How do leading brands find the right co-packers for their businesses? How do they evaluate, manage and maintain successful long-term relationships? Beyond good intentions, the devil’s in the details of meeting expectations, structuring contracts, sharing information and measuring results. These were among the topics leading luminaries from the consumer packaged goods (CPG) sector discussed at a town hall-style meeting at late February’s CPA 2013 Annual Meeting in Naples, FL.
The panel discussion, moderated by Jason Tham, CEO of contract packaging management systems provider Nulogy, featured three panelists:
• Mike McGee, senior contract packaging manager with Florida's Natural Growers, has experience in quality assurance, operations and, since 1999, in contract packaging for Florida’s Natural. He has created, negotiated and administered more than 50 juice and beverage co-packing contracts. The company also co-packs for noncompeting beverage brands.
• Jon Heussner, director of operations/business with ConAgra Foods, oversees roughly 100 contract manufacturers and packagers, and came to his current position by way of positions in project engineering, plant management and contract manufacturing management—including ConAgra’s own co-packing operations.
• Karl Kretschmer, recently retired senior supply chain manager for Mars Canada, spent decades in finance, marketing, procurement and logistics and supply chain management. He led the company’s 500,000 sq ft national distribution center project and was also an architect of its contract service provider program.
Why do brands seek contract packagers, and what are the benefits? Faster turnaround time, greater flexibility, meeting capacity surges and avoiding financial risk were just some of the reasons panelists gave. Contract packagers provide the speed and flexibility for shorter-run jobs (seasonal spikes, new products/packages, etc.) as well as providing end-of-line flexibility (custom displays, retail-ready packs, etc.). In contrast, brand-owned plants are designed for longer production runs and fewer changeovers.
For instance, the lion’s share of Florida’s Natural Growers’ juice business is in higher-end single-strength or “not from concentrate” juices. But for lower-volume from-concentrate juice, shipping concentrate from Florida to California makes no sense, so for that market, McGee noted how that product was given to a co-packer because “it wasn't economically feasible” to own a plant there based on the lower volume of concentrate product.”
Embedding co-packing operations inside the brand’s distribution center is something Kretschmer sees “more and more of” across the CPG sector, and he says it helps reduce freight costs and turnaround time while adding flexibility. Companies vary in their approach, however; while Mars dedicated 30,000 sq. ft. of space in its distribution center, embedded operations are "minimal" at ConAgra, Heussner said. Despite varying approaches on some issues, panelists agreed on many big-picture criteria for contract packaging partnerships.
Evaluating co-packers
In addition to financial solvency and other business checks, it’s no surprise that with three food brands on the panel, food safety and quality are of primary importance in co-packer selection. For ConAgra’s co-packers, Heussner said that "if they are not already GFSI certified, they're on their way to that," he said, noting that the company will help them in that journey. GFSI, the Global Food Safety Initiative, is the primary standard driven internationally by major retailers as well as a key for compliance with the U.S. Food and Drug Administration’s Food Safety Modernization Act.
Beyond the must-haves, Heussner cited the desire for co-packers to sustain a "cost-savings mindset” that helps reduce cost in the supply chain; “We'd like them to come to us with ideas and to share those things so we can mutually benefit from them."
Kretschmer concurred in referencing “thought leadership. This is where we separate those that are in the game and those that aren't.” For example, outsourcing partners create a tighter bond when they recognize the intense pressure major retailers place on CPGs, which can include requirements to meet inventory supply targets with 98% or greater accuracy—or face penalties deducted from their invoices. “It's about innovation,” Kretschmer said, “and it's about those folks who are thinking about the future, about where they see the market trends going within the retail environment and CPG industry.”
Successful co-packing relationships should be based on good communication across purchasing, supply chain, sales, operations, engineering and all departments, panelists agreed. Beyond talk, co-packers must be prepared to measure, benchmark and validate their performance to key metrics such as quality measures, on-time delivery levels, schedule adherence over a set period, volume variances to forecast and more. Successful relationships, in turn, often depend on the ability for both partners to view the same information openly.
