Partnering with Co-Packers:
Finding the Right One for You

By Mary C. Mulry Ph.D.


In the dynamic, diverse environment of organic production, new food products are being introduced faster than ever. One of the ways that many product developers are making this happen is by partnering with contract manufacturers, or co-packers, to help them bring a product to market in a timely and cost-effective manner.

While some companies want to maintain direct control of the manufacturing and quality, many others decide that their expertise lies in the creative phase of initial product development, or other areas such as sales and marketing. These entrepreneurs have little interest in managing the technical details of manufacturing and would rather leave such things to someone already in the business.

Partnering with a co-packer not only takes a huge workload off your shoulders, but it often makes much more sense financially. There’s no need to invest in your own equipment or pay exorbitant rent for a facility. Also, since co-packers buy ingredients for several companies, especially basics like sugar and flour, they can often get much better prices they may pass on to you.

In addition to business owners and entrepreneurs, many retailers use co-packers to manufacture their private label products— especially when it comes to organic. Only very large retailers own their own manufacturing plants and very few choose to get them certified for organic production, leading them to find facilities that already possess such certification. Even large companies, such as Kraft Foods or Nestlé, when starting new organic lines, will often choose to have products contract-manufactured until the product line is proven to justify an investment in equipment.

Whether you are a business owner or a retailer looking to launch a private label brand, the search for the right co-packer can be complex and challenging and there are many issues that arise during this process. If you follow some key steps and advice, however, you can eliminate many headaches.

The process of finding a co-packer can be broken down into three main steps:
• Preliminary evaluation
• Feasibility and rough cost development
• Site visits and final selection

Preparation is Key
Once you have decided to use a contract manufacturer, the first step is to determine your main requirements and the other secondary features that would be nice to have.

Start by making sure you know your product and what you need to create it. Develop a business plan and a comprehensive set of product specifications. Then, each item on the preparation list should be rated as to its level of importance and to what degree there may be flexibility. For example, keeping an open mind on the type of packaging desired will allow more options than if there is only one type of packaging that will work for the product. Also, it is important to know which items are “deal-breakers” going in to the discussion, so that those items are given the highest priority.

It is best to make this comprehensive list of requirements and specifications before contacting any contract manufacturer. Manufacturers tend to ask the same set of questions and it is a time-saver to be prepared by knowing what exactly you need.

It is prudent to have an in-depth discussion about each of these issues in order not to be surprised later.

Sales Volumes. The first question a co-packer asks is, “How much volume over what period of time do you expect to sell?” Make sure to notate in your business plan your volume projections for at least the first three years.

Product Specifications. What type of organic product are you planning to produce—100 percent organic, organic (at least 95 percent) or made with organic ingredients (at least 70 percent organic ingredients)? In addition, are there any other requirements, such as allergen-free (gluten-free, dairy-free, soy-free, etc)? Are there any other regulatory or formulation restrictions for the product?

Product History. What is the product history? Is it an R&D formula or has it already been manufactured elsewhere? Who retains ownership of the final formula? What is your familiarity with the category? What financial resources do you bring to the table?

Packaging Desired. What type of packaging is desired for the product? Does it exist in the marketplace? Is there flexibility in the type of package? Does it need to be environmentally responsible packaging? What are the sizes and case pack needs?

Preferred Timetable. Is the product seasonal? Is there an optimum time to deliver the product to retailers? Create a rough timetable to discuss with the co-packer.

Terms. Usually, “terms” refers to payment terms, but other items need to be discussed. Is this a turnkey process or will key ingredients and/or packaging be provided? Who takes ownership of ingredients and packaging?

When seeking out co-packers, it’s important to realize that co-packers, especially the most reputable ones, are often selective themselves. Being organized and clearly presenting your business ideas and needs conveys that you will make a good partner as well.

