Is your business ready for a co-packer? Here’s what you need to know

Take it from industry consultant and author William Madden—finding the right co-packer is no easy feat. That's why the founder and senior partner of Right Brain Consulting authored "Separating the Con Man From the Co Man: How to Source a Contract Food Manufacturer." Here, he shares tips for sourcing the right co-packer, spotting a not-so-great-fit and achieving success with the right support.

How does a brand know it's the right time to start exploring contract manufacturing?

William Madden: My stance? I tell my clients they need to make a decision: either make the product or sell the product. If you enjoy making product, become the co-packer. If you like branding and selling, become a brand. Don't try to be both. I say this because you only have so much capital and time. Whatever you spend on a plant is that much less you have for building your brand. It's also a huge distraction to run a plant. You have to deal with a thousand issues every day and it takes away your most valuable resource—time—which can hinder the growth of your brand.

Also, if you're growing your business for the purpose of selling it at some point in the future, you're not really getting value by focusing your resources on manufacturing, because large businesses already have that capability and then some. You're better off using a contract manufacturer and focusing your efforts on branding and marketing.

What would you say to a brand that is intimidated by the process of finding a co-packer?

WM: I know it can be a scary process. There are a lot of co-packers out there that will take advantage of smaller companies. My advice is to work with your industry contacts that already use co-packers. Read my book so you know what to look for. And make sure you have a good, solid contract.

Don't rush the process. Selecting a co-packer should not be a quick process. Plan on spending four to six months to really vet potential co-packers. You're not just looking for any co-packer; you're looking for the right co-packer. You have to do a lot of research and talk to a lot of people.

With so many co-packers to choose from, how can brands narrow the playing field?

WM: Match size. You don't want to be much smaller or bigger than the company that is co-packing for you. If the co-packer is too small, you will become a large portion of their business and will have too dramatic of an effect on that company's business if you move on from them. You don't want to find your name in the newspaper if you change co-packers, causing your old co-packer to go out of business.

If you go with a co-packer that's much bigger than you are, which can be very tempting because their pricing can be advantageous, you'll quickly find out that they don't really need your business. You're a small fish for them. So, when they run into a capacity constraint, you're the first one they cut. If this happens, your brand can suffer a ton of damage and you'll be off the shelf.

The ideal co-packer is someone similar in size—or slightly bigger—and willing to grow with you. I also like family-owned companies as opposed to big, private companies, mainly because a family business tends to take a longer term approach to how they conduct business. They're growing it for their grandchildren and not looking to sell.

What are some of the key qualities a brand needs to look for in a contract manufacturer?

WM: Number one, make sure they're GFSI certified. Check on their reputation from others in the industry. See if they have any in-house R&D that can help with extensions and development later. Find out who they're doing business with. If they won't share that information on the tour, look at their warehouse and ask yourself what you think of those brands.

Finally, check online resources to see if the contract manufacturer has had any recalls. It they have, ask the co-packer about them. Ask for the reasons why it happened and what they did to respond. Every plant will eventually have a recall. It's not necessarily the kiss of death—the key is how they handled the recall. Ask specifics. Think about how you'd want to them to handle it if it happened to you.

Do you have any contract negotiation tips to share?

WM: If a co-packer is charging for R&D, see if they're willing to be flexible. One of the ways to negotiate is by asking for a 25 percent credit in R&D costs after the fourth order is placed. Most of the time, the reason co-packers charge R&D costs isn't so they can make a profit. Instead, it's to cover them for products that don't move forward, or are only produced once.

What are some of the biggest challenges facing retailers/brands using a contract manufacturer?

WM: Managing expectations. If you have your own plant, you are making product purely for yourself. But a co-packer will have 20 or 50 customers. And a lot of times, these customers all have similar business cycles, so that creates an issue for the co-packer because everyone's peak period is the same time and capacity becomes an issue. The number one complaint that I get from companies using a co-packer is capacity issues and those tight time periods.

The good news is that there are ways to manage it. If you have a good co-packer who has been in business a while, they know their business cycles, and can provide a strategy to avoid the issue.

What can we expect from your new book?

WM: You will learn how to spot co-packers who are taking unfair advantage, and how to identify co-packers who are good at what they do. You will also learn how to manage your own expectations and how to talk to a co-packer so you sound like you know what you're doing even when you don't.

I wrote this book because, as I built this practice, I saw a lot of small companies getting taken advantage of in their contracts. They didn't know what they didn't know. It's expensive to source a co-packer, but it's very expensive to get out of a bad contract. I wanted to give the average Joe or small company exploring this option a guide for what to avoid and what to do to maximize positive outcomes.