05: Manufacturing
Getting Started with Manufacturing
One of the most critical steps in starting a food or beverage company is setting up a manufacturing operation.
Here’s everything you need to keep in mind when setting up a manufacturing operation:
When starting a new food or beverage business, one of the most important questions is, “How am I going to manufacture my product?”
There are two main options to consider: self-manufacturing or co-manufacturing.
Self-manufacturing means that you produce your product in-house, while co-manufacturing involves outsourcing the production process to a third-party manufacturer.
So, which option is right for your company? Let’s take a closer look at the pros and cons of each:
Self-manufacturing
Pros:
You have complete control over the manufacturing process and can ensure quality control, timely production, and consistent supply. You can also keep costs down if you can produce at scale.
You can ensure that your products meet your specifications and quality standards, and you can make changes or improvements as needed. You also have more flexibility in terms of the production schedule, inventory management, and distribution.
Lex Evan, Founder of Lexington Bakes, agrees,
“I love being in control of the full process. With so many parts of the business—and people—vying for my attention as I start up, knowing the product is perfect is one less major thing to worry about.
The challenges of course are rapid growth. I can only produce so much and still do everything else. Slow and steady scaling is not a problem, but when you hope to double production every quarter to grow in retail, I start to worry about my ability to manage the other needs associated with these growth goals.”
But it’s not all good. Self-manufacturing has its fair share of downsides as well. Let’s dive deeper.
Cons:
However, self-manufacturing has its fair share of disadvantages.
It includes:
- Significant costs and responsibilities.
- Investing in building or leasing a facility that meets all the regulatory requirements for food safety and sanitation.
- Purchasing or leasing equipment
- Hiring and training staff
- Obtaining permits and licenses
- Maintaining records and documentation
- Complying with local, state, and federal regulations.
- Paying taxes and insurance fees,
All these expenses can add up quickly and affect your profitability. Additionally, self-manufacturing can limit your scalability if you want to grow your business. For example, you may face challenges such as increasing production capacity, meeting customer demand, expanding distribution channels, and entering new markets.
On top of that, entrepreneurs may encounter operational issues such as equipment breakdowns, staff turnover, supply chain disruptions, and quality control problems.
Co-manufacturing
Just like self-manufacturing, co-manufacturing comes with its share of both advantages and disadvantages.
Let’s find them out.
Pros:
Co-manufacturer (co-man) can be cost-effective and allow you to tap into the expertise of a specialized manufacturer. You can also scale production up or down to align with your market’s demand without worrying about the capital investment or liability associated with self-manufacturing.
Cons:
However, co-manufacturing also has some drawbacks, such as:
- Less control and flexibility: You naturally have less control over the manufacturing process when you outsource it to someone else. You have to rely on their quality standards and procedures, which may not align with yours. You also have less flexibility in terms of making changes or improvements to your product formula or packaging design.
- Standard equipment: Co-manufacturers typically have standard equipment and processes for producing similar products. For instance, energy bar companies require specific equipment like Slab Lines, Extruders, and Rotary Molding machines. If a product doesn’t fit within these processes, a company may struggle to find a suitable co-manufacturer or buy additional equipment. For such startups, self-manufacturing makes more sense.
- Sharing confidential information: You have to share confidential information about your product recipe or formulation with the co-manufacturer, which may pose a risk of losing intellectual property rights or competitive advantage. You also have to trust them not to disclose this information to anyone else without your permission.
- Finding a suitable partner: It can be challenging to find a co-manufacturer who can meet all your requirements in terms of product type, volume, quality standards, budget, and the like. You may have to do extensive research and due diligence before choosing one.
Additionally, you may also face issues such as communication gaps, cultural differences, contract disputes, pricing changes, and even delivery delays.
Deciding between Co-manufacturing and Self Manufacturing
The decision to pursue co-manufacturing or self-manufacturing depends on several factors, such as the company’s production capacity, budget, expertise, and market demand.
Both options have their pros and cons, and the best choice may vary based on individual circumstances.
Here’s a quick breakdown:
Some possible scenarios when you should go for self-manufacturing are:
- You have a niche product that requires unique or custom equipment or processes that are not available at co-manufacturers.
- You want to protect your intellectual property and avoid sharing confidential information with third parties.
- You want to maintain full control over the quality and consistency of your product and ensure compliance with regulatory standards.
- You have sufficient capital, labor, and resources to invest in your own facilities and manage your own production.
- You have a stable and predictable demand for your product and do not need to scale up or down quickly.
Some possible scenarios when you should go for co-manufacturing include:
- You have a new product that you want to launch quickly without spending too much on building and operating your own facilities.
- You have a simple or standard product that can be made with existing equipment and processes at co-manufacturers.
- You want to reduce your capital, labor, and overhead costs by outsourcing your production to a third party.
- You want to increase your production volume and meet fast-growing demand from new customers.
- You have a flexible and adaptable product that can be modified to fit co-manufacturers’ specifications.
Co-manufacturing is for large food companies that want to shed assets or by startups that want to launch new products without investing in their own facilities.
However, if you’re a startup food startups that want to create disruptive or innovative products that require complex or custom manufacturing processes, then co-man might not be suitable for you.
Michelle Razavi, co-founder of Elavi shares why she decided to start with a co-manufacturer from the beginning instead of self-manufacturing:
“I’m the founder of ELAVI – a company that produces sustainably-sourced, functional products infused with marine collagen, plant protein, and antioxidant superfoods. As a first time founder with no prior food production experience, going straight to a co-man was risky, capital intensive, and a huge learning curve. Would I do it again? Absolutely. Would I recommend it for everyone? Probably not.
Our biggest pain points: the long production lead times and operating procedures (frustrating for a small company that likes to move fast)
The benefits: save time on navigating ingredient sourcing, prevent costly mistakes with FDA regulations, and set yourself up for scaling faster
Here’s why this worked for our company:
- We knew exactly what we wanted and asked a lot of questions – our formula was unlike anything else in the market. We worked with food scientists for about 5 months to ensure that we could achieve a shelf-stable product with extremely clean ingredients – a surprisingly difficult task.
- We had strong backgrounds in financial accounting and project management – my co-founder and I had relevant corporate experience that helped us establish smart unit economics from day 1 and manage all the logistics with multiple vendors. We still made mistakes but learned swiftly how to optimize for each subsequent run.
- We stayed super lean – we launched with only one flavor at the absolute lowest production run quantity. This allowed us to learn from our mistakes – reformulate, rebrand, and gather feedback to iterate on our next production runs.
- We value efficiency – by outsourcing the production to our co-man, we could focus on what we did best: branding, marketing, sales, and strategy.
So, have you made up your mind yet? Self-manufacturing or co-manufacturing? Regardless of which route you take, it’s crucial to know what you’re getting into.