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Challenges of Co-Packing
April 01, 1999 - Article
Food Product Design

Challenges of Co-Packing

April 1999 -- R&D Management

By: Christine M. Homsey
Contributing Editor

  As the old saying goes, there are two sides to every story. And two sides to every co-pack agreement, one might add. As the term co-pack implies, two parties are involved - two parties who must cooperate with one another. Sometimes this marriage between marketer and manufacturer works seamlessly, and other times it can be a downright catastrophe. Here we share both sides of the story, as well as tips for a successful co-packing relationship.

The marketer's side

  Inventors and marketers of food products turn to co-packers for a variety of reasons. Limited production capacity; the expense of purchasing equipment; lack of efficiencies or competencies in a particular area; or wanting to manufacture a product that does not fit into dedicated production lines are oft-cited reasons for outsourcing production.

  Some sellers of food products choose to stay out of the manufacturing business altogether, and are simply marketing companies. One such example is Glory Foods Inc. of Columbus, OH. Walt Lindeboom, Glory's director of development and a veteran of the restaurant industry, puts it this way: "We want to use dollar and people resources to build a business - we want to stay in the 'front of the house.' If we had to worry about a plant, we would never accomplish anything."

  Many factors need to be considered when signing a contract with a co-packer. For example, projected product volumes will influence how good a match a marketer and manufacturer will be. If a marketer has very low volumes or a single product to sell, many manufacturers will not want to bother. On rare occasions, co-packers turn away large volumes that would cause them to exceed their capacity or make them too dependent on one customer.

  The manufacturer's equipment needs to be compatible with the proposed products, or new equipment will have to be purchased. Who pays for and owns the equipment depends on the situation. Lindeboom says that while Glory owns no equipment, if a co-packer needs a new piece of machinery, his company will work it into the product pricing or help find ways to finance the equipment.

  Ingredient-management practices also need to be fleshed out. Some marketers choose to closely control their ingredients by purchasing and managing their inventories directly. Others allow the co-packer's purchasing agent to handle this responsibility. Depending on the wishes of the customer, a manufacturer may use the ingredients originally specified, or substitute in-house ingredients to streamline inventories.

  Manufacturers offer varying levels of assistance to those who want to put a formula into production. Some co-packers simply blend and package products, and have no technical department at all, which requires the marketer to stay abreast of all technical matters. In other cases, co-packers can offer the gamut of QA and R&D services, and may even help formulate or refine the products.

  The co-packer and marketer should have similar standards of quality and sanitation, or the relationship will not be a smooth one. When shopping for a manufacturer, Lindeboom says, "You need to ask yourself, 'Would I bring my very best customer in here?' If the answer is 'no,' keep on walking."

  While co-packing offers many benefits to marketers, caution should be exercised when negotiating with a manufacturer. Jed Williams, operations manager for Med-Diet Laboratories Inc. in Plymouth, MN, knows what it feels like to be burned. Med-Diet had a long-term association with a company that was packaging its dry soups for the medical-foods market, but the relationship soured. "They took our formulas and began to change ingredients without our knowledge," he says. "Then we tried to re-create our products from our old formulas, and they ended up being nothing like the product we were currently getting." The co-packer refused to divulge the existing formula, so Med-Diet ended the relationship and was forced to redevelop its mixes and search for a new co-packer.

  Lindeboom says that his company's experience with co-packers has largely been positive, but stresses the importance of clarifying expectations in advance. "You should always know costs, who manages inventories, how long it will take to ramp up. Always ask these questions up front." (See sidebar entitled "Co-Packing Checklist.")

The manufacturer's turn

  One of the biggest challenges for a manufacturer is taking the marketer's existing formula and adapting it for in-house equipment. Kim Hipsher, director of technical services for Pacific Fruit Processors Inc. in Southgate, CA, says he is almost never handed a formula that is plant-ready. "Even when the formula has been written thoroughly, we end up redoing it. I've not had an instance where somebody's given me a formula that's worked in production, and I've been doing this for twenty years."

  Oftentimes, formulas are developed on a bench scale, and have never been run at a production level; or, they may have been designed for different equipment. Also, some products scale up more easily than others. For example, a dry soup mix may be upsized with minimal fuss, whereas a formula for a beverage or a sauce may require considerable adjustment to achieve the correct solids level.

  In true co-packing arrangements, the marketer will almost always set product and ingredient specifications. Says Bruce Spurlock, national sales manager for Mrs. Clark's Foods L.C., a dressing and juice manufacturer in Ankeny, IA, "We always use the exact specification the customer settles on. They may work with us on recommendations, but they always have the final say."

  The same generally holds true for quality-control testing procedures; most manufacturers will test and monitor products as directed by their customers. If the customer has not already developed quality checks, the co-packer will sometimes help design appropriate tests.

  Auditing procedures will depend on the customer's requirements. Says Spurlock, "We see some customers once a month on a casual basis or once a year for a more formal audit. It depends on the size of the company. Some companies have more people in QA than we have in our company. For some smaller companies, we are their QA."

  Attitudes among co-packers vary widely when it comes to formula ownership, underscoring the need for a solid written agreement. Some manufacturers believe that if they tweak a formula even slightly, it becomes their property. Others feel that no matter how much they modify a product, the seller retains all rights to the current formula.

  Contracts should also include detailed exit agreements that spell out how remaining product and ingredient inventories will be handled if the contract is terminated or a product is discontinued.

  Co-packing is inherently a low-margin, high-volume business. Manufacturers typically charge 5% to 15% over production costs when they sell finished goods to a marketer. Some manufacturers make no money at all, but use co-packing as a means to build their business up to capacity. "Co-packing allows us to fill more of our line time and keep our people busy with volume we can count on, which reduces our overhead," explains Spurlock.

  These tight margins leave little room for error. If anything goes wrong - if production is slowed, product is out of spec, or the trucks aren't on time - money will be lost.

  When asked to summarize the nature of a successful co-packing arrangement, Spurlock offers this: "It's not just about money. It's relationships, quality service, making things easy for the customer. They really don't want to come and watch you make food everyday - they want to sit back and let you do it."

  Christine M. Homsey is a food scientist with the consulting firm of Food Perspectives Inc. in Plymouth, MN. She has developed products for the frozen-food and restaurant industries, and is pursuing a graduate degree at the University of Minnesota. One of her goals is to take a walking tour of France and wine and dine her way through the countryside.

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