The Decision to Outsource

October 20, 2005

One of the most critical decisions for any company is whether to build a plant or enlist the services of a contract manufacturer. Many companies consider state-of-the-art manufacturing facilities to be the crown jewels of their organization. But while corporate facilities have distinct advantages, contract manufacturers can offer unique benefits that a plant can’t, such as efficiency, expertise, and experience with good manufacturing practices (GMPs).

 

One of the most critical decisions for any company is whether to build a plant or enlist the services of a contract manufacturer. Many companies consider state-of-the-art manufacturing facilities to be the crown jewels of their organization. But while corporate facilities have distinct advantages, contract manufacturers can offer unique benefits that a plant can’t, such as efficiency, expertise, and experience with good manufacturing practices (GMPs).

Paul Nadel, director of contract sales at Access Business Group, the contract manufacturing arm of Amway and Quixtar parent Alticor (Ada, MI), says the right decision has a lot to do with how a company sees itself. Is it a manufacturer, or simply a marketing and branding company?

“Contract manufacturers allow companies to focus more on marketing, instead of worrying about manufacturing quality products,” Nadel says. “Companies like ours can handle the manufacturing for them.”

According to Nadel, dietary supplement companies look for manufacturers that make high-quality products and already follow the GMPs. “These manufacturers can give their customers a huge marketing advantage over other companies whose manufacturing is at a lower level of quality,” Nadel says. “Because we have the facilities, equipment, and expertise in place, they don’t have to spend the money or time trying to replicate that on their own.”

THE MANUFACTURER'S CHOICEE

If a company sees itself as a manufacturer, its first choice may be to purchase a plant or build one from the ground up. But if they build it, will customers come? Constructing a new facility can be a risky proposition fraught with uncertainty.

“Building a plant and its supporting infrastructure takes time and requires significant capital investment,” Nadel says. “Then a company must recruit suitably skilled staff to operate the facility. The company also must create training programs for the employees to ensure compliance with multiple regulations. They also need to consider labor costs, quality control, operational overhead, and barriers to entry that are very high.”

Nadel adds that there are also new industry regulations, building codes, and government and community factors to consider. “The company needs to decide whether its business will be able to support the type of manufacturing plant that will be built. To build a facility, and then not have the business to maintain it, could be a very costly mistake. Contract manufacturers, however, are able to fluctuate with the ebb and flow of a business, essentially eliminating the risk of a company trying to maintain a facility that it doesn’t have the business to support.”

Because of the complexity of building a plant, the decision to use a contract manufacturer is often an easy choice. “Many companies are choosing to focus on branding and marketing, versus making the investment in the facilities and operating overhead,” Nadel says.

THE MARKETER'S CHOICE

If a company sees itself as a marketer or branding company, it may be wise to use a contract or private-label manufacturer rather than build a new plant. However, even companies that already have manufacturing facilities still use contract manufacturers from time to time. This is especially the case when a contractor can handle a task more efficiently.

“Companies should consider their business cycle,” Nadel says. “Do they have times of the year when they sell more product, and other times when they sell less? A contract manufacturer can adjust its own production schedule to accommodate the needs of its customers without having a negative impact on their business because other clients can help fill the extra capacity at different times of the year.”

Avoiding Contract Manufacturing Pitfalls

 

 

Although price is always a factor when it comes to choosing a contract manufacturer, marketers should avoid the temptation to sacrifice quality and service, says Ned Becker, vice president of sales and marketing at Nutritional Laboratories International (Missoula, MT).

“There is a significant level of difference between contract manufacturers in today’s marketplace,” Becker says. “Many times, marketing companies place price over quality and service. There needs to be a balance among all three key performance factors in order to finalize a decision. The future environment, with more-rigid good manufacturing practices in place, will place a greater emphasis on the quality of these services.”

Nutritional Laboratories International conducts extensive analytical, microbial, and physical testing to ensure that materials meet specifications, and also operates an extensive finished-product specification service to ensure product consistency. “Our customers cannot accept inferior-quality or subquality products due to the high value of their brand and the trust their customers have in their products,” Becker says. “They rely on this high level of quality support to ensure that their growth continues.”

To avoid pitfalls, marketers should take the time to formally audit a contractor’s operations to learn the details of its processes and systems. Marketers should also observe how contractors respond during a problem. One of the most common mistakes marketers make when choosing contractors, according to Becker, is letting the contractor become the “owner” of a product formula. Becker says that that mistake can cause several problems. “First, the marketing company is ultimately responsible for the product and has all of the liability exposure and risk,” Becker says. “Because of all this, it is their right to know everything about the product, what ingredients are used, and how the product is manufactured. Second, in order to properly label the product, all ingredient specifications and input quantities need to be identified for proper identification.”

Ensuring that a formula remains portable is also important in case the marketer changes contractors in the future.

“It just makes good business sense to have documentation of all finished-product specifications and copies of manufacturing records so that the product may be reproduced at a different operation if needed,” Becker says.

 

Companies sometimes don’t anticipate how changes in business can impact product volume, Nadel adds. “Missing the mark on this final area can result in costs of extra inventory or lost sales due to product shortages,” he says. Contract manufacturers can also offer expertise in some areas that are unfamiliar to marketers or other manufacturers. “In our case, those areas of specialty include Food and Drug Administration (FDA) license, Therapeutic Goods Administration (TGA; Australia) and Health Protection Branch (HPB; Canada) certification, kosher facilities, specialized quality assurance equipment, and highly trained and experienced staff,” Nadel says, adding that Access also offers product development services. “If a company comes to us and needs a product idea developed, we can help them do that, along with manufacturing and distributing the product for them as well. In turn, they can concentrate their resources on branding and selling the product.”

