9 Key differences when sourcing EMS v. ODM suppliers

By Steven Linahan

THERE ARE KEY DIFFERENCES by definition between an electronics manufacturing services (EMS) provider of manufacturing services and an original design manufacturer (ODM) that incorporates design as the additional variable into the equation.

However, that equation isn’t as precise as it used to be anymore as it is more of a blurry line between them.

The days of black and white EMS v. ODM differences aren’t that applicable any longer, one has to look deeper.

It is widely contended these days that it is common knowledge that EMS providers provide design services, not all do, but the top tier EMS providers do, to my knowledge. It is also common knowledge ODMs can provide strict EMS services without the design support.

So the point of this blurry line is demonstrated in the following simple assessment based on questions OEM executives should ask themselves that address some of the “other” primary distinctions between the two models.

1. Who owns the design IP?
Traditional EMS providers do not warrant the design unless they designed it for you and release all IP to the customer, except for their manufacturing processes, which can also be deemed IP.

With ODMs, there’s a mixed response to this question. Typically, you own whatever you brought to the table in the form of patents, and they own what they design, or offered you. (This is obviously a simplified explanation but you get the idea.)

See, also:
Lowering intellectual property risk in manufacturing outsourcing
Hong Kong-based legal counsel discusses Chinese intellectual property protection
Interview with World Intellectual Property Organization (WIPO) on protecting intellectual property rights

2. Does the EMS / ODM supplier have their own product lines / brands?
Traditionally, EMS providers do not and ODM providers (typically) do, but not always. In the realm of the ODM, this practice lowers the NRE costs for development as costs are shared across platforms.

But with this you also face potentially competing products the ODM manufactures that may be similar to yours – if not exactly the same product as yours. After all, most ODMs have standard motherboard designs (and other products) and you provide the fit, finish and features you want to complete the package. I suggest a non-compete clause in your supply agreement that at least limits direct competition based on time or features.

3. Do you get a costed, detailed BOM?
EMS providers typically will provide a full, costed bill of materials (BOM). ODM providers may provide this BOM but if this is shared, they usually won’t, and even if it is unique you probably won’t get a full BOM.

Instead, you typically get a generalized BOM of the major product elements plus field replaceable unit (FRU) levels. FRUs are printed circuit boards, parts or certain assembly portions of an electronics product already in use in the field that can be easily swapped out or removed by the user or repair person without the customer needing to ship the unit to a specified location for repair. (See, also: 80 Metrics EMS providers use to manage profits)

4. How easy is it to move your product from one supplier to another?
In an OEM-EMS relationship it is painful but definitely executable as you have access to, or at least should have access, to all drawings; CAD files, authorized supplier lists, costs, test files…

In an ODM relationship, rarely do you have access to all files as they are mostly truncated, abbreviated or simply not yours.

The above being said, moving to a new ODM supplier is nearly improbable unless doing so is under extraordinary circumstances and your transitions are being done more at new product launches v. transitioning existing products.

5. Is there a difference in cost reduction expectations?
Cost reductions are typically different in EMS models compared to ODM. As with most companies, the more you know the more power you have to influence. (See, also: OEM Supply chain and contractual strategies to reduce EMS provider pricing and sourcing costs)

You have more information on component costs and sources in a typical EMS relationship than you have in an ODM relationship. Thus, you know more detail in an EMS relationship and you are able to drive cost reductions more effectively as you can baseline best pricing, plus you can quote component costs yourself, whereas with an ODM you don’t have all of the detail so your focus is higher level and less direct.

As in all relationships there are caveats such as global OEM prices on processors; custom parts such as cases / chassis where the OEM sourced the product, and unique parts where the OEM manages the supply relationship.

But the point made above is still valid – when you have access to detailed component prices you know more than when you don’t. Knowledge creates leverage.

6. What are rebates and who uses them?
If you thought cost reduction initiatives are addressed once you acquire costed BOMs, think again. With ODMs they rely heavily on back-end rebate programs with suppliers, especially Asian-based suppliers.

Some of these rebates are as much as double-digit percentages that are both volume-based and also component-based.

Cost reductions are typically first absorbed, or passed on, in the form of rebates before you would see it as reduction in your purchase price. Thus, your PO price [if you actually saw it] isn’t usually the “real” price.

