Creating Your Product: Contract Manufacturers versus In-House Production

Key Pros and Cons

Contract Manufacturers versus In-House Production

Are you filled with a brilliant product idea but unsure whether to manufacture it through a third-party or produce it in-house? Fret not, for I am here to aid you in making this crucial decision.

In this article, we shall examine the advantages and disadvantages of both options. To make it more engaging, let’s step into the world of Tim. Tim is a passionate entrepreneur, and product development is at the heart of his endeavors. He has conceived a new product idea: gluten-free crackers made from lentil flour.

Already having devised the recipe for the lentil crackers, he conducted initial tests in his home oven. Although his company manufactures numerous products in-house, it lacks the machinery required for kneading the dough, baking, and packaging the crackers.

Now, the big question arises: Should Tim invest in expanding his production capabilities, or should he outsource the manufacturing to a Co-Packer?

Having your own products manufactured – the pros and cons put to the test

Before we solve Tim’s dilemma, let’s take a look at the pros and cons of both options:

In-House Production – The Enchanting Advantages:

1. Recipe Control: Opting for in-house production enables Tim to maintain complete control over the recipe for his gluten-free crackers. This bears several advantages. Firstly, it becomes more challenging for competitors to replicate the recipe. Moreover, Tim can tailor the recipe and production process to his exact specifications, avoiding typical issues faced with third-party manufacturers, who often impose high minimum order quantities for gluten-free products or use only the flour varieties they have in stock.

2. Cost Management: In-house production also allows Tim to have a better grip on costs. He can avoid the markup charged by an external manufacturing partner for their services, which includes accounting for recipe formulation, production, labor, and their profit margin. By manufacturing in-house, Tim can save costs and offer his lentil crackers at a more competitive price in the market.

3. Flexibility is Key: Another advantage of in-house production lies in the flexibility of production quantities. Third-party manufacturers often impose fixed minimum production volumes and yearly order quantities as per contractual agreements. With in-house production, Tim can adjust the production volume according to the current demand. Whether producing less or more based on demand fluctuations, the power rests entirely in his hands.

4. Time is Money: As you know, time is of the essence! Once Tim’s machinery is set up and his staff is trained, he can produce finished goods faster than relying on an external manufacturer. The processing speed at a third-party manufacturer hinges on their order backlog, and ensuring delivery to Tim’s warehouse may pose challenges. With in-house production, Tim can promptly meet the demands of his customers when time is of the essence.

5. No Allergen Surprise: When Tim produces his own lentil crackers, he can guarantee that no unwanted allergens find their way into his production. For allergy sufferers, this is a significant plus, as they can confidently enjoy his crackers without worries.

In-House Production – Challenges to be Overcome:

Despite the many advantages, in-house production also comes with some challenges that should not be overlooked:

1. Risk and High Effort: Especially in the initial stages, when a new product like Tim’s lentil crackers is still an uncertainty in the market, in-house production carries significant risks. The costs and time required to revamp facilities, acquire machinery, hire and train staff (a full-time baker is required for bakery products) can be substantial.

2. Certifications and Requirements: Tim’s company is already engaged in food production and holds the necessary certifications. However, for those starting a new venture or transitioning to in-house production, understanding the required certifications is essential.

Certifications like IFS or HACCP entail additional effort and expenses. Additionally, the production of gluten-free products places specific demands on the company.

3. Machinery Costs: The acquisition costs of machinery can be considerable and must be factored into the product unit costs. For smaller production volumes, these costs could drive up the unit costs, potentially leading to lower profits or rendering Tim’s crackers non-competitive due to higher end consumer prices.

Or Is Outsourcing the Better Option? Collaborating with a Contract Manufacturer

Now that we’ve examined the advantages and disadvantages of in-house production, let’s explore the alternative: partnering with a contract manufacturer. Let’s delve into the benefits this option brings:

The Four Greatest Advantages of Having Your Products Manufactured by a Third-Party:

1. Reduced Effort and Manufacturer Expertise: By choosing a contract manufacturer, Tim saves himself the hassle of expanding his production capacity and hiring new personnel, such as a baker. This not only saves him money and time but also grants him access to the extensive expertise of the manufacturer, who, in this case, is likely to be a bakery with decades of baking experience.

A glance at Tim’s recipe or a taste of his homemade lentil crackers can provide valuable insights for refining the recipe further.

2. Improved Cost Control: Collaboration with a contract manufacturer allows for better cost control, as a fixed price per unit is agreed upon from the outset. This way, Tim knows in advance whether his product will be financially viable or if he should consider discontinuing the project. You can learn more about pricing here.

3. Procurement Advantages: Particularly if Tim uses raw materials that the contract manufacturer already purchases in large quantities, he can benefit from the manufacturer’s advantageous purchase prices. Even if the manufacturer only requires 40 tons of flour annually for producing Tim’s crackers, they might order several thousand tons of the raw material for all their clients. This leads to lower costs and enhanced competitiveness for Tim.

4. Specialization: Contract manufacturers often possess in-depth experience in dealing with specific requirements, such as producing gluten-free or organic-certified products. As the products are delivered ready-packaged, this significantly reduces the workload for Tim’s company.

