In this blog, we explore the differences between OEM and ODM services and the factors to consider when determining which is better for your business.
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Are you planning to launch a cosmetics products line or expand an existing one? If so, you have probably come across the terms “OEM” and “ODM” a couple of times when searching for cosmetic manufacturers. These terms represent different types of manufacturers used to produce cosmetics products.
OEM stands for “original equipment manufacturing,” while ODM stands for “original design manufacturing.” Understanding the differences between these two manufacturers is crucial for informed decision-making.
What is OEM?
An OEM or Original Equipment Manufacturer is a company that specializes in manufacturing and producing cosmetic products based on the specifications and designs provided by customers. Cosmetic brands collaborating with cosmetic OEM manufacturers must provide specific requirements, including formulations, packaging designs, and branding elements.
Although the manufacturer allows customizing existing products, brands can design a new product that will stand out in the market. This type of cosmetics OEM manufacturing allows them to create unique, high-quality products that match their target customers’ needs.
What is ODM?
ODM, or the Original Design Manufacturer, is a company that produces cosmetic products according to a buyer’s specifications by modifying existing products. ODM often offers private label services, where a cosmetics company selects a product(s) from a manufacturer’s existing line, makes a few changes, and sells it under its brand name.
Unlike in OEM, where you are required to provide product specifications, ODM manufacturers do everything for you. In this arrangement, the ODM company will plan, design, formulate, develop, and manufacture cosmetic products and develop the product packaging and design elements.
How is OEM different from ODM?
OEM and ODM are frequently used terms in the cosmetic industry, and their differences can be slightly blurred sometimes. In the OEM production line, the buyer provides the designs and formulations while the manufacturer offers expertise, infrastructure, and other resources to facilitate manufacturing.
However, some OEM companies lack the needed machinery to manufacture the products, prompting them to contract another manufacturer. This aspect of outsourcing manufacturing in OEM causes confusion as it aligns with how some people define ODM. However, ODM involves in-house designing and manufacturing of cosmetics products.
In this section, we explain the various ways in which the two cosmetics manufacturing processes differ from each other:
1) Manufacturing process
In an OEM partnership, the brand provides the manufacturer with the specifications, designs, and formulations. Brands aiming to work with an OEM manufacturer must have a finished product concept since this company’s primary role is to produce products based on the specifications presented. OEMs are not heavily involved in product design and limit their manufacturing focus to providing necessary facilities, equipment, and expertise.
ODM companies, on the other hand, are responsible for designing, formulating, and manufacturing cosmetic products. They offer more comprehensive services since they are actively involved in the entire manufacturing process.
ODM manufacturers work closely with beauty brands to generate ideas and develop the product concept, including formulation, packaging design, and branding. These companies allow brands to modify existing formulations or create new products.
From these perspectives, the choice between OEM and ODM manufacturers hugely depends on the desired level of manufacturer engagement. For example, big brands capable of formulating and designing their own products can opt to work with OEM manufacturers. In contrast, small and new beauty brands can opt for ODM partnerships since they offer more support and resources.
2) Product development time
OEM and ODM manufacturing processes can take different times to develop the products. For instance, in OEM, the manufacturer produces the product based on customer requirements, meaning they may have to manufacture new products from scratch. The procedure may involve testing and experimenting until they acquire a perfect formula that meets the customer’s needs. As a result, product development in OEM may take longer.
On the contrary, ODM cosmetics involves modifying the existing products to match customer needs. A beauty brand may select a company’s existing products and modify the packaging and branding. Since the ODM manufacturer does not have to produce the products from scratch, the product development time will be lower than in OEM production.
3) Intellectual property issues
The intellectual property rights for each production method are different. In ODM production, the manufacturer has more intellectual property rights. This is because the ODM is involved in the product design, formulation, and packaging processes, meaning they retain full ownership or co-ownership of the intellectual property. However, brands can negotiate licensing and transfer agreements regarding license, usage rights, and any royalties or fees associated with the intellectual property of the contracted products.
In OEM production, the customers retain most of the intellectual property rights. The OEM production method requires the customer to have a finished product concept, including product design and formulation, before engaging the manufacturer. As a result, the buyer typically owns most aspects of the product, including trademarks, logos, and specific branding elements.
However, the OEM manufacturer can claim ownership in certain cases, for example, where the company was involved in product formulation. Thus, manufacturers and brands should establish clear agreements to ensure that both parties intellectual property rights are respected and protected.
4) Minimum order quantity
Typically, ODM has low minimum order (MOQ) quantity requirements than OEM.
In ODM, the manufacturer already has the products ready for modification, making it easy for them to provide flexible MOQ requirements. If the products are unavailable in stock, the manufacturer can use existing formulas and designs to manufacture the products.
However, manufacturers in OEM production have to create new formulas and products based on the customer’s requirements. As a result, they may provide a specific, high MOQ requirement that justifies the effort and production costs.
Depending on the agreements, OEM can be relatively more cost-effective than ODM.
Brands opting for OEM production can avoid certain costs associated with product development, such as formulation research, packaging design, and branding. This can help reduce upfront expenses. In addition, outsourcing cosmetics manufacturing to OEM help brands avoid costs such as raw materials, labor, production equipment, quality control, and packaging.
ODM partnerships can be more expensive since the manufacturer is extensively involved in product design, formulation, and packaging. Brands may need to cover the costs associated with these production aspects, including product concept creation, formulation research and development, packaging design, and branding.
However, the overall costs in either OEM or ODM arrangements can vary depending on the product complexity, level of customization, negotiated terms, and general agreement.
Why work with OEM cosmetic manufacturers?
