The Hidden Risks of ODM Overdependence

At first, OEMs insisted on designing their own products, even if they outsourced the manufacturing to Asia. But more and more OEMs today rely on original design manufacturers (ODMs) to do almost everything, including design, procurement, and manufacturing.

It's a tempting model for OEMs. It reduces their engineering expense and also often improves the working relationship with the ODM. The ODM offers several possible designs for a switch, server, or smartphone, for example; the OEM chooses and then that's it. If there is a problem in manufacturing or the supply chain, there's no more finger pointing between OEM and manufacturer because it's all the ODM's problem.

Except that it isn't. Not really. OEMs may be sacrificing more than they realize, says Pamela Gordon, CEO of Technology Forecasters, in a recent blog on Gordon, whose company advises OEMs on supply chain best-practices and sustainability, argues that OEMs could be “taking a step backwards from corporate responsibility” when they hand everything over to an ODM. Although the purported benefit of the ODM model is to relieve OEMs of a lot of the design, procurement, and manufacturing work, regulations, quality, environmental, and human rights issues have a way of working their way back to the OEM.

Gordon identifies several key things OEMs are giving up when they use the ODM model and explains the consequent risks for each:

  • Environmentally sound designs. ODMs aren't well trained in design-for-environment principles. OEMs could be bested by competitors with superior products — products designed to be smaller, lighter, and more energy efficient.
  • Visibility into their supply chain. Regulations like the European Union's chemical law REACH and the conflict minerals provision of Dodd-Frank require OEMs to determine, and under certain circumstances disclose, whether certain materials are used in their products. “When asking ODMs for this information — typically with numerous reminders — the compliance managers often doubt the veracity of the product-content information they receive from ODMs,” said Gordon.
  • OEMs also are at the mercy of ODMs to verify the quality of parts. How would an OEM know if counterfeit parts were being used in its equipment, for example? They can also be unaware of human rights abuses in ODM factories. ODMs often resist “surprise audits,” she said, “and sometimes the auditors sense that what they are shown is staged.” This lack of visibility risks violation of regulations, shipment of low-quality product, and PR disasters.

  • IP theft. Gordon claims that intellectual property is “nearly impossible to protect” when the ODM does both design and manufacturing. Many OEMs simply want the cheapest possible hardware, claiming that their true value is in the software. Gordon doesn't say it, but ODMs very likely get at least some access to the software as well. They may program the chipsets or at least handle chips that have already been programmed. In short, if they are handling the hardware they are probably handling some software. IP lawyers do what they can but it's hard to prevent IP theft.

Gordon is not condemning the ODM model, but pointing out that OEMs should be fully aware of the risks and mitigate them as much as possible. The awareness itself will help them decide whether to fully embrace the model, or modify it by keeping control of the supply chain or requiring the ODM to agree to unannounced audits of their factories, for example.

What are your experiences working with ODMs? What safeguards do you have in place?

2 comments on “The Hidden Risks of ODM Overdependence

  1. Hailey Lynne McKeefry
    October 30, 2013

    It seems to me that many organizations underestimate the amount of work it takes to build a strong relationship with an ODM–and that a lack of relationship is what leads to many of the challenges you describe above. Any advice for those who are working with ODMs on how to smooth the process? Are there instances when it is preferable not to take this path? Let us know your thoughts…

  2. ahdand
    October 31, 2013

    @Hailey: Indeed , they need to focus on CRM and how to build a relationship which lasts for a longer period of time. Gaining new customers is easy but retaining them for a longer period is what they should focus on.  

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