EMS is based more on purchase price variance (PPV) and transactional in nature but also has global spend rebate programs. But, these programs are typically a lot less of a percentage, such as with distribution spends.

7. What do you mean: location, location, location?
As most of us have a reasonable understanding of global geography, this is amazingly underestimated when comparing EMS and ODM models.

In brief, most ODMs are predominately Asian-based while most EMS providers are global with still a stronger presence being in North America.

 

 

Also, with ODMs, an OEM’s travel is greater, time zones are a very real consideration and logistics are usually international. Logistics demands that delivery of goods be planned in advance and shipped consolidated otherwise you get eaten up on freight and import costs.

Conference calls are also at night or early morning hours. You can’t just catch a regional flight or hop in your car and be there later that day.

8. Is there is a culture difference?
Relationships are actually worth something with a typical ODM. Its sort of like the American Express commercial which states something along the line of ‘you are a proud member since 1999.’

In the EMS industry, changing providers can be a revolving door at times, and sometimes these changes are over petty things.

Also, the Asian business culture is much different than the west but this is a whole different subject. Style conflicts abound.

But, yes there are differences and these are are larger than you may think and you may have to vary your style, approach, business acumen and certainly adapt as necessary.

See, also:
China: How to negotiate and other business practices
Using Hong Kong as a base for western companies working with China
Different faces revealed in Asia-based EMS providers
7 China purchasing mistakes to avoid

9. Where will service and repair be done?
It is simply amazing how many people think about the forward side of logistics and then skip over the service side.

The location where you and your customers have to send your products for repair may be either an eye opening conversation, or a carefully thought out and supported activity.

Don’t underestimate the differences between where manufacturing facilities are located, where service centers are located, and where your customers are located. (Reference #7 above.)

Although these nine points are globalizations and somewhat stereotypical, there is also enough detail described to allow reader to understand a bit more of the skeletal differences.

It is also not a finite treatise on all the differences either.

Each passing day in the electronics industry the things you know and the things you don’t know both evolve. One must stay in tune with the industry’s evolution.

 

Contact Steve Linahan directly in GlobalNet community. Log in. (Not a member? Sign up today. It’s free and takes only two minutes to complete your profile)


Ask a Question Post In Forums
Post your article comments below. Please follow our Website and community Terms

  1. Mark Zetter

    Mark Zetter    
    Silicon Valley | North America
    Posted at 4:23 pm on September 19, 2012

    “We would be cautious about reading too much into expected increased use of ODMs having a negative impact on the EMS industry for several reasons.”

    [Great article, Steve. For a reference point on the ODM model and how it has evolved and its impact and relation to EMS, the quotes above/below are from a 2003 report written by a Wall Street EMS industry analyst. I find the third item about location be specific to ODMs myopic now, as I did then.]

    “First, ODMs did not crack the majority (or 50% mark) for increased use in high complexity, higher margin telecom, networking, industrial, aerospace/defense, medical, or semiconductor capital equipment end-markets.

    Second, original design manufacturing is a business model not a regional advantage (labor and overhead costs are the same for everyone located in Asia). Therefore, EMS companies can penetrate the ODM market thereby maintaining share with OEMs, albeit with near-term start-up costs.

    Third, although location is not key for doing ODM work, location does matter. While ODM services can be provided in other parts of the world, including other low-cost regions, Taiwanese ODMs are concentrated in Taiwan and have no ability to source product globally in Europe, North America, etc., unlike EMS providers. This issue of location has become particularly relevant given concerns about access to supply with last Fall’s West Coast port lockout and the recent outbreak of SARS originating in Asia and still increasing in Taiwan.

    Fourth, EMS companies are pursuing ODM business which has structurally higher margins. Therefore, there is a chance that increased ODM offerings by EMS companies will expand EMS margins but adversely affect the margins of ODMs as they experience more competition on an ODM basis.”

    –Wall St. EMS Analyst (2003)

Comments

Leave a Reply

TIP: Anyone can post article comments whether or not you are registered. But, if you register or log in you can attribute your posts to your user profile in GlobalNet Community.

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

You might also like:

View VO Webinar calendar