Openness, from ledger to data
The theme of open-book management permeated the Annual Meeting (See this issue’s President’s Letter and CPA Here & Now articles). In fact, openness should pervade the brand/packager relationships, from financials and goalsetting to open-book pricing policies with customers, something panelists indicated to expect more of in dealing with CPG firms.
“We understand that the co-packer needs to make money,” said ConAgra’s Heussner, but he also wants an accounting of co-packers’ fixed, variable, direct and indirect costs as well as product margins. “We have co-packers that are very, very open, and those are the ones we tend to do more business with.” The topic of openness encompasses knowing each partner “has the other’s back” in times of crisis, and the panelists shared examples of how partnerships built on trust have helped both partners solve problems and thrive in serving their shared supply chain.
While good partner relationships start with open and candid discussions, today’s tight margins and competitive economy require partners to verify, validate and build trust through shared numbers and data.
The retail supply chain is driving continued efforts to implement pull-based strategies, which is driving more partnerships toward tighter information technology (IT) integration. The problem is that sales forecasts are notoriously inaccurate; terms like “awful” and “so bad, it’s killing us” were used in the discussion, and were met with great audience response. Retailers want innovation and customization that typically outstrips suppliers’ ability to forecast, resulting in excess inventories or, alternately, shortages in material or time.
In various markets and increasingly in the U.S., Kretschmer noted the increasing trend for retailers to impose lead times as short as 24 hours, which may work for base products but not for customized displays or retail-ready packs. He suggests that instead of full, unstructured customization, the brand’s marketing department can work with retailers on pre-defined pre-pack structures and displays. From these, the retailer can choose which products go into that configuration. “Rather than us trying to push it in and sell it, let them tell us what they need, because it may be geographical, it may be demographic, it could be a host of things that make markets different,” Kretschmer said. To do this effectively, he said, requires something on the order of a CPG Web portal. In this scenario, the retailer configures the order, and clicking “send” generates a purchase order that flows directly to the co-packer who "already has the bill of material all lined up and—boom!” The orders flow, and the system is “transparent.”
He believes that said pull-based software systems require a “huge mindset change,” but could become a mainstream reality within five years.
The open-book financials, IT and other details aren’t goals, but tools set carrots and sticks for partner performance, profit and problem solving. In short, these tools build trust so that, “at the end of the day,” as Heussner put it, “when we go home at night, we know that the co-packer has our best interest at heart.”
Quick tip: Address IP issues early
There was general agreement that the more proprietary a technology is, the less likely it is to be outsourced, to protect intellectual property. In decades past, before confidentiality measures were well understood, there were many more cases where co-packers running a brand’s proprietary package would turn around and run essentially the same product or package for other customers, or for retailers seeking private label packs to compete with the branded product. Over the years, smart brands and reputable packagers learned that non-disclosure agreements (NDAs) protect both parties by spelling out any gray areas that might lead to such practices—and ruin a relationship. Panelists agreed that the NDA needs to be signed early in discussions: not just before the contract and not just before test runs but early in discussions, panelists agreed. Off paper, it’s still hard to control all disclosures by employees, so it’s important for all parties to make sure all employees involved in a contract are aware and apprised of NDA stipulations.
Quick tip: Mitigating financial risk
How can co-packers mitigate the financial risk of investing in new equipment in cases where volume targets aren’t met and major retailers drop a new product—but the co-packer has "put some real money toward some real machinery, and hired some real people to do the job?” moderator Tham asked panelists suggested several ways to structure contracts to accommodate this risk. Solutions vary by contract, but can include either party buying the equipment, or various levels of investment by either party, with time- and volume-based milestones. For example, either party can buy equipment outright; the customer can buy or finance capital expenditures and the co-packer can opt to own it fully over time; and higher co-packing per-case fees can be built into lower volumes. (For more on this topic, read “Stretch your CapEx budget by managing risk.")
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