S5 – Chapter 03: Co-manufacturing - How to Start a CPG Business

05: Manufacturing

Co-Manufacturing

Contract manufacturing is an attractive option for many food companies because it allows them to focus on their core competencies while outsourcing production.

However, it can be difficult to navigate the myriad regulations and trade agreements that govern this industry.

Finding a Co-Manufacturer

So, how do you find and work with contract manufacturers for your food business?

To begin, you need a list of co-manufacturers who can produce what you want at the right quality level, price, and quantity on time. You also will want to consider their certifications and licenses and their ability to manage logistics such as distribution. Foodbevy put together a list of 2000+ co-manufacturers to help make your product.

And that’s not it.

Here are some more things to consider and prepare yourself for:

1. Manufacturing Equipment:

One important consideration when manufacturing your food or beverage product is the equipment needed to produce it at scale. Each product category has its own set of standard equipment, and it’s important to understand what is necessary for your specific product.

For example, if you’re producing a carbonated beverage, you’ll need equipment for carbonation, bottling, and labeling. On the other hand, if you’re making granola bars, you’ll need equipment for mixing, forming, and packaging.

Here are a few suggestions to keep in mind when considering manufacturing equipment:

Research the standard equipment for your product category: Use online sources or industry associations to learn about the common types of equipment used for different food and beverage products. You can also visit trade shows or exhibitions to see the latest technologies and innovations.
Compare different co-manufacturers’ equipment: You can ask potential co-manufacturers for their equipment list or specifications or visit their facilities to see their equipment in action. Don’t forget to ask for references or samples of their previous products to evaluate their quality and consistency.
Adjust your product design if needed: You can simplify your product design or use common ingredients or materials that are easy to source and produce. This can reduce the complexity and cost of production and increase the availability of suitable co-manufacturers.

It’s also important to understand what equipment different manufacturers have. Some manufacturers may have the equipment necessary to produce your product, while others may not.

2. Minimum Order Quantities:

Minimum order quantity (MOQ) is the smallest number of units a co-manufacturer requires you to order in one production run. It helps the co-manufacturer cover their costs and make a profit while ensuring you get a competitive price per unit.

It depends on several factors like:

The type of product: Different products have different production processes, equipment, and materials that affect the MOQ. For example, a dry product like granola might have a lower MOQ than a liquid product like juice because it’s easier to store and transport.
The category of product: Different categories of products have different market demands, standards, and regulations that affect the MOQ. For example, a niche product like vegan cheese might have a higher MOQ than a mainstream product like an energy drink because it has a smaller customer base and more specific requirements.
The co-manufacturer’s capacity: Different co-manufacturers have different production capabilities, resources, and policies that affect the MOQ. For example, a large-scale co-manufacturer might have a higher MOQ than a small-scale co-manufacturer because they have higher fixed costs and more efficient operations.

3. Expected Order Frequency:

You need to know how often you need to place orders with the contract manufacturer and how long it will take them to deliver your products. This depends on the demand for your product in the market, the shelf life of your product, and the lead time of the manufacturer.

For example, if you want to produce cookies with a six-month shelf life, you might need to place orders every two months. If you want to produce juices with a one-month shelf life, you might need to place orders every week.

4. Prepare a Structured Set of Process Steps in Advance

Before you approach any co-manufacturer, you need to have a clear and detailed idea of your product and how it’s made.

This means you need to prepare a structured set of formulas and process steps in advance that define the following aspects of your product:

Formula: This is the list of ingredients and their quantities that go into your product. You need to specify the exact measurements, units, and sources of each ingredient. You also need to indicate any allergens, additives, preservatives, or special dietary requirements your product may have.

For example, if you are making a fruit juice drink, you need to list the types and amounts of fruits, water, sugar, citric acid, natural flavors, colors, etc., used in your formula.

Victoria Ho, an expert at taking a product from its humble beginnings in the kitchen and transforming it into a production-ready recipe without sacrificing its essence, shares an example of what such a recipe might look like.

