Steps to Success: How to Choose a Contract Manufacturing Partner
Every company starts with the goal of growing larger and more successful. No matter what field you’re in, scaling means bringing more people into the fold, as well as reaching out to strategic partners to help you in areas where you have no capacity or expertise.
In the beverage industry, this means partnering with a contract manufacturer. Moving from an operational structure where you make your own product to one where you contract it out is a daunting task, but it’s also one that’s unavoidable if you’re going to continue to grow.
Why Do I Need a Manufacturing Partner?
For those who are hesitant to reach out to a contract manufacturer, know that your company is not alone in taking this step. All small beverage companies run into the same barrier sooner or later. At a certain point, small companies begin experiencing growing pains. They operate under cash constraints and have limited product development options. Marketing is tough without a full marketing department and is often limited to small, grassroots campaigns. Expansion into adjacent categories can seem impossible. Limited market access and distribution opportunities add to the obstacles.
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Despite all of this, your business is picking up and is beginning to outgrow the do-it-yourself manufacturing operation that’s worked thus far. You can’t simply build a factory, so you must find a manufacturing partner to help you get over the hump and scale your production.
A Strategic Decision
Next to choosing investors, deciding which manufacturer you will work with is one of the most important decisions for your company. This should be a board-level decision and it’s important to do your homework in advance. Once your company decides on a manufacturer, changing this decision in the future will an expensive, time-consuming and potentially brand-damaging undertaking. What can go wrong if you choose the wrong manufacturer? Simply put: everything can go wrong.
You can have production disruptions due to poorly-maintained equipment or because they prioritized a larger customer ahead of you. Operational missteps and process deviations such as formulation errors and recalls can impact your ability to put products on the shelf—or can be devastating to your reputation with customers. Manufacturers can experience raw material quality problems due to poor vendor management. While many of these things might be a minor headache to a huge company, they can be fatal to a startup that’s struggling to gain brand recognition and make a first impression on customers.
When researching various contract manufacturing partners, know that your team’s number one focus is to be able to spend time focusing on what you do best: developing distribution, brand-building, and product innovation. You shouldn’t have to spend time worrying about manufacturing. In fact, your contract manufacturing partner should run “lights out.” You should be able to let them do what they do while you flip the lights off and go to bed at night without having to lay awake worrying about it. Have they maintained their equipment? Will they make a mistake when making your batch? Will your packages will be damaged or leak? Will you have product spoilage out in the field? When you choose the right manufacturer, these shouldn't be things that worry you. All manufacturers claim that quality is their number one concern. However, talk is cheap. This is why homework is important. Here are the things to look for as you research options for a contract manufacturing partner.
Take a Look at Their Team
Is the company composed of one compelling salesperson/founder and a team of medium-quality employees? An ideal manufacturer will have an entire team that’s full of knowledgeable competent people who are strong and well-respected in the company. How long have the employees been with the company? Has the company built a good reputation in the industry? Have they won external awards for quality? Do they have external certifications?
Responsiveness Is Key
The next item to look at is the manufacturer’s responsiveness. When you are looking at your watch and counting down the hours and minutes, do they share your sense of urgency? Do they answer the phone whenever you need to reach them—even if you’re calling someone’s cell phone at night or over the weekend? In addition to responding in a timely manner, will they be flexible when the unexpected happens (and the unexpected will always happen, sooner or later)? Contracts can’t possibly cover every difficult situation you will encounter. Can you expect a manufacturer to respond appropriately, behave honourably and do what’s right if a problem arises?
Who Are/Were Their Customers?
Also look at a manufacturer’s current and past customers. Have they worked with other customers that are similar to you, or are you the first company of your type and size that they've worked with? Are their other customers happy? Do they maintain customers longterm? Do they have top-tier customers? Be leery of doing business with a manufacturer that isn’t happy to offer to connect you with other customers as references. Also, ask them for a list of past customers. Contact past customers and ask them why they stopped doing business with that particular manufacturer.
Look at the Total Landed Cost
When you’re pricing various manufacturers, know that the total cost will have many components. It will include things such as the manufacturing fee, ingredients, packaging/materials, yield loss, transportation, and storage. In order to compare apples to apples from one manufacturer to the next, you need a simple contract that is inclusive of all costs. Ensure that your manufacturing fee is all-inclusive and that nothing else can/will be added on later. Your yield loss should allow for around 3% on ingredients and a percent or two on packaging materials. Also ensure that the total landed cost includes procurement, storage, quality assurance and waste disposal.
Helpful Things to Look For
A manufacturer with strategic locations is a must. Where is your market compared to where the manufacturer is located? Transportation can greatly drive up the cost if the co-packer is not located in your market area. Know those big manufacturers have better purchasing power with suppliers. This can provide you with savings on ingredients and packaging supplies, but only if the manufacturer doesn’t mark up the materials.
Speaking of packaging, always look towards the future. As your company grows and you expand your product lineup, you may want different bottle sizes and different kinds of packaging. If a manufacturer has a whole menu of things they can offer, that will work better for your growing company than a manufacturer that can only do one thing. As you look towards the future, also consider manufacturers who can help you extend your brand.
Can they assist with executing warehousing and distribution or help you get licensed partnerships into new channels? Will a manufacturer take you under their wing and help you avoid common rookie mistakes? Do they have strategic relationships with large industry players that might be interested in acquiring your company at some point? Entering into a contract with a manufacturer is like a marriage—it’s a long-term, multi-year, strategic relationship. After you do your homework and look at the numbers, much of your choice will be based on an instinctive gut feeling. You need to like them and you must be able to trust them. When things go wrong, you need to know without a doubt that they will do the right thing. Your entire brand—and the future of your company—will depend on it.