Specialization and focus — companies across the food industry seem to be honing in on doing one thing and doing it well. Dabbling in everything doesn’t necessarily pay anymore.
“What most companies have realized is in manufacturing, it’s not cost-effective to be a generalist,” said Dave Van Laar, president, Biscuit & Cracker Manufacturers’ Association. “There are things that are much more economical for other people to make that specialize in that product type.”
That’s just one of the many reasons why co-manufacturing continues to be such an integral part of the baking and snack industries. These producers can take the production side of a baked good or snack item off the hands of the company that owns the brand, freeing up that branded company to focus solely on sales or marketing or the manufacture of its staple items. Co-manufacturers can act as the generalist, juggling many different products at once, or they can provide manufacturing capabilities for very specific and costly-to-produce items such as enrobed products. For companies with zero manufacturing experience and no interest in bumbling through a start-up, co-manufacturers can offer their expertise and leave the branded company to do what it does best — marketing the brand.
“Co-manufacturers have gotten very good at what they do,” Mr. Van Laar said. “They’ve developed standards that meet or exceed customer standards for quality. The customer focuses on sales and marketing, and neither one is distracted. Branded companies have expertise in sales, marketing and distribution, which co-manufacturers allow them to build upon that strength. They rely upon co-manufacturers when production may dilute that effort.”
As new products continue to push the boundaries of snacks and baked goods and the market continues to change increasingly fast, co-manufacturers will only become more integral to the food industry’s need to meet consumer demand and keep things fresh.
“It’s strategic for larger customers; they rely more on external manufacturing than they ever have before as an essential arm of their manufacturing capability,” said Byron Goulding, president and CEO, Oak State Products, Wenona, IL. “Co-manufacturers can be more nimble and react to changing market dynamics faster than larger food companies, so I can see a continuing and increasing strategic reliance on co-manufacturing.”
Passing off the pressure
Outsourcing production to another company is nothing new to the baking and snack industries and can be the right choice for many different reasons.
Co-manufacturers can simply take on extra capacity for a bakery or snack company that has maxed out its own capacity. They can also make new products for start-up companies and existing larger ones, which may not be ready to splurge on the investment in new equipment and facilities for a risky new product or something completely unlike what they already produce. “If it is a large-volume item, large companies will typically do the production themselves in-house where they can do it efficiently,” Mr. Van Laar said. “But on smaller-quantity items and start-up items, it is more feasible from an economic standpoint and a quick-to-market standpoint to use a co-manufacturer.”
This is because co-manufacturers tend to have flexibility that larger companies do not.
“We can do it faster and be more flexible because we’re geared to doing a lot of
different things whereas they are geared toward making one, two or three SKUs very efficiently and effectively,” said Rich Scalise, chairman and CEO, Hearthside Food Solutions, Downers Grove, IL. “But they’re not designed to do the smaller SKUs or the unique things.”
This is possible, according to Mr. Scalise, because co-manufacturers aren’t necessarily as automated as the larger companies they call customers. While Hearthside Food Solutions definitely employs automated production, its automation is designed to make many different products with a labor force to match, not the kind of automated production line dedicated to make one product for days on end.
Some businesses, often referred to as virtual companies, want nothing to do with manufacturing at all. These virtual companies come to co-manufacturers with an idea for a product and give the production over to those more experienced in that area. “Branded companies are really good at marketing and selling, and depending on the company, they want to focus on what they’re good at,” Mr. Goulding explained. “By off-loading the manufacturing, it doesn’t defocus their company and keeps them focused on their marketing efforts.”
Virtual companies often rely on co-manufacturers not just for the manufacturing piece but also assistance in R&D and technical services. Co-manufacturers with a staff of food scientists and an R&D department can provide them the expertise they need to scale up a product to the commercial level. “Virtual companies are looking for product development, and they sometimes may not have experience with seasonings, flavorings or formula development,” said Rex Parrott, president, Wyandot Inc., Marion, OH. “When they need more support, you need to make sure that support is available.”
Even though many larger companies rely on their own food scientists and R&D departments, they can also benefit from co-manufacturers who employ an R&D staff. “The customer’s food scientists who developed the product want to talk to a food scientist here about the product, someone who can understand what they’re talking about,” Mr. Parrott went on. “No matter what you’re doing, there is always some work that requires the technical services expertise.”
Depending on a co-manufacturer is a long-term business relationship that requires a lot of communication to keep it running smoothly. “A co-manufacturer is one who partners with a company with a notion of a long-term strategy of how they supplement or aid customers in terms of growing their business,” Mr. Scalise said. “It’s a longer-term relationship; it’s not a transactional relationship.”
The success of such a relationship largely depends on each party being up front about expectations and clearly communicating those expectations continually. “The smoothest I’ve seen the customer relationship with the branded company is when the planning departments from both companies are locked in step together,” Mr. Van Laar said. “They’re communicating, they’re anticipating, and when they take care of those things for production planning, it smooths the entire operation. When there is a disruption on either side, it causes missed deadlines, overtime — things that are out of the ordinary that we shouldn’t be dealing with.”
