The manufacturing options available to technology companies are defined by a jumble of similar acronyms that often make understanding them a more difficult challenge. The increasing complexity of overlapping IT supply chains don’t make it any easier to sort out the relationships between product designers, manufacturers, suppliers, integrators and resellers. The three most common options are OEM, ODM and JDM. What do these terms mean and how are they relevant to your enterprise? It all depends on where you’re located in the value chain, your market orientation and where you’re headed on your business journey.
Understanding these options unlocks your ability to make better decisions for your organization. Here’s what you need to know about OEMs, ODMs and JDMs:
Original Equipment Manufacturer (OEM)
This is the manufacturing model that most consumers are familiar with and most enterprises aspire to: all specifications, design and development processes are submitted by the outsourcing company to the OEM, which simply builds the product to order. The finished product bears the outsourcing company’s brand. The outsourcing company is responsible for sales, marketing and distribution of the manufactured product. All licenses and IP developed by the outsourcing company are retained by the company and the OEM is essentially only contracted to perform manufacturing as a work-for-hire. In this model, the outsourcing company is hiring a contract manufacturer to build a semi-finished or finished product.
Outsourcing enterprises may prefer the OEM model because it removes the need to maintain costly manufacturing resources, management systems, program management, and labor. The model could also provide access to markets that are difficult to foreign entry. Startups and enterprises that have low risk tolerance or limited access to capital and/or resources may also prefer this model, since the OEM partner enables the outsourcing enterprise to have better control of its capital and operating spending. This allows these companies to maintain focus on their critical operations and strategies.
Original Design Manufacturer (ODM)
An alternative to the OEM model is to outsource a portion of the design and manufacturing process to an original design manufacturer (ODM). Within this model, if yours is the outsourcing enterprise, you submit the product specifications and contract with an ODM to design and manufacture the product in volume. Often times the product development costs are borne by the ODM and the OEM may bare a portion of the non-recurring engineering costs for any alterations in design. The final product is typically labeled with the outsourcing enterprise’s brand or trade dress: this is known as “white boxing” or “white labeling.”
The benefits to the outsourcing enterprise include:
- Lower new product introduction and development costs
- Lower labor costs, overhead and resource inputs
- Simplified supply chain
- Access to more advanced manufacturing processes and technologies
The ODM retains all the relevant licensing and IP rights and, in many instances, the same base product is licensed to multiple enterprises: the final assembly is identical in all respects, except for the brand marking. The limitations in outsourcing to ODMs is product flexibility, minimum order quantities, and local support coverage.
Joint Development Manufacturer (JDM)
A third outsourcing method is joint development manufacturing, which is a balance between OEM and ODM: distinctive parts are designed and manufactured by the outsourcing enterprise, while design and manufacture of certain modules, along with final assembly, are accomplished by the JDM. This can create a complex yet rewarding partnership for both the outsourcing enterprise and the JDM – it’s a relationship that is built upon collaboration from beginning to end.
One common scenario is that a hardware manufacturer has a design in mind, but doesn’t have off-the-shelf parts or manufacturing expertise to complete the design in-house. A JDM agreement allows a substantial measure of control over the process and output, while accessing the design and manufacturing capabilities needed for a successful product.
One important challenge within the JDM model is that of intellectual property: determining which partner owns what is not always clear and can lead to licensing problems at later stages of the relationship. For example, the manufacturing process is also deemed IP and would be owned by the outsourcing partner unless the outsourcing company brought a patent or manufacturing process to the table. Navigating these complexities requires a strong and honest relationship, with clear delineation at every step as to how IP will be introduced, assigned or (more commonly) shared. Effective communication throughout the design and manufacturing process is ideal, to ensure the original agreement and specifications are adhered to and the final product performs as planned.
OEM, ODM or JDM: Which is Right for You?
Working with an OEM allows your enterprise to maintain the most control over the manufacturing process. You still likely need to share confidential designs or information with your OEM partner, however your organization maintains ownership of the relevant licenses and IP (and depending on the use of off-the-shelf products). Depending on the scope of outsourced services provided by the OEM, your costs could be higher than in other scenarios, however your supply chain is simplified and there’s reduced complexity end-to-end.
Contracting with an ODM is often the best way to defray product development costs. Design, development, and R&D costs and resources are no longer your responsibility, which allows you to prioritize mission critical operations. You don’t have control over the relevant licenses, IP or even the fully costed bill of materials, but that’s not a problem if your business model doesn’t require them to realize value. You will need to get all the major product elements plus any field replaceable units (FRU) that can be easily swapped out for repair. Your business relationships need close monitoring and frequent communication, so there is some added complexity in your strategic operations.
The JDM model provides a balance between the previous two. You share responsibilities with your JDM partner, which relieves you of the burden of some expenses but requires you to allocate resources toward ensuring the relationship runs smoothly and equitably. If you’ve already built a trusting relationship with a JDM partner, this process can be easier and less prone to challenges. This is also a relationship that is more in line with modern business movements toward multi-nationalism, cross-market cooperation, and products that are manufactured in the United States.
When selecting an OEM, ODM, or JDM model, keep in mind that not all outsourcing partners are created equal – or deliver the same experience. Undertake a deeply informed analysis to truly understand your market, your goals and your enterprise in order to make the best choice of results for your business.