Here’s an example of the formula for a 40-gram nutrition bar:

(Source)

Process: This is the sequence of steps and operations that transform the ingredients into the final product. You need to describe the equipment, tools, methods, temperatures, times, and safety measures involved in each step.

For example, suppose you are making a fruit juice drink. In that case, you need to describe how the fruits are washed, peeled, cut, juiced, pasteurized, mixed with other ingredients, filled into bottles or cans, sealed, labeled with expiration dates and nutrition facts, stored in refrigerated trucks or warehouses, and delivered to your customers.

Here’s an example of the process for a 5-oz burrito:

(Source)

How to Work with a Co-Manufacturer

Manufacturers are key strategic partners for your business, so it’s important to find one you’re aligned with. This means finding a partner you have good communication with, has the right equipment capabilities, and fits your minimum order quantities. While some manufacturing partners may be flexible on the quantity of product they produce for their customers, the long-term goal is to optimize the run size.

For some co-manufacturers, it can take up to 3-5 manufacturing runs to make a profit, so they need to find growing brands that are a good fit to invest in.

Building a Relationship

Emerging brands need to sell themselves to the co-man about their business model and products. They need to prove the capability to execute those plans and have proof of financial backing. As a strategic partner, a co-man will be interested in your distribution and sales strategy. And many will require a demand forecast, which will provide details regarding a brand’s viability.

It’s easy to inflate your sales forecasts to meet your co-man minimums, but brands who do so risk overestimating, producing less, and ultimately disappointing their manufacturing partner.

Michelle from Elavi recommends to “over-communicate – Be that person who asks a ton of questions for clarity and build a strong relationship with your co-man. There will always be hiccups, so make sure you know who to contact if something goes wrong and keep the lines of communication open.”

Co-Manufacturer Contract

This is a fundamental and key relationship for any brand. It needs to be an open, collaborative, transparent ‘partnering’ of the parties. The business relationship must be good for both parties or it will be good for neither.

Looking for a sample manufacturing contract? You can download the one we created in partnership with JPG Resources here:

Some key attributes of a good contract:

Transparent pricing model – When the co-man is ‘turnkey,’ which means they procure some or all the raw materials and/or packaging, brands need to have visibility to those itemized costs. The finished product costs need to be a build of material costs, tolling or conversion costs, and budgeted scrap rates.
Promote collaboration to optimize – Opportunities to find mutually beneficial ways to optimize require communication and joint efforts. The contract should build the mechanism to promote and incentivize that.
Protect intellectual property – Protect ownership of finished products including formulas, processes, trademarks, trade secrets, and proprietary information. This includes any changes or tweaks made at/by the co-man to produce the products in their facility.
Appropriate access to facilities and records – Ensure adequate access to the co-man facilities that are relevant to your products and base materials. Also, make it a requirement to gain access to any quality or food safety and production records related to your products and production.
Regular cadence of communication – Regular communication between the brand and co-man on all issues is key to success. In addition to covering day-to-day matters, a schedule of business review updates promotes ‘buy-in’ and the sense of ‘partnership’ and helps both to understand business goals, objectives, and needs.
Clear product specs and requirements regarding certifications and claims – This is critical to identify and ensure adherence to product standards against which performance can be graded.
Require robust food safety/quality programs – Require adherence to industry standard programs such as the Global Foods Safety Initiative (GFSI) and receipt of any 3rd party audits as well as deficiency reports and corrective action reports.
Clearly defined responsibilities to investigate consumer complaints – The co-man should commit to prompt investigation of any manufacturing or packaging issue related to consumer complaints and to providing a written Corrective Action/Preventative Action (CAPA) report.
Articulate responsibilities in the event of a product recall – Clearly defined roles and responsibilities in the event of a mandatory or voluntary recall.
Define termination for cause & notice requirements for termination without cause – Articulate the breaches and any timelines and remedies to correct them. In the event of a termination without cause by the co-man, provide an adequate timeline for the brand to identify, validate and onboard a new co-man.