What Food Processors Need to Know about Co-manufacturing

For most co-mans, the opportunity for expansion and upgrades is an internal and purely financial decision. They will look at who their clients are in aggregate and based on monthly demand, determine if the increased capacity from the upgrade will allow them to run fast enough that they can generate enough additional income to offset the cost of the upgrade, otherwise known as a return on investment (ROI).

Speed to market

For brands large and small, the installed equipment at a co-man—along with the labor force capable of running and maintaining it—represents an opportunity of enabling growth quickly. For brands that value speed to market, co-mans are the best solution. Self-manufacture takes much longer to bring online due to equipment lead times, staffing, and training. Sometimes building upgrades must also be completed before the equipment can be installed.

Projecting growth

A co-man could be the right choice when the volume of a product needed by a brand’s annual demand plan for the next two years lies between four and 200 times their MOQ per SKU, according to Bauer. “This translates to running four to 200 shifts per year, assuming their MOQ is based on a shift of production, only one of their lines can run that product and the product has at least six months of shelf life,” he says. “For most co-mans, running once per quarter is necessary to make sure they don’t forget how to run a brand’s product correctly. At 200 shifts per year, the co-man has likely engaged a second shift of production, and the brand is approaching 40% of the total line capacity. Co-mans should limit the risk of brand exit by not having any brand occupy more than 40% of a line’s total capacity.”

If a brand cannot make the volume commitments to four runs at MOQ, co-mans can sometimes operate below these limits for additional cost per unit—same cost per shift but less units produced. For brands that are expecting to grow 1000x in the next two years, it is recommended to self-manufacture to internalize risk of failure and co-man profit as income.

Capital

Recently, the decision to self-manufacture has been more based on the cost and availability of capital. When capital is cheaper, numerous financial bodies (like banks, venture firms, and tactical investors) will be more likely to fund capital equipment investments for new and expanding operations—these financial bodies are betting that the returns they can get on the capital loan are in excess of the market return rate. Some municipalities incentivize brands to bring facilities and jobs to their communities and contribute to the bottom line of the project.

“For brands that value speed to market, co-mans are the best solution. Self-manufacture takes much longer to bring online due to equipment lead times, staffing, and training.” – Jamie Valenti-Jordan, food brand program manager, Food Finance Institute.Jamie Valenti-Jordan

Other times, capital is not free flowing, and the cost of the capital (interest rate) is so high that the brand cannot make money on the investment in a facility. It is important for a brand to review the terms of any sources of capital to ensure that they are beneficial to the cash flow of the business before committing to self-manufacture.

Perkin points out that there are tactical reasons for a brand to not purchase small equipment “until their new product is established in the market. This may be done to reduce risks associated with unnecessary capital expenditures in the short term.”

Novelty

Some products that brands commercialize are so unique in their process requirements that no facility exists with the right equipment to make them. In many of these cases, emerging brands attempt to self- manufacture components that can be sourced in an existing format or produced easily at another facility. Other times, the novelty is a new process or technology altogether, in which case self-manufacture is the only option. Refinement of the concept often shakes out which is which.

From Bauer’s perspective, “conventional wisdom suggests that the more people know a secret, the more likely the secret will be shared. This wisdom, along with a small handful of industry horror stories, has led many new brands to believe that co-mans are interested in the IP (intellectual property) of certain products. In the food industry, IP matters little in comparison to the systems, processes, and relationships necessary to produce, market, and sell a product. Co-man business models are simply not built with extra staff to monetize others’ IP.”

Brand values

If day-to-day operations of dealing with interpersonal conflicts, missed trucks, and line stoppages causes a brand team’s collective blood pressure to rise, perhaps self-manufacture is not the right fit. It would be more appropriate to offload those concerns to a co-man who specializes in these challenges. For many brand owners, self-manufacture is seen as a brand attribute despite not being a core competency; for these groups, it’s important to remember that the product is what the target consumer is purchasing based on their experience with it, not the brand’s ethos.

Conclusion

At the end of the day, each brand must make their own decision about the best manufacturing path forward based on the mix of people and values that make up their brand, their go-to-market strategy, and current market forces. A brand that self-manufactures will have the new facility and equipment costs plus the same operational costs that a contract manufacturer has.

Self-manufacturing brands can turn to contract manufacturing to support their indirect/fixed operational costs until they can fill up their lines with their own products. Perkin also reminds that “the company developing the new product must establish a well-written contract with the co-manufacturer to define which party is responsible for what elements.”

At the end of the day, there are no rules for whether a brand at a certain size or phase of growth should use internal or contract manufacturing resources—it must be assessed on a case-by-case basis.