Working with OEM cosmetics manufacturers presents multiple benefits, including:
Working with OEM manufacturers presents a cost-effective solution for brands in the cosmetic industry. By leveraging the manufacturer’s existing infrastructure, production capabilities, and economies of scale, cosmetic companies can benefit from lower production costs than establishing their manufacturing facilities. This can be especially beneficial for smaller brands or startups with limited resources.
ii) Access to high-quality products
OEM manufacturers have specialized knowledge and expertise in cosmetic manufacturing, enabling them to produce high-quality products. These manufacturers possess the technical know-how, experience, resources, and understanding of industry regulations, standards, and trends.
Leveraging this expertise can help beauty companies manufacture and deliver high-quality products that meet regulatory requirements and consumer expectations.
iii) Higher control over production
In an OEM partnership, the brand has higher control over the production of its own products since it defines and specifies the desired product attributes. The brand sets the standards and guidelines for the OEM to follow during manufacturing by providing information on formulation, packaging, labeling, and other requirements. This helps ensure the final product matches the company’s vision and the target market’s preferences.
iii) Access to advanced technology and resources
OEM manufacturers often invest in advanced manufacturing technologies, equipment, and research and development capabilities. As a result, brands partnering with an OEM gain access to these resources, which may otherwise be expensive to acquire and maintain independently. Therefore, such collaborations enable brands to innovate, develop new product formulations, and stay competitive in the global cosmetics market.
iv) More time to focus on branding and marketing
Outsourcing the production process to an OEM enables companies to allocate their time and resources to marketing and branding strategies, such as market analysis, brand development, and building customer relationships. This approach helps them establish and strengthen their presence and position in the market and differentiate themselves from other competitors, thus potentially expanding their market share.
However, despite these benefits, partnering with an OEM can have numerous disadvantages. These include:
i) Longer lead time
Creating new products from scratch may result in a longer lead time since the process may involve creating new formulas, product designs, packaging, and branding. Sometimes, the manufacturer may require time to create molds and new tooling, which may take some time and delay the product launch.
ii) Limited feedback and guidance from the manufacturer
Limited involvement of the manufacturing team during the product designing and development processes limits the brand’s access to valuable feedback and guidance. Without the manufacturer’s input, the brand may miss opportunities to optimize the product formula or design.
Given that the manufacturer is more knowledgeable about the production process and the industry, their involvement can increase access to valuable insights. These can help improve product functionality, cost-efficiency, or manufacturing feasibility. Thus, it is recommendable for beauty businesses to embrace more collaborative approaches that allow information sharing.
Why work with ODM cosmetic manufacturers?
Working with ODM cosmetic manufacturers offers several advantages. These include:
i) Much shorter lead time
Since ODM manufacturers have pre-existing product formulations and designs, brands can quickly launch their products by selecting pre-developed options. This is especially beneficial for brands that want to capitalize on emerging trends or products that experience seasonal demand. ODMs can speed up product development, allowing brands to launch their product line faster and stay competitive in the market.
ii) Lower MOQ
ODM manufacturers often have lower MOQ requirements than OEM arrangements.
Since ODMs have established production lines and resources, they can provide flexible MOQ arrangements and efficiently handle smaller order quantities. Leveraging ODM manufacturing enables brands to produce cosmetics in smaller batches, reducing inventory costs and minimizing the risk of holding excess stock. Therefore, this production approach is more favorable for emerging brands, startups, or those testing new products in the global cosmetics market.
iii) Access to market insights and trend forecasting
ODM companies deeply understand market trends, consumer preferences, and emerging innovations in the cosmetics industry. Due to their significant involvement in production processes, these companies actively monitor the market, conduct market research, and track the latest trends.
By partnering with a private label, cosmetics brands can tap into this knowledge and gain access to valuable market insights and trend forecasts. This enables brands to develop products that align with current market demands, stay relevant and competitive, and cater to evolving consumer preferences.
iv) Acess to Advanced manufacturing and production capabilities
ODM manufacturers typically have advanced manufacturing facilities equipped with modern technologies and innovations. They invest in technology and infrastructure to optimize production efficiency and ensure consistent product quality.
Therefore, working with an ODM manufacturer enables brands to leverage these advanced capabilities without investing in their own manufacturing setup. This opportunity helps brands achieve higher production efficiency, maintain quality standards, and scale their operations effectively.
v) No need for know-how
When partnering with an ODM, brands do not require extensive knowledge or expertise in product formulation, packaging, or manufacturing. The ODM takes care of these aspects, utilizing their knowledge and experience. As a result, brands can focus on their core competencies, such as branding, marketing, and distribution. They can also leverage this opportunity to enter the market with high-quality cosmetics without requiring extensive technical knowledge or investment in specialized resources.
However, ODM is characterized by various downsides, which makes it not a viable choice for every company. Here are some disadvantages of this production approach:
i) Limited product differentiation
ODM companies often create products sold to multiple brands with minimal modifications. Since the product formulation, design, and packaging is similar regardless of the branding, the products launched in the market lack originality.
ii) Limited customization options
ODM typically offers a range of pre-developed options for brands to choose from. This limits their control over the customization of their products since they must work within the provided framework. As a result, ODM partnerships may not be a viable option for brands looking to create unique products.
OEM and ODM cosmetics manufacturing processes offer unique opportunities for brands aiming to launch new products or expand their existing product lines. While these processes may have overlapping advantages, the decision to use one over the other should be based on the brand’s needs. For instance, a brand seeking full customization and higher control can opt for OEM, while another that prioritizes shorter lead times can opt for ODM.