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What Does Contract Manufacturing Dietary Supplements Cost?
The economics of contract manufacturing today
Contract manufacturers (CMs) are well-nigh indispensable in today’s supplement industry. But as regulations and expectations change, cost equations change with them. That puts CMs in the tricky position of mitigating what costs they can while passing on those they can’t to brand-owner customers who don’t always appreciate the underlying arithmetic.
Yet CMs, says Eugene Ung, executive vice president, Best Formulations (City of Industry, CA), “work on very thin margins.” Without sharing some of the cost burden, he says, “we could be in the red on certain products we manufacture.” Marketer partners who see the longer term understand and accept that all nodes on the production chain must grow to survive. “Otherwise,” Ung says, “they’re killing their own goose.”
But still, the case for cost sharing can be hard to make.
No wonder, then, that CMs first try to cap costs all around. Says Ephi Eyal, president and CEO, Innovative Food Processors Inc. (IFP; Faribault, MN), “We work closely with our customers to mitigate inflationary pressure, whether as a result of material input cost hikes or increased regulatory requirements. Yet when systems are in place and rigorous processes are documented and implemented well, the outcome is worth the increased effort on both sides.”
And that’s why CMs are in no danger of cost-sharing their way into obsolescence. “Contract manufacturers have so much information about the supply chain,” contends Michael Schaeffer, president, Pacific Nutritional Inc. (Vancouver, WA). “They’re useful in managing costs by spreading the burden over all of the products being manufactured in a single facility.” In so doing, they ultimately save their customers money and more than earn their keep.
We asked contract manufacturers where their costs are shifting up or down. Read on for a full accounting.
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Labor Pains
A sure sign that the recession is over is upward pressure on wages-and that’s as true within the supplement-manufacturing sector as it is in any other industry. Indeed, labor, insurance, and associated operating costs “are always a challenge, as they continually go up,” says Ung.
Steve Holtby, president and CEO, Soft Gel Technologies Inc. (Commerce, CA), agrees, noting that “highly trained, competent machine operators” add to his cost as a maker of softgel capsules. The rotary die process “involves high precision and requires constant oversight.” That said, “Inaccuracies make production even costlier,” he points out.
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Machine Learning
One benefit of automated over human capital: machines don’t ask for pay raises or vacation. They don’t mind if management cancels the holiday party, either. But, they don’t come cheap.
Even so, CMs are investing in automation to streamline their operations. Several years ago, Soft Gel shifted to an optical inspection system to sidestep the operator fatigue that’s inevitable when visually evaluating thousands of softgels per day. The new system, Holtby explains, “digitally photographs each softgel with up to four cameras and compares the images to an approved reference standard.” It can process up to 1 million doses per hour and check for irregularities and foreign objects as well as flaws, rejecting inferior product with an air jet. What’s more, “it’s designed to FDA 21 CFR Part 11 requirements and helps increase throughput while reducing labor costs,” he says.
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Teach to the Test
You just can’t put a supplement or its constituent ingredients through too many tests these days. As a result, “In the past several years, testing was the big cost for everyone in the supply chain,” Ung says. Making matters worse is the lack of international testing standards for many of the raw materials used in dietary supplements. “Therefore,” he continues, “there could be a handful of assay methods out there, which is a source of inefficiency and additional costs.”
His company’s in-house laboratory helps the firm contain test-related expenses. Nevertheless, “accurate test methods pose a challenge at the moment,” he notes. “As the industry evolves, we hope that testing will become more streamlined and efficient, as well.”
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Stake Your Claims
Supplement shelves are more crowded than ever; meantime, supplement shoppers are increasingly discriminating. The upshot: a product’s really got to stand out to get noticed.
One way to do just that is to bear a catchy product claim or certification. But, says Michael Schaeffer, president, Pacific Nutritional Inc. (Vancouver, WA), “With marketing companies wanting to add more claims, such as gluten-free, allergen-free, and non-GMO, there’s been an added burden on changing ingredient specifications and additional testing.” Indeed, certification and claim substantiation “has the highest cost,” he says.
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No Such Thing as a Minor Detail
When it comes to increasing costs in supplement manufacturing, it’s the little things that really add up. As Holtby notes, customers rightly focus on testing and certifications to ensure product integrity and “effective quantities of safe, clinically proven, and ethically obtained ingredients.” But less-flashy features, including product price, delivery logistics, and batch sizes, “are sometimes more critical,” he says. “We spend a great deal of time advising customers on what is and isn’t realistic, and we strive to understand what issues are most important to them, building our business proposals to encompass these key factors.”
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Download Issue: Nutritional Outlook Vol. 19 No. 1