Ron Rash, partner in Organic International, a brokerage and marketing firm, has worked for co-packers and represented companies in need of co-pack capabilities. “As a well-known organic contract manufacturer, we would get dozens of calls from potential clients each week,” states Rash. “We were impressed by those that were knowledgeable about the category, distribution and the retail environment. The world doesn’t need another organic salad dressing unless there is a clear point of difference in the market. We wanted to work with smart, well-capitalized companies and we could afford to be picky.”

Where to Find a Co-packer
Once the information listed above is put together, a prospective list of manufacturers should be developed. Unfortunately, there is no comprehensive directory of sources for private label or contract manufacturing for organic products. A good first step is to consult the Organic Pages Online, maintained by the Organic Trade Association (OTA) at www.ota.com. Search by product category, such as cookies, crackers, dairy, frozen entrees, etc. There are also several private label trade magazines/directories and often, a Google search for private label or contract manufacturing will turn up some sources. Often, product development consultants have had extensive experience with sourcing particular manufacturers and can provide sources through their business networks.

Supply Chain
Supply chain management is one of the most important issues to consider when introducing a new product, and the contract manufacturer is almost always a partner in this process. Because of this, it is best to seek out manufacturers who are already producing organic products, are familiar the challenges of the organic supply chain and have relationships with organic suppliers. Plus, the process of certifying a facility may add 10 to 12 weeks to the timetable.

Organic ingredients and commodities are often in short supply, therefore contracts for forward buying are critical for procurement. Spot shortages may occur, so it is best not to have a product dependent on a single one ingredient. Good organic co-packers should have a solid supply chain in place and help you navigate through tight spots in the market.

A few companies may opt for “toll processing,” where the company buys all the ingredients and ships them to the co-packer and then just pays a processing fee. The majority of companies, however, rely on their co-packers to do most of the ingredient sourcing because of the manufacturer’s buying power and connections with suppliers. There are exceptions. For instance, if you have proprietary ingredients that you want to protect, such as flavors, spice blends or a gluten-free base you’ve developed, you may want to have those items shipped pre-mixed to your co-packer.

Certification
The regulation and certification issues in organic production can often be very complicated—especially when you are working within a global market. Many companies work with suppliers and manufactures around the world and there are several different organic certification bodies that exist. However, in order to sell product labeled “organic” in the United States, the certification for both the ingredients and the manufacturing facility must be performed by a USDA-accredited certifier. A current list of accredited certifiers is available on the National Organic Program’s website, www.ams.usda.gov/nop. To make things more complex, if you are working with a co-packer outside the United States, the facility will not only need a USDA certification, but will also need to be certified to that country’s prevailing standard, as well as the standard for any part of the world where you would want to sell that product.

Another issue to address is deciding who holds the official organic handler certification. A company can either list the co-packer as the organic handler, or they can get a separate certification to identify themselves as the handler.

“It is always preferable for the manufacturer to hold the site certification,” said Sheila Linderman of Sheila Linderman Consulting, a regulatory consulting firm. “For one thing, it makes the co-packer more accountable for their paperwork and maintaining organic regulations in their facility instead of it being something the company has to worry about.”

This also makes the most sense because a co-packer already is required to go through organic certification in order to manufacture organic products. Thus, having the co-packer hold the certification means just one versus two separate certification processes, saving time and money.

There are a few reasons why a company may want to hold the handling license though—the biggest reason being labeling complications. Each USDA certifier has it’s own distinct seal that is required to appear on the label of an organic product, and with 90-some accredited certifiers out there, chances are that if you switch co-packers, you may also be switching certifiers. This could cost a company quite a bit if it has to reprint its labels to reflect the new certifying agency. So if you think you may want to switch co-packers soon, it may be of value to hold the handler’s certification yourself.

This is also the case with private label retailers who use several different co-packers for a line of products. The retailer may hold a “trade” certification, enabling their trade certifier’s seal to uniformly appear on all the private label items, no matter which certifier each of the co-packers uses. The National Organic Program recently reaffirmed that this is acceptable as long as the supply chain is traceable by the certifier and handler listed on the product, and that any consumer questions can be readily answered by the handler.

