In a LinkedIn group, a food broker servicing major chains such as Acme Markets, Ahold, King Kullen, Bozzuto's, Weis Markets, A&P, and Wakefern, among others, asked a question on the subject of co-packing or contract manufacturing frozen breakfast items.
Two of the responses to Walter Venarchik's question are educational for any mompreneur looking to start a business or for those whose products are in supermarkets and want to grow their business without the cost and commitment of running their own production facility.
Questions to Ask a Co-Packer
Jack Marcus, who has experience in the co-packing industry, pointed out that "there is no simple answer" and posed a series of great questions you should ask.
- Will you or the co-packer be purchasing and managing the ingredient and packaging inventories? If they are handling it all, you need to decide on safety stocks, storage, and out-of-date costs. Are you able to use ingredient specs that are common to other producers (e.g., salt granulation)?
- How predictable is the demand for your product and how far in advance will you be willing to "lock in" on the production schedule?
- Do you have or do you know the optimum production length?
- Does the co-packer already own the equipment and can it be used as is?
- Does your packaging material run on their machinery?
- What raw material, in-process, and finished product analysis do you require?
- How will you train the co-packer's employees on the sensory standards for pass-fail of the product?
- How will you handle "emergency" product demands and does the co-packer have machine/personnel resources to handle the production and at what cost?
- If you require short runs on an unpredictable schedule, your costs will be very high. Will this be sustainable for your business?
- Have you considered asking the co-packer to develop two cost scenarios?
These are just a few of the questions you should ask.
Create Multiple Scenarios for Food Production
Jack suggested that you might build into your requirements:
- They develop the FOB manufacturing cost only; you handle everything else, e.g., purchasing all materials and delivering them on a truck to their plant based on their evaluation of your product. Ask them to break out all the detail and losses.
- They quote on a finished case price based on their providing all services, e.g., purchasing, etc. Again, get all the detail.
Jack also added that "full cost markups, where the co-packer is doing all, can range from 20 to 50 percent depending on all the factors above."
Other Advice for Food Entrepreneurs
Michael Gagne chimed in with some helpful advice, "We use a 100% transparent formula...running the raw materials through our manufacturing database, and charge a conversion costs on finished product with three percent shrink on materials and packaging built in. Jack's right on, but as a co-packer, with my own brand, I try to approach the relationship in such a way that my costs are covered, my margin fair, and the cost to the customer is such that there is the possible success based on their operating margin, for them to promote and sell. We do charge an upfront SKU charge to set up, and to do the risk analysis, as we are SQF level 3 certified, and it takes a fair amount of work to set it all up, approve suppliers, etc."
What Co-Packers are Not
If you look like you are very prepared for having a conversation with a co-packer, you will have a better chance of engaging the correct co-packers. Far too many food entrepreneurs expect the co-packer to educate them, and co-packers are not in the business of educating. They are in the business of making money.
Updated by Susie Wyshak