Contract Manufacturing: Rolling with the Changes


Contract manufacturing plays a vital role in the production of nutritional supplements, as it does in the pharmaceutical and over-the-counter segments. It enables brand owners to have access to state-of-the art, validated manufacturing capability, without the need to make the heavy capital investment of buying, maintaining, and servicing their own production facility. It also gives brand owners a partner in meeting FDA’s new current Good Manufacturing Practices (cGMP) requirements for supplement makers.

Contract manufacturing plays a vital role in the production of nutritional supplements, as it does in the pharmaceutical and over-the-counter segments. It enables brand owners to have access to state-of-the art, validated manufacturing capability, without the need to make the heavy capital investment of buying, maintaining, and servicing their own production facility. It also gives brand owners a partner in meeting FDA’s new current Good Manufacturing Practices (cGMP) requirements for supplement makers.

Common sense would suggest that the current economic slowdown has affected all nutritional supplement marketers negatively, and that their relationships with their respective contract manufacturers would be similarly affected. Our original purpose for this article was to investigate specifically how contract manufacturers might be helping their customers meet the pressures of a down market by helping to control overall production costs-and specifically, manufacturing line costs.

Across the Industry
What we found was that, while a growing economy may lift all boats, a declining economy affects each company individually because each company responds differently to the challenge. And the response by both brand owners and contract manufacturers is often critical in determining how individual companies fare. While some pull in their reins and conserve resources to ride out the storm, others proactively respond by working to expand their markets. Still others take an aggressive attitude and look for opportunities to acquire companies driven to the wall by the downturn.

Consumer behavior has also been a major factor. “We and our customers at first saw a decline in business,” says Terry Wehling, vice president of business development for Amerilab Technologies Inc. (Plymouth, MN), a leader in the manufacture of effervescent tablets and powders. “Consumers began to view spending on supplements as discretionary, and cut back to focus on essentials like basic groceries. Then, halfway through 2009, we began receiving more calls from prospective customers than usual. It still isn’t clear whether that was because consumers were feeling there was relief in sight or because there were fewer competitors in the marketplace because of business failures. Certainly, the economic downturn has weeded out some new startups and marginally capitalized companies.

“But even during that slow time, we did not see a lot of pressure from customers to control costs-perhaps because, like many other contract manufacturers, we continually work at improving productivity regardless of the business climate, by becoming more efficient in transferring product from station to station. Last year, for example, we installed new conveyors and automated transfer systems. We also trim costs through economies of scale in buying raw materials.

“What we did find, in consulting with our core customers, was an effort to increase emphasis on customer service and product quality as a response to the recession. We invested even more in supporting those areas, which seems on the surface to be counterintuitive during a downturn, but our customers valued it.”

Contract manufacturer and filler CAPCO Labs (Santa Fe Springs, CA) reports a similar experience with cost-control pressures. Executive vice president Sacha Licciardo points out that CAPCO always invests significantly in automating processes and in purchasing energy-efficient equipment, both of which contribute to lower production costs.

In addition, the company has always offered customers the opportunity to source their own ingredients and components as a way to control costs. However, says Licciardo, “We have not seen an increase of customers sourcing their own ingredients due to the economy. They may have established relationships with raw-material and component vendors that they are drawing on, but we haven’t seen a great change.”

Best Formulations (City of Industry, CA) saw, as the economic recession began to take hold at the end of 2008, a sharp slowdown in the number of new-product development requests. Companies working on projects to develop new products put them on hold.

“Companies became very risk-averse,” says Eugene Ung of Best Formulations, “and fell back on their tried-and-true products. Throughout 2009, what brand owners did continue to produce were the standard nutritional products such as single vitamins, multiple vitamins, and antioxidants.

“But in the fourth quarter of 2009, the new-product quote requests began to increase again-both projects brought back to life and new ones.”

Many of those interviewed said that they have seen companies fail, often as a result of having insufficient capital to either ride out the storm or to invest in the new equipment that would enable them to take advantage of new marketplace opportunities. Others have been consolidated into larger players looking for expansion opportunities. But those that invested in the future have done well.

Growth Opportunities Continue
We also found that while “downturn” may accurately describe the greater economy, within the industry there occurred more of a shift in market opportunities than a downturn. For example, as loss of employment and health insurance coupled with reduced personal income placed medications and professional healthcare out of reach for many families and individuals, these customers instead turned to supplements as a way to continue to support their health. As a result, while many supplement makers have known loss, more have experienced growth.

“The nutritional supplement market as a whole is experiencing significant growth,” says Suhail Ishaq, president of GMP Laboratories of America (Anaheim, CA). “Consumer thinking became, ‘If I can no longer afford even the copayments, or if I don’t have any health insurance coverage at all, I should take a more active role in promoting my family’s health by alternative means such as nutritional supplements, which I can still afford.’”

Kenn Israel, vice president of marketing for Robinson Pharma Inc. (Santa Ana, CA), echoes that positive report: “We have experienced dramatic growth, as have many value-oriented contract manufacturers that focus on meeting core nutritional needs rather than trendy desires. In a recession, desire-driven purchases tend to become viewed as luxuries, while core health needs remain essential.

