has expired, the company may become a competitor in the future. Additionally, through OEM outsourcing, the outsourcing company becomes fully aware of the company’s planning and manufacturing know-how. This point can be considered a disadvantage of OEM.
Disadvantages of trustee
- Difficult to spread the name of your company or brand
The contractor is only in charge of manufacturing, so even if the product they manufacture becomes a huge hit, it will not gain recognition. If your goal is to spread your brand, OEM contracting may not be the best choice.
- Costs may increase due to low price
In many cases, those who outsource OEM production want to keep production costs as low as possible. Therefore, OEM contractors often have to fulfill the request of “reducing production costs as much as possible.” Reducing costs requires wisdom and cost, and there is a risk that profitability will decline.
- Production volume depends on the contractor
As an OEM contractor is a type of manufacturing industry, it is naturally necessary to secure a certain amount of production in order to continue the business. However, if sales decline due to some kind of market change or the number of manufacturing requests decreases, we will be in a pinch. In this way, the disadvantage is that the production volume of OEM contractors depends on the contractor.
How to choose a reliable OEM manufacturer
For outsourcers, it is most important to choose a reliable OEM manufacturer in order to overcome some of the disadvantages of OEM manufacturing and to perform OEM manufacturing more efficiently.
The OEM manufacturers we outsource to are important partners who convey our know-how and create products together. There are always companies you can trust. If you are thinking about using OEM, please be patient and find one.
Here we will introduce the commonly recommended criteria for selecting an OEM manufacturer.
Is it possible to accommodate the desired lot?
OEM contractors are very particular about the number of production lots. If you want to start with a small batch for test production, you will need to confirm whether you can handle small batch production. Some OEM manufacturers support small-lot production.
Do you have the technology and development capabilities that meet your expectations?
You must make sure that your company has the technology and development capabilities to make the products you want. It is important to confirm whether the desired product will be produced through past experience and detailed discussions.
Do you have good communication skills?
Most OEM manufacturers have sales representatives who handle communication with the outsourcer.
The important points are whether you can communicate with the person in charge who will be the point of contact without any problems, and whether they maintain close communication. Trust is born from communication. Pay special attention to the OEM manufacturer’s communication skills.
Are hygiene and quality control systems in place?
Hygiene control is especially essential in food manufacturing. It is necessary to confirm whether the factory is a safe and secure environment.
Furthermore, the quality control system is also important. There are a variety of quality control methods, and we recommend choosing an OEM manufacturer that incorporates and manages them. For example, an OEM manufacturer can be trusted if it has obtained ISO9001 certification, the international standard for quality management systems.
Does it provide thorough support even for beginners?
Many contractors enter the industry with little knowledge of the industry. For example, manufacturing and selling cosmetics requires specialized knowledge of various laws and regulations. There are detailed rules for catchphrases, descriptions, and package design, and products must be manufactured and sold in accordance with these rules.
In such cases, it is important that the OEM manufacturer provides kind and thorough guidance. Check to see if they will respond quickly and courteously.
About OEM contract
Once you have decided to use OEM and have selected an OEM manufacturer, there are many things you need to be aware of when signing a contract. Be sure to check it out.
What is an OEM contract?
In the case of OEM consignment, the specifications of the product are determined by the consignor, and the right to manage and own the completed product belongs to the consignor. The OEM’s general contract matters, such as rights arrangements, confidentiality, and responsibilities, are set out in the contract, and the contract is concluded accordingly.
Main items of OEM contract
The following items are mainly used in the OEM contract.
Specifications/Transaction details
Describe OEM transaction details. Describe the details of the outsourced manufacturing of the product. The specifications of the product to be manufactured include the shape, dimensions, ingredients, raw materials, etc., clearly and specifically described. In some cases, blueprints and specifications are attached separately. It is important to write it down in detail so that there is no misunderstanding.
trademark
Describe the brand name attached to the product, in other words, how to handle the trademark. Specifically, we will include the following:
- Trademark rights belong to the consignor
- Displaying the trademark in the manner instructed by the consignor (details of the display method, such as the display part and design of the manufactured product, will be specified)
- The trustee shall not transfer the trademark to a third party.
- The trustee will not use the trademark for any purpose other than the purpose of achieving the contract.
By specifying details like this, you can protect your brand.
burden of risk
Liability is an item that determines who will bear the cost when a product becomes dangerous and a loss occurs.
In this case, risk refers to the situation where the manufactured product is damaged or damaged, making it impossible to fulfill the contract, even though neither the outsourcer nor the contractor is responsible.
For example, a contractor may have completed a product and stored it in a warehouse before delivery, but the product was damaged by a tsunami and became unusable.
order
Describe matters related to ordering, such as when and how to place an order. By determining the minimum quantity when ordering, both parties can enter into a contract with peace of mind.
inspection
Inspections are usually carried out by the contractor after the product manufactured by the contractor is delivered to the contractor. The inspection confirms whether the product conforms to the specifications and quality standards agreed upon at the time of the contract. After delivery, both parties need to thoroughly discuss and decide on the deadline for inspection, the inspection method, the criteria for determining compliance and non-conformity, and the appropriate response if the product fails.
Liability for non-conformity to contract
Contract non-conformity liability means that if, after inspection, the consignor discovers that the specifications or quality of the product are different from what was in the contract, the consignor may request the consignor to make repairs or reduce the price if it is within the specified period. You can request for things such as It is important to clearly define this responsibility.
product liability
Product liability refers to who is responsible for any damage caused by a defect in a product after it has been sold and is being purchased and used by a consumer or user. You also have to decide how to respond.
Usually, the outsourcer is held responsible for damages caused by their own products. Therefore, in order to investigate the cause of the damage, we will also provide for compensation to the trustee.
subcontracting
Subcontracting determines whether the contractor can outsource manufacturing to a subcontractor, in other words, whether subcontracting is allowed. For example, many OEM manufacturers have many factories overseas, and may have contracts with other companies’ factories. This falls under subcontracting, so decide whether or not to allow it. If necessary, state that subcontracting is prohibited.
confidentiality
During the contract period and after the contract period ends, both the trustor and the trustee will enter into a confidentiality agreement in which they will not divulge any confidential information they have learned.
By concluding this confidentiality agreement, it is possible to prevent the leakage of know-how, financial information, etc.
Cancellation of contract
In the unlikely event that a party goes bankrupt or engages in fraudulent activity, the reason and method for terminating the contract will be stated.
compensation for damages
This stipulates the contents regarding compensation, etc. in the event of damage.
The content introduced here is just an overview. If you want to draw up a formal contract or have any questions, or if you are concluding an OEM contract, it is a good idea to consult a lawyer to avoid a disadvantageous contract.
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summary
OEM is an abbreviation for “Original Equipment Manufacturing (Manufacturer).” A company with manufacturing capabilities manufactures products under another company’s brand.
ODM is an abbreviation for “Original Design Manufacturing (Manufacturer),” and we undertake not only manufacturing but also design, that is, planning, design, and development stages. The big difference is that while OEM mainly undertakes only manufacturing, ODM outsources not only manufacturing but also planning and design.
The benefits of OEM outsourcing include “the ability to reduce costs and create products under one’s own original brand,” “reduced inventory risk,” “able to focus on development and sales,” and “increased name recognition.”
Disadvantages of OEM outsourcing include “in-house manufacturing technology cannot be developed,” “manufacturing costs may increase,” and “the outsourcing company may become a competitor in the future.” In order to compensate for the disadvantages, it is essential to choose a reliable OEM manufacturer.