8 Drawbacks to be Aware of When Opting for Outsourcing:

Naturally, collaborating with a contract manufacturer has its downsides too. Let’s take a look at them:

1. High Minimum Order Quantities: The high minimum order quantities imposed by contract manufacturers can make many projects unfeasible. Especially for new products where their success in the market is uncertain, high minimum order quantities can become a hindrance.

2. Lesser Influence on the Recipe: Collaboration with a contract manufacturer means Tim has less say in the formulation of his product. Manufacturers often adapt the recipe to suit their machinery and ensure smooth production processes. However, this could make it challenging to find a manufacturer willing to work with gluten-free flour in their machines.

3. Recipe Protection: When collaborating with a contract manufacturer, there is a risk that they might claim ownership of the recipe or assert intellectual property rights even if they only add processing aids. To ensure control over the recipe, clear agreements on ownership and, if necessary, confidentiality agreements are crucial. .

4. Protection of Know-How: Partnering with a contract manufacturer runs the risk of exposing valuable know-how that could be utilized by competitors. To safeguard his know-how, Tim can rely on confidentiality agreements and selective information sharing.

The use of patents, trademarks, or copyrights can provide additional protection for intellectual property, securing his unique features. It is essential to take appropriate precautions to safeguard valuable knowledge and retain control over it.

5. Long-Term Costs: Especially if the product gains success and has been in the market for some time, collaborating with a contract manufacturer might prove more expensive than in-house production. This is primarily due to the manufacturer’s profit margin for the lentil crackers.

6. Challenges in Competition: The margin demanded by the contract manufacturer may make it difficult for Tim to remain competitive in a tight market where consumer prices are lower. This could pose a significant challenge for his products, particularly in the German discount segment.

7. Ongoing Costs: In in-house production, Tim incurs ongoing costs, such as employee salaries, machinery leasing, rent, etc., regardless of how well the product sells. In contrast, collaborating with a contract manufacturer often demands a more substantial upfront capital investment, as Tim must pay for their services in advance before generating revenues from the product sales.

8. Limited Packaging Options: Another aspect concerns packaging. Usually, the client must use the packaging types already employed by the contract manufacturer on their machines. This might mean limited flexibility in choosing packaging materials and designs, potentially deviating from Tim’s original concept. . It is vital to consider this aspect when selecting a contract manufacturer and clarifying packaging options in advance.

Collaborating with a Contract Manufacturer: Tips and Tricks

If Tim decides to collaborate with an experienced contract manufacturer, here are some crucial steps to consider:

1. Pricing: Set a maximum price for the finished product to ensure a competitive retail price later on. Calculate your costs in advance and involve procurement early in the process.

2. Manufacturer Briefing: Create a detailed briefing for the contract manufacturer, outlining all the product requirements.

3. Identifying Potential Manufacturers: Thoroughly search for the right manufacturer, even outside your country, to find suitable options. Compare at least three providers to identify the best quality and cost-effectiveness. A good starting point is trade fairs or websites like the German ‘Wer liefert Was?“.

4. Tastings: Have your product professionally evaluated and compared with competitor products. Seek independent opinions and conduct various tastings to gain a realistic understanding of the quality.

5. Packaging: Familiarize yourself with the types of packaging the manufacturer employs. If possible, utilize the manufacturer’s existing packaging options to avoid additional costs.

6. Services and Prices: Clearly define the services you require from the manufacturer, such as only mixing the recipes or a complete service involving raw material procurement, production, and delivery. Document all agreements in writing to avoid misunderstandings. Ensure price transparency and avoid hidden costs.

7. Contracts: Collaboration with a contract manufacturer should always be established in writing. A contract provides legal security for both parties and clarifies essential aspects such as prices, confidentiality, minimum quantities, contract terms, and notice periods. In case of doubt, seek legal advice to ensure all legal aspects are covered.

Tim’s Decision

After careful consideration, Tim has chosen to collaborate with an experienced contract manufacturer. He found a partner who manufactures his gluten-free lentil crackers according to his vision, using high-quality raw materials. With this decision, Tim can swiftly introduce his product idea to the market and focus on marketing, sales, and advancing his brand.

Conclusion:

The choice between in-house production and collaboration with a contract manufacturer is no simple decision. Both options come with their pros and cons, which should be carefully weighed.

In-house production provides full recipe control, cost savings, production quantity flexibility, quicker delivery times, and assurance that no undesired allergens enter the production. However, it also entails risks like high initial investments, additional effort for certifications and requirements, and potentially higher machinery acquisition costs.

Collaborating with a contract manufacturer offers reduced effort, access to manufacturer expertise, improved cost control, procurement advantages, and specialization benefits for specific requirements like gluten-free or organic products. Nonetheless, challenges like high minimum order quantities, reduced influence on the recipe, know-how exposure, and long-term costs should be considered. Regardless of whether you choose in-house production or collaboration with a contract manufacturer, each path has its own advantages and disadvantages.

The most crucial aspect is to thoroughly assess your options, keep your goals in mind, and ultimately make the best decision for you and your product.