Your Adventure in Contract Manufacturing

October 23, 2008



Adventurers respond to the call of the wild. Entrepreneurs respond to the call of the market. When the market is dietary supplements, the call rings out loud and clear.

That's because the dietary supplement market has grown to $24 billion, according to the Natural Products Association (Washington, DC), and it is destined to continue growing, if only because baby boomers, a burgeoning market segment, are determined to stay active, healthy, and young, and they are willing to spend their ample discretionary income on nutritional products to achieve their goal.

With a wide-open market, the challenge to entrepreneur-adventurers is how to participate in it. Contract manufacturing may be the answer.

But, before you begin your manufacturing adventure, you should consider both the benefits and pitfalls of entering a relationship with a contract manufacturer. Then, if you find the pros outweigh the cons, plan carefully, manage the process, and enjoy the rewards of your adventure.

A Look at the Benefits
By nature, adventures have both rewards and risks. First, let’s take a look at the rewards (benefits) of contract manufacturing: 

 

 

 

  • No capital expenditures. Manufacturing is expensive; it necessitates considerable capital outlay on land, buildings, materials, and equipment. Companies benefit from contract manufacturing, since they do not have to make the significant investment in equipment, manufacturing facility, and personnel, explains Randy Pollan, vice president of sales at ProTab Laboratories (Rancho Santa Margarita, CA).  

Bev Phillips, account manager at Access Business Group (ABG; Ada, MI), concurs. "Many of our customers consolidate their production into our facilities and close their own inefficient plants or avoid purchasing and setting up their own new facilities in the first place," she says. 

 

 

 

  • Reduced variable costs. One benefit of contract manufacturing, says Michael Schaeffer, president of Pacific Nutritional Inc. (Vancouver, WA), is the ability to spread costs out. "Costs associated with material identification and analyses are spread over all of the inventories used for all of the products manufactured," he says, "thus reducing the financial burden for the individual client."

 

 

 

  • Fast, efficient delivery. Distributors often reflect, "If the product isn't on the shelf, you can't sell it." A contract manufacturer can help assure that your product remains on the shelf, because the manufacturer can help even out business cycles when customer demand for your products increases, says Phillips.

 

 

 

  • Access to expertise. Manufacturing is more than processing materials into an end product. It involves tapping into the expertise of specialists in quality control, research and development, and compliance with regulatory bodies, all of which can benefit customers, says Phillips.  

In some cases, says Joseph Montgomery, business development coordinator for Amerilab Technologies Inc. (Plymouth, MN), a key benefit is access to specialized expertise, not found in all companies. For those companies wishing to market a new effervescent product, he says, "We can take their ideas and product requirements and manage the entire development and commercialization process under one roof." 

 

 

 

  • Focus on core competencies. "A main benefit is our customers can concentrate their energy and resources into what they know best-marketing and sales of their branded program, without having their efforts and finances diluted with manufacturing issues," says Pollan.  

And Now the Drawbacks

  • It would seem the benefits of engaging a contract manufacturer are alluring-little capital outlay, a focus on core competencies, expert resources-but what about risks? Does contract manufacturing have any drawbacks? According to the experts, the answer is yes: 

 

 

 

  • Lack of quality control. Quality is king in dietary supplements, and consumers are short on forgiveness if quality is compromised.  

"Companies that utilize contract manufacturing need to be wary of those that operate at a lower level of quality, which could impact the quality of the finished product and ultimately the customer’s reputation in the marketplace," warns Phillips.

Pollan advises looking for a company that can pass the scrutiny of high-performance liquid chromatography (HPLC), microbiology, and identity testing, as part of their quality processes. This would help guard against the lack-of-quality pitfall. 

 

 

 

  • Subcontracted services. Another pitfall is subcontracted services. "Some companies use consultants for quality control and do not have an on-site lab, or they use outside vendors for preprocessing work, such as granulation and blending. Or, they do not have packaging capabilities to complete the products to finished goods," says Pollan. "This reduces the level of quality- assurance standards that they control."

 

 

 

  • Focus not on the contract customer. Some manufacturers take on contracts just to fill excess capacity, says Pollan. "Ensure that your manufacturer has your best interest for success," he says. "The service level for these companies can be quite frustrating, as their own brand has priority over your order."