Some marketers also turn to contract manufacturers when they have questions about health and label claims. However, contract manufacturers are not really the best option in this area. While a contract manufacturer’s opinion is useful, it is not a substitute for legal counsel, and companies that have questions about health and label claims should seek outside legal advice. “Health and label claims are monitored and controlled by FDA, so companies need to be very careful when making any questionable claims. If a company wants the contract manufacturer to be responsible for crafting or supporting product claims, it should make sure that the manufacturer has technical staff for research or can undertake clinical studies, has a legal staff familiar with the laws, and has a good relationship with FDA. Then, they need to work with the government to meet the necessary qualifications to make that claim on their product.”

QUALITY CONTROL AND THE NEW GMPs

One of the biggest strengths or weaknesses of a contract manufacturer is its familiarity with the GMPs. Choosing a contractor that doesn’t follow the GMPs could be a huge and costly mistake since the GMPs establish rules that apply to everyone involved in the manufacturing process, including contract manufacturers. On the other hand, choosing a contractor that adheres to or exceeds the GMPs is usually a wise decision that improves product quality and reduces the chances of error.

“All manufacturers, contract or otherwise, need to follow the same standards, which affect personnel, facilities, equipment, processes, and recordkeeping,” Nadel says. “Extending the rules to apply to contract manufacturers simply makes the quality of the products higher and easier to maintain overall throughout the process.”

GMPs are used as a quality management system to ensure that products are safe, properly identified, and of the highest quality, Nadel adds. “While many nutritional companies struggle to meet these guidelines, we easily exceed them,” Nadel says. “In fact, our rigid GMP standards extend well beyond our manufacturing facilities to cover the science labs where our formulation techniques are developed.”

For example, Access Business Group’s GMP practices include a battery of tests for purity and quality, method validation, capability for stability testing, raw-materials quality assurance, lot tracing throughout the manufacturing process, standards for cleanliness and safety, qualification and training of personnel, in-house chemistry and microbiology testing, production and process controls, and warehousing and distribution controls.

AVOIDING MISTAKES

Although contract and private-label manufacturers can meet production needs and improve efficiency, errors are possible. The best way to avoid problems and mistakes is to keep open lines of communication between customer and contractor.

“The expectations for the contract manufacturer and the client should both be clear and detailed from the beginning,” Nadel says. “If concerns do arise, address them immediately. Making sure that the chosen contract manufacturer meets the precise needs of the company is critical. If it does not, the company should decide whether to find a different manufacturer or to adjust its product to fit a specific contractor.”

Because the key to contract manufacturing is having quality products that are delivered on time and at a competitive price, good communication is essential. “To avoid mistakes and problems, it’s important for a contract manufacturer and a client to have an open, proactive, and honest relationship,” Nadel says. “Companies can also make the mistake of not doing enough research in the selection process and making sure that the contractor meets their needs in every area.”

While nothing can eliminate the possibility of mistakes when choosing a contract manufacturer, establishing detailed guidelines on ingredients, process specification, and plans for distribution can help. Other areas to watch for include production schedules, product seasonality, and changes in product specification.

What to Look for in a Contract Manufacturer

 

 

Companies that are seeking a contract manufacturer should be prepared to ask a lot of questions, advises Paul Nadel, director of contract sales at Access Business Group (Buena Park, CA). Nadel suggests looking into the following areas:

Proactive partnership. Is there a sincere partnership and open communication between the client and manufacturer, and a desire from each for the success of the other?

Forthright communication. Are you discussing goals, priorities, and challenges? Are you receiving continuous updates on steps that need to be taken?

Competitive pricing. Are the bids priced differently? The lowest price isn’t necessarily the best. When you receive your bids, find out why they are priced differently, and if one manufacturer is higher than the others, find out why. Also, are there any expected cost increases down the road?

Product integrity. Is the final product as perfect as possible? Are the ingredients in the products exact, and has anything unexpected been included?

Certifications. Does a contract manufacturer already have all the needed certifications for the client’s product? If they don’t have one, why not, and are they willing to get it? Are there new certifications the manufacturer is currently pursuing, and what is the status of that process?

Integrity. Is the contractor someone you can absolutely trust? Will they sugarcoat issues to protect themselves, and if something goes wrong, will they let you know immediately?

Available Capacity. Can the manufacturer’s existing facilities and equipment make the client’s products? What are the limitations? What type of products doesn’t the manufacturer make, and why? Can production capacity grow with the client’s product demand?

R&D and scientific support. Does the contract manufacturer have staff that will suggest improvements to your formula? Are there any health safety concerns with the client’s product? Does the contractor offer a cost-benefit analysis for suggested improvements?

Legal and compliance support. What role will the contractor take in product and labeling? Is clinical support available to support label claims? Do they stay on top of legal or regulatory issues that may impact a client’s business?

Raw materials. What are the policies and procedures for procurement and testing of raw materials? Where are suppliers located?

Packaging. Can the contractor give direction on possible improvements to the client’s packaging? Are outside companies used, or is everything internal? What are the latest innovations in packaging and shipping? Can they be applied to the client’s product?

Logistics support. What are the contractor’s logistics capabilities? What are the contractor’s strengths and weaknesses in this area?

Financial support. Does the client need financial support, and is the contract manufacturer able to provide credit? If so, what are the terms? If the manufacturer buys new equipment to meet the client’s requirements, is there an expectation that the cost will be shared?