Moving Forward
The next step is to do a phone interview with the contract manufacturer. They will answer preliminary questions about their general capabilities, terms and any competitive products manufactured or conflicts of interest that might preclude a partnership going forward. Once you have identified at least two or three potential co-packers, a more in-depth discussion and rough preliminary costing should take place with each one.

Most manufacturers will request a rough product formula at this point in order to give an approximate cost. It is prudent to exchange a non-disclosure agreement (NDA) with the co-packer to protect the confidentiality of both parties.

The more in-depth discussion should include specifics for each manufacturer regarding:
• detailed costs for development, manufacturing and warehousing of product
• certification history and experience
• timetable for scale-up and manufacturing, including product ship date
• their financial stability and capacity to add equipment to keep up with the market.

Once the contract manufacturer has returned a cost estimate, it is up to the client to determine if the discussion should move on to the next level. Keep in mind that it is not unusual for cost to go up 15 to 20 percent between the initial quote and the final quote that is given after the co-packer has performed the test run. When competing for your business, the co-packer may shoot low but then realize after the test that they underestimated supply costs or the manufacturing time needed to make your product.

Before arranging a site visit, it is a good idea to check a few references from companies that are using, or have used, the manufacturer to co-pack their products. In addition, it may be prudent to determine the financial stability of the contract manufacturer by doing a Dun and Bradstreet search or equivalent due diligence with suppliers.

Meeting Your Manufacturer
The partnership with a co-packer is not to be taken lightly. The two parties must be compatible and there is nothing like a face-to-face meeting to assess whether the two parties can work together long-term.
The site visit should include:
• a complete plant and warehouse tour
• a preliminary review of organic capabilities, including capability to write/develop organic system plan
• a quality systems/sanitation review
• a complete product/packaging capability analysis.

This process often turns up issues that weren’t identified over the phone and the co-packer’s reaction to these issues may be a good measure of how they will act when challenges arise in the future.

Final Selection
Based on site visits of at least two manufacturers, it is now time to make the final selection and enter into a partnership.

Going back through and reviewing the entire process is important. Are there any issues that are uncomfortable or left unresolved? If so, now is the time to address them. Any nagging feelings usually indicate that an issue needs more discussion.

One more pass at the cost model is important. “The biggest hurdle to successful new product introductions is failing to find the appropriate pricing and holding to it,” according to Geoff Wilson, president, Innovate Food Inc., a marketing and sales consultant who has introduced several organic products to mainstream supermarkets and club stores.

In addition, Wilson said, the most important considerations contributing to the success of any co-pack relationship are: 1) adequate infrastructure and staff to complete the project, 2) the plant capacity to keep up with the growth of a new item, 3) the ability to install and operate the proper equipment and 4) most importantly, a company that understands project-based communication and assigns someone at a high level to resolve any problems that may occur.

Ongoing Relationship
Even after a co-packer is chosen, the work is still not done. Like any successful relationship, the partnership needs constant communication and attention from both sides to assure success in the marketplace. Even in categories that have few differentiated products, consumer needs are constantly changing and the competitive environment may force constant rethinking of the business plan.

You will also be far ahead if you choose a partner that appreciates the growth and change in the organic marketplace and wants to be an active participant. Those that view organic as difficult, time-consuming and a niche market will not be as supportive during challenging times and may not remain in the organic industry for the long haul.

Mary C. Mulry, Ph.D. is president of FoodWise, Inc., a natural, organic and specialty foods technical consultancy. Dr. Mulry has more than 25 years’ experience in product development, nutrition, product innovation and strategy, and quality systems. Her unique background has encompassed the entire food supply chain from ingredients to retailing, and she has worked on projects involving conventional food, natural and organic foods, functional foods and dietary supplements for companies ranging in size from start-ups to large multi-national consumer packaged goods’ companies. Over her career, she has held management positions at Kellogg, Kraft Foods, Celestial Seasonings, Wild Oats Markets and H-E-B. She can be reached at foodwise@aol.com.