 

 

 

  • Employ qualified employees and supervisors.

TOP CRITERION FOR PICKING A MANUFACTURER: ADHERENCE TO GMPS

ONE OF THE MOST COMPELLING CRITERIA for selecting a contract manufacturer is assurance that it adheres to the current good manufacturing practices (CGMPs) for manufacturing dietary supplements, which went into effect for large manufacturers June 25. Additional assurance of compliance with GMPs comes from third-party certification, such as certification from the Natural Products Association (Washington, DC) or NSF International (Ann Arbor, MI).

Basic GMP standards require manufacturers to:
 

Preparation is key to getting the most out of your contract manufacturing adventure, just as it would be for any other adventure. Here are five steps to help ensure your adventure will be all that you want it to be.

1. Know your requirements. Montgomery advises, "Understand what you are trying to accomplish with a new product and what you require from a contract manufacturer to do so. We put a lot of emphasis on identifying goals early on so we can determine compatibilities as well as stumbling blocks. With both sides focused on the end product, we can work efficiently toward it or prevent wasting time if it is not feasible."

Phillips adds that her company expects you to provide a detailed product description, including appearance, size, and weight; the formula or concept, with nutritional profile requirements and label claim; raw material and packaging requirements; packaging configurations; volumes; launch timing; pricing; sample requirements; shelf-life expectations; and shipping requirements.

2. Make a careful selection. Although theoretically it is possible to change contract manufacturers easily, realistically, choosing a manufacturer translates into making a long-term commitment.

"Get to know the manufacturer before you get involved," advises Phillips. "Find out what types of products it produces and how long it has been producing them. Understand available capacity and options for growth. Check out financial history. Confirm the control of quality is independent from production."

All the experts emphasize: Visit the facility to make sure it has the quality systems in place that you want and need.

3. Don't buy on price alone. Smaller companies and companies new to contract manufacturing may be susceptible to price ploys, says Phillips. "Sometimes focus on pricing alone over service and quality results in unforeseen problems for the customer," she notes.

4. Insist on quality assurances. In the consumer's eye, top quality of dietary supplements must be a given. As you consider a company, look for third-party current good manufacturing practices (GMPs), recommends Schaeffer. He says the manufacturer should also have a staff of qualified individuals, such as chemists and microbiologists, in the quality control department.

Phillips says you should confirm the plant has a formal quality assurance program in place, complete with standard operating procedures (SOPs), FDA registration, and audit information and reports, along with other registrations and certifications.

PRIVATE LABELING: A LUCRATIVE ALTERNATIVE

ONCE UPON A TIME, Americans were shy about buying private labels. They believed store brands were of inferior quality.

Today, it's a different story.

Market Research.com (Rockville, MD) estimates that about 70% of Americans try private-label goods, because they believe the differences between them and nationally advertised brands are negligible. And the Private Label Marketing Association (PLMA; New York City) claims that 41% of American shoppers describe themselves as "frequent" store-brand buyers, up from 36% just five years ago.

These statistics apply to all store brands, not just dietary supplements. But dietary supplements account for a large share of private-label purchasing. In its 2008 Private Label Yearbook, PLMA says that privately labeled nutritional supplements account for 29.7% of unit-sales in drug chains and 20.5% in supermarkets-a hefty share by any calculation.

And be sure the company you select maintains the proprietary nature of the formulations provided, adds Pollan.

5. Establish clear expectations. Assume nothing. Phillips says you should clearly detail your expectations concerning the manufacturer's commitment, capabilities, and responsibilities; research and development involvement; quality assurance; pricing and cost requirements; and lead-time requirements.

The experts say standard lead times range from four to eight weeks.

A primary factor affecting lead time is material availability. "The typical time-to-market has a number of variables," says Schaeffer. "The time frame can be affected by material nonconformance to the established specifications."

When you take these five steps, you will be off to a good start on your contract manufacturing adventure.

Linda Segall, former editor of an award-winning business magazine for alternative healthcare providers, is a freelance writer from Jacksonville, FL. She can be reached via e-mail at Linda@segallenterprises.com.