For Mr. Scalise, the most successful relationships happen when the customers treat Hearthside as one of their own plants. “You wouldn’t call up your own production facility and say, ‘I don’t need you for three weeks,’ ” he said. “It could be easy for someone to view the co-manufacturer as very expendable. That’s not how good co-manufacturing relationships work. If you see that eight weeks out something is changing in your business, you’re communicating that so you can adjust and be flexible, and that goes both ways.”
To ensure success, it’s important that the co-manufacturer can fit within the systems that exist in the customer’s business. “The larger the company, the more sophisticated its systems tend to be,” Mr. Parrott explained. It’s important that the customer clearly defines its processes, such as those commanding quality assurance and food safety expertise, so the co-manufacturer knows what’s expected.
Forecasting, however, has the biggest impact on production and can cause the most headaches between the co-manufacturer and its customer. “That’s the biggest thing that I saw that caused the most discussion between the co-manufacturer and the branded company,” Mr. Van Laar said of forecasting. “And it’s not always easy to forecast, but the better the forecast is, the better chance the co-manufacturer will get it made at the right time and in the right quantities.”
To be fair, forecasting is difficult on both sides of the relationship. Often the reason a product is being made by a co-manufacturer in the first place is because it’s new and the branded company is unsure of what the volume will be. Unfortunately, though, the co-manufacturer can’t even begin to guess. The producer relies solely on the customer to provide that information to schedule production on the lines and fill the customer’s orders.
“Because they don’t have a good history of that item,” Mr. Van Laar continued, “it can be like the elephant in the room no one wants to talk about, but it is essential the co-manufacturer and customer understand the commitment for line time.”
Beyond forecasting the volume, it’s also important that there is enough volume. Changing over between products and customers requires sanitation and equipment changes. It’s a costly endeavor in terms of time and money. “You need to have sufficient volume to cover the cost of those changeovers,” Mr. Goulding explained.
Many issues between co-manufacturers and their customers can be avoided if the customer brings the co-manufacturer in on the project early on. “If the branded company is developing a product, and it knows early on it wants to go to an outside manufacturer, then the sooner the branded company goes to them, the better,” Mr. Van Laar said.
It’s important that as product development evolves, the co-manufacturer is kept in the loop to avoid any planning mishaps. For example, a project brought too late to a co-manufacturer might have packaging that doesn’t match the manufacturer’s equipment. “I’ve seen issues that could have easily been avoided if the co-manufacturers’ equipment had been better understood [by the customer] like start-ups where the product didn’t fit properly in the package and it wasn’t considered until too late in the process,” he continued. “As simple a thing like that may seem, if it doesn’t fit in the package, it doesn’t work.” When a company brings the co-manufacturer on board sooner, these costly mistakes can be avoided.
Breaking into niches
For co-manufacturers, the future looks bright. With the current climate of today’s food industry being centered around companies out-innovating each other, these third-party manufacturers are benefitting from branded companies wanting to try new products and branch out into categories previously not considered. It is much more cost-effective for these branded companies to outsource those production products to trusted co-manufacturers rather than drop millions of dollars on new equipment for a risky new venture.
“The biggest opportunity for co-manufacturers is developing those relationships with branded companies and being able to put new products on the market or specializing in some type of product,” Mr. Van Laar said.
Today, the role of the co-manufacturer is changing as innovation drives the industry. “What’s different for us from 2009 to 2015 is, we’re showing our customer innovative ideas generated from our own ability to produce,” Mr. Scalise explained. Co-manufacturers can share their knowledge of new technologies with their customers, and immediately the conversation about innovation becomes less one-sided.
Specializing in a niche also brings co-manufacturers more opportunities today as bigger companies are trying to break into smaller categories. Today, the co-manufacturing business’ growth is coming just as much from new product innovation as necessary added capacity. “Originally, the co-manufacturing business was driven by capacity restraints at our customers’ plants,” explained Tom Marcucci, vice-president, sales and marketing, Gonnella Baking, Schaumburg, IL. “Today, it’s driven more by specialty breads, and at Gonnella Baking, we like to say we were making artisan breads 100 years before someone made up the term.”
For example, if a bakery that has historically only made white bread and buns decides it wants to hop on the pretzel bun trend, that bakery is now looking to co-manufacturers who specialize in that product, such as Gonnella Baking, to bake it for them. “We can really focus on that demand that the baker or retailer has and give them precisely what they’re looking for,” he said.
“Business used to be driven by value,” Mr. Marcucci said. “Now it’s driven by the desire of the customer to get into specialty niche breads, and those niches are becoming larger portions of the total consumer demand for baked goods.”
More and more companies turn to co-manufacturers to relieve capacity, bring forth new products and break into new categories. It’s important that these relationships are built on open communication and pre-determined expectations so orders are filled in a timely manner and the end consumer gets the innovative products they want.