Hiring a Co-Packer Part 2: What You Need to Know

This is the second part of our two part series on Vetting a Co-Packer. You may want to start reading on Part 1. Both parts were written to summarize a series by Patrick Nycz at Newpoint Marketing which came out of a roundtable they hosted at their Emerging Food Brands 2018 Annual Conference. I recommend reading the entire 4-part Vetting a Co-Packer 101 Workshop Q&A series on Newpoint’s website as well.

Thinking about minimum volumes and contracts

Striking a balance with minimum volumes

If you currently manufacture your own products, you might decide you are tired of producing product every day so you consider moving to a co-packer who runs it once a week or once a month. Now you can focus on sales and get your brand out there. However, you need to be sure that more is not created than what you will be able to sell. You will have to factor storage costs into your cost structure. Even more concerning might be the loss of shelf life – if you end up with out of spec product that needs to be thrown away the cost could be incredibly damaging.

One piece of advice is to ask your co-packer if they will provide tiered pricing, whether it be a half truckload, full truckload, or three truckloads. Select the levels and costs you are comfortable with – factoring the lower cost of longer runs with the higher cost of storage and potential for out of spec product. A co-packer may be willing to store product for you – for instance, asking you to pay for part of it up front and then pay for the rest as you pull it. You may even be better off if you have to pay for it all at once if they agree to store it for you and ship it as needed.

Navigating the contract with a co-packer

Before discussions that include key details begin, it is important that a non-disclosure legal agreement is signed by both parties. This protects anything of yours that is proprietary such as a process or ingredient but also protects any intellectual property the co-packer may own. It starts the relationship on good footing and builds trust. From your standpoint, you want to protect what is not easily recognizable in your process or ingredient statements. You want to make sure that you are defending your brand on the front end instead of getting it out there and then having to fight off copycats.

Setting an understanding in writing with a co-packer early on about expectations is very important. For example, even with a very small test run it should be clear who is responsible for the ingredients, shipping, packaging, changeover, clean-up, low volume run charge, etc. Usually these things are your responsibility but they should be clear and the total cost of each of them to you should be clear.

Service agreements are more formal documents that include quality standards and define who is responsible for what. These are usually completed and signed before the first full production is scheduled. Additionally, co-packers may be willing to name you as an additional insured on their insurance policy – if they’re packing products underneath your name, you may be able to get that done.

Startup cost and lead times

Calculating start up costs

Many factors come into play when estimating initial costs of utilizing a co-packer for manufacturing. Smaller runs will equal higher unit costs especially if there are set fees for changeover and clean up costs. If you do your own ingredient sourcing you may spend a lot of time getting the best price but it may be more cost effective to use ingredients that are on the shelf at the co-packer where they likely have volume discounts.

You can be as involved as you want to in areas such as sourcing, labeling, determining nutrition facts, and other facets of the product to try to reduce costs. Or it can be turn-key – you just show up and the cases are packed and ready to go.

Utilizing experts for product improvement

There are many different places to find food scientists and other product development experts who will help you improve your products. One alternative is to leverage food science departments within our countries’ top universities. The Purdue University Food Science Department is one example. They have experts in many areas. They can help with process design, PH analysis, sensory panels, scaling, micro, and more. Even though there is a cost to cover expenses and development of all the different resources, it’s relatively inexpensive to go through a university compared to a commercial enterprise.

One thing to recognize, however, is that universities are generally not inspected by government food agencies. They also do not have any degree of scale – production will be very limited. But what is provided and emphasized is the data set. They say, “Under these conditions, using these ingredients, this is the outcome and data that’s produced.” They will help you with product development, at the lab, and in the Pilot Plant. After that you can go into the co-manufacturer—and they’ve filled your toolkit in advance of those conversations.

Typical scheduling practices and lead times

There are many variables that come into play when a co-packer is making a schedule and executing that schedule – some are within their control such as who gets placed in the schedule where and others are not, such as ingredient availability from ingredient suppliers. Maintaining a schedule perfectly is not easy. However, a good, reliable co-packer is not going to bump you other than for reasons outside their control.

It is important to recognize, however, that not only do small companies use contract packers, but massive companies with leverage like Kraft use them as well. That factor does come into play, especially when setting a schedule. Co-packers can provide a good option for large companies in terms of cost and management and other factors and the amount of business they offer the co-packer can be very attractive.

Lead time to get on a co-packer’s schedule will depend on the demand they are currently encountering. Sometimes a product can be made in a week and other times for reasons such as seasonality it will take six weeks. As mentioned, sometimes it isn’t the schedule; it could be the access to ingredients or a piece of equipment. Holidays can have an impact as well when there are more days off being taken. This is an area you should not neglect in upfront discussions.

A Parting Reminder

To conclude, it’s important to note (as Newpoint does) that every company is different and every product is different. Every bit of advice on this page may not apply to your brand, but hopefully it’s a useful jumping off point to help you set your course and move forward. Come back to PacMoore’s blog after December 12, 2018 to read part 2 on this topic! In the meantime, check out these additional resources:

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