“Our growth has been especially strong with private-label companies, which is Robinson Pharma’s primary customer base. Private-label products today provide the same ingredients as national branded products and meet the same third-party regulatory requirements, building strong brand loyalty. And large retailers themselves have focused more on providing quality products under their private labels, giving them the opportunity to become category leaders rather than followers.”

Other opportunities have arisen both from the recession and from the growing national personal and governmental emphasis on environmental protection. Shipping fortified or flavored drinking water, for example, not only consumes fuel and produces exhaust pollution, but also runs up a considerable freight bill. Wehling points out that Amerilab offers consumers the alternative of purchasing a dry nutritional additive in effervescent tablet or powder form, enabling them to create their own fortified drink using plain bottled water or, to be even more “green,” by using tap water and their own reusable water bottles. In essence, this creates an entire new market segment for effervescent additives.

Controlling Production Costs
The companies we interviewed were varied in terms of their product lines, their customers, and their geographical locations. Yet their answers about customers asking for help controlling production costs were similar: the recession had not brought with it a noticeable increase for such requests. Almost unanimously, the response was that contract manufacturers devote time and effort to such control even during good times; it is an essential function of a contract manufacturing business to control costs. Asking for closer control simply wasn’t necessary for most customers.

In some cases, increasing savings is very challenging. Best Formulations’ Ung explains that it is also the nature of most contract operations to experience frequent changeovers.

“We manufacture about 200 different products per month. We have made our changeovers as efficient as we can, but by their nature they require time and effort to maintain mandated sanitation standards and to prevent contamination from product to product. If we were running just one product 24 hours a day for several days, that would be a different ball game, and we could realize significant efficiency gains and cost savings.

“However, we understand that our customers are looking for value, and we have to be price competitive. Adopting lean manufacturing practices has helped a great deal, and we continue to work toward greater efficiency.”

Ishaq of GMP Laboratories says: “We achieve greater control of production costs in two ways: we are perpetually upgrading our production equipment and streamlining our operational procedures; and via economies of scale. For example, we have recently greatly expanded our production capacity for liquid products. Liquids are the hottest segment of the nutritional market, and we realized that we would not be able to keep up with growing demand until we expanded our liquid-production facilities-and, at the same time, exploited the higher throughput volume as a way to trim costs.”

Fortitech Inc. (Schenectady, NY) is a leader in the development of custom nutrient premixes for the food, beverage, and pharmaceutical industries. According to Samuel M. Sylvetsky, Fortitech’s vice president of global sales, the recession has brought little change in the volume of the company’s output.

“We have seen a shift towards more of our customers being private-label marketers,” he reports, “but our output volume remains fairly constant.”

In part, he attributes this to the fact that a premix is by its nature already a product that increases efficiency by mixing numerous additive constituents into a single product, simplifying production. He also points out that the fortified products these premixes go into are food products, and their users regard them as staples, not luxuries to be eliminated in hard economic times.

Like others we interviewed, Sylvetsky reports that, early on, new product launches had slowed, but that they have come back strong this year.

Meeting GMP Compliance Rules
FDA’s requirement that manufacturers of nutritional supplements meet cGMPs is now fully active. Most large and medium-sized companies now meet those requirements; smaller manufacturing operations seem to be reluctantly complying as needed. Stronger enforcement by FDA, as time passes with the rules in place, will bring them on board as well.

“Larger companies have often sought us out specifically because of our reputation as a leader in Good Manufacturing Practices, as our name states,” says Ishaq of GMP Laboratories. “As FDA extends its enforcement of tightened cGMP standards to smaller companies, we expect to hear from them as well. And to some extent, we also expect to hear from manufacturers that are not so much motivated by regulatory pressure directly as by the growing pressure of competition in the marketplace.

“Quality products have a way of surviving competitive pressures in the marketplace better than inferior products, and everybody knows this.”

Sylvetsky of Fortitech points out in addition that, as regulations increase, contract manufacturers and suppliers of specialized premixes become more necessary to brand owners, whether of traditional or private-label brands. This year, Fortitech has seen a growth in the number of companies turning to it to take advantage of its experience and expertise in meeting these new standards.

“This requirement is influencing our entire industry at least as much as the recession,” says Robinson Pharma’s Israel. “The relationship between contract manufacturer and customer in the past was often focused almost entirely on price and speed to market, with quality often a distant third. Today, that focus is on quality first, speed second, and price last.”

This reflects perhaps the most influential result of the recession: the reinforcement to manufacturers and their customer companies of the fact that external factors-newness to the marketplace, eye-catching package design, marketing-may sell a product initially, but that only product quality will generate return sales and build long-term brand loyalty.

Many larger contract manufacturers were already well on the way to FDA cGMP qualification. Some formulators like Best Formulations were already fully licensed drug-manufacturing facilities. Others, like Amerilab Technologies, were managed by executives who had come from the pharmaceutical industry, where high manufacturing standards were the everyday norm and who began with similar standards from the beginning. Even those companies, however, had some more work to do to enhance and formalize those standards, and establish new standards, particularly in the qualification of raw materials.

A number of interviewees pointed out that the weight of the new requirements will fall most heavily on the smaller contract manufacturers and those still following the traditional contract manufacturing role of selling themselves as the low-cost alternative. These companies now face not only considerable work to qualify themselves, but also the expense of doing so. That may make dramatic changes to what the industry as a whole will look like in years to come.

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