2020.3.16                

What is OEM in Cosmetic Industry?

The cosmetic industry has been growing rapidly for the last couple of decades and is still attracting more and more newcomers.

With thousands of outsourcing manufacturers all over the world, it is now much easier than ever to build your own lineup and join the game, even on an individual level.

In this article, we will take a general look at OEM in the cosmetic industry then discuss what are some pros and cons of building your own cosmetic lineup using an OEM company, inside and out.

In the end, we will share some of the features that we offer as OEM Co., Ltd.

What is OEM and how does it apply to cosmetics?

It may be a little bit `too much information` but it’s always good to start with basics. Let’s take a look at what OEM stands for and how it differs from ODM.

Understanding the term `OEM`

OEM is an acronym that stands for `Original Equipment Manufacturer` which is basically a company that produces parts or products in private labels for other companies to market. Foxconn making phones for Apple and Samsung is a good example of this.

It is no different in the cosmetic industry. Most of the products we see in the market are produced by OEM companies upon request. It makes a lot of sense since not everyone could own a factory and run it efficiently.

It’s actually a great system since factories get to keep their production lines busy as they are making products not only for themselves but for a lot of other brands too.

On the other hand, it definitely creates opportunities and makes it possible for people who wish to enter the cosmetic industry with large SKUs and production lots, without having to invest millions of dollars and making their own factories. It’s a win-win situation.

So, in regard to how exactly it works in the cosmetic industry, we will be covering that in one of our other articles soon.

What’s the difference between OEM and ODM?

You’ve probably seen the term `ODM (Original Design Manufacturer)` before, and sometimes in the same paragraph with `OEM` and maybe wondered what the difference is.

In short, an ODM is a company that designs and manufactures a product. In the cosmetic sector, a lot of companies use this term as a “we do everything for you” statement. However, it actually means that the ODM company rebrands existing products from its catalog for other companies to market.

You probably come across a lot of products that look exactly the same except for the brand print on Amazon. That means they are products coming out of the same ODM.

OEM, on the other hand, is when the manufacturing company designs a product originally for you or produces a product that was designed by you. If we get back to our Foxconn and Apple example, you can see why it is OEM and not ODM.

Pros of Using OEM in the Cosmetic Industry

So, what are some benefits of using OEM in the cosmetic industry?

  1. 1 – Higher Profit Margin
  2. 2 – Originality
  3. 3 – Intellectual Property

 

1 – Higher Profit Margin

In the cosmetic OEM industry, product manufacturing costs are often kept between 20%-30% of the retail price, although it can go down to 10% or even less.

If a product is sold for 50 USD, there is a good chance that it cost about 10-15 USD per unit to manufacture.

Depending on your business model, you could be investing in marketing which adds up to the cost as well.

Yet even in that case, cosmetic OEM products hold a very high potential to be higher in profit margin than selling existing products.

2 – Originality

With the freedom you have with cosmetic OEM, it is in your hands to create products that no one has ever thought of before. Products that you know that people want but are not there.

In short, you could simply create any product or brand concept you have in your mind and challenge the market. There are many examples of successful beauty startups who exactly did the same!

3 – Intellectual Property

When you make your own brand, you get to keep all property rights associated with your products and designs. As you own the rights to the product and the concept, you also have full control over them. You could always modify the prices, product specifications, design or the formulation.

Cons of Using OEM in the Cosmetic Industry

Not a thing on Earth comes with only pros and not have any cons. And cosmetics OEM is not an exception for this.

  1. 1 – High Initial Costs
  2. 2 – Inventory Management
  3. 3 – Production Limitations

 

1 – High Initial Costs

Although the manufacturing costs per unit can be low, doing cosmetic OEM will require initial costs.

Even if you start with 1 product, you will have to meet the minimum order quantities provided by the cosmetic OEM companies.

Depending on the product you are developing, it can be as high as 3 thousand units. Let’s say the product cost per unit is 5 dollars, which makes it an order of 15 thousand dollars.

Manufacturing the product is, however, not the only cost. You also get charged for printing plates, product registration fees, etc. If you want to start with multiple products, the initial costs could be much higher.

2 – Inventory Management

When doing OEM, you will be restricted by the MOQ policies that your manufacturer forces on you. Let’s assume that the MOQ is 1,000 pieces and the lead time is 3 months after placing your order.

What happens when you sell out in a month’s time? Well, you will be out of stock for a product that is highly demanded, for a couple of months which can’t be great for business.

Also, prices for MOQ are usually very high in comparison to orders in higher quantities. In Japan, for instance, the price difference between producing the same product 1,000 pieces and 3,000 pieces is usually twice as much.

In this case, it is more price efficient to order 3,000 pieces instead of 1,000 but the question is, will you be able to sell them?

As you can see, it can be challenging to figure out the optimal inventory management for your business. Given enough time and experience, anyone should be able to optimize this -as it`s no rocket science- but it sure is very difficult in the beginning.

3 – Production Limitations

Cosmetic OEM is unfortunately not all about freedom. There will be a lot of sad realities waiting for beginners who want to make their dream products come true.

Container options won`t be infinite and the ones you like can be very, very expensive. What about making an original container?

It would require designing it which is very time and money consuming. Then you would have to pay for the injection mold which would start from 10 thousand dollars and could go up depending on the design.

You want a box with a unique design, a couple of heat stamps and embossings? Well, you probably shouldn’t since it will cost quite a lot unless you order in huge quantities.

The point is, big brands order their containers or other packaging materials in massive lots which enables them to have their own detailed designs at very small costs. As this is hardly the case for people who order in small lots, you will need a different approach.

Why Choose OEM Co., Ltd.?

We would like to address 3 points why we think you should consider us as your cosmetic OEM partner.

1 – Friendly MOQ policy

We understand that it is not realistic for a startup to manufacture 10 thousand units. We take pleasure in helping our clients who order in small lots by offering them our flexible correspondence and cost-effective solutions for low quantity orders.

We do our best to help you with your inventory management. For instance, to reduce the costs and lead times, we offer to store packaging materials such as containers and boxes.

This way, you are able to order 5,000 containers and split them into multiple productions. This makes the containers much cheaper and lead times much shorter.

2 – Material Procurement Assistance

We think that we are doing a great job when it comes to assisting our clients through the material procurement process. We look everywhere for containers that would meet your requirements. While doing this, we always make sure we find the most cost-effective options too.

Although there will be limitations due to order quantities, based on our experience, we came to realize that there is always a great option for everyone if you know where to look.

3 – All-around Consultation

We do not only manufacture cosmetics but also offer our clients an all-around consultation. As well as assisting our clients for cost-effective and efficient productions, we also share our knowledge generously. We make sure we never leave a question unanswered regardless of what it is. We are eager to share our knowledge with them supported by past examples.

We also introduce them designers, marketing consultants, forwarders, etc.,

Conclusion

In this article, we first discussed what OEM is and how it differs from ODM then went on talking about the pros and cons of doing OEM in the cosmetic sector.

In the end, we tried to explain why we think we could be a good option for people who are seeking for a manufacturer in Japan.

We are looking forward to hearing any questions that you might have.

See you in another article.

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