Running a frozen specialty co-packing operation for nearly 30 years has given me unique insight into what makes up a healthy partnership between Co-Packer and customer. At Little Lady Foods we introduced over 100 new product lines for customers such as Nestle, Kellogg’s, Newman’s Own, Walmart, and numerous early-stage companies.
The basic business models of a consumer package company (CPG) and a Co-Packer are quite different. A CPG company is concerned with growing their brand, having additional capacity available on demand, and maintaining a workable price structure. A Co-packer, on the other hand, wants a stable and predictable demand, consistent lead times, and sufficient volume to justify manufacturing the product. While these may seem at odds, the strong common bond between customer and co-packer is that each wants a stable long-term relationship as the cost of breaking the relationship is high to both parties.
What Your Co-Packer Wants
Many of the start-up and early stage food companies I work with have a limited understanding of what a co-packer needs to be successful. Because of this, friction can sometimes develop between a co-packer and their customer. The following are a few things companies should keep in mind when working with a co-packer:
- A CO-PACKER IS NOT SELLING A PRODUCT: A co-packer does not sell a product, they sell time on a production line and space in their facility. Because of this, beyond material costs, the main drivers of cost are run speeds, line changeovers, number of raw materials, staffing and anything else that slows line speeds or takes up space in their operation
- YOU ARE NOT THEIR ONLY CUSTOMER: Many early-stage companies expect co-packers to react quickly to any change in demand or product. This is often difficult because co-packers can have up to 20 different customers all making simultaneous demands. These inherent conflicts can be worked through, but it helps if the customer remembers that the more business a co-packer has the more they can spread their fixed costs, lowering prices for everybody
- UNDERSTANDING A CO-PACKERS PLANNING TIME FRAMES: Co-packers typically work off the following planning schedule:
- 30-Day Production Schedule: Raw material lead times and staffing scheduling are optimized when planned over a 30-day period. The first 7 to 14 days are generally fixed, except for emergencies, with the remaining time flexible.
- 90 Day volume increase planning: If a customer is expecting a major pick in volume due to a promotion, the addition of a new account, or other reasons, the co-packer would like 90-day notice. Acquiring additional raw materials, adding a production shift, and obtaining more storage space are all longer lead time items that require longer notice.
- 6-month line expansion timing: If new equipment is required for capacity increase, cost reduction, or any other reason a 6-month notice is necessary. Most equipment requires a 4 month + lead time, installation, and training before becoming fully operational.
It is a best practice to have a rolling plan with your co-packer that is updated every 2 to 4 weeks addressing the time frames above. If you make it a habit of doing this on a regular schedule without deviation it will prevent a lot of future headaches.
- FUTURE PRICE REDUCTIONS: The long-term goal of both the customer and co-packer is for significant volume growth. As volume grows, the cost of production to the co-packer will drop. It is best to discuss this in the initial agreement and determine how these cost reductions will be shared over time. Tiered price reductions at predetermined volume points or agreed percentage sharing of future cost reductions are two ways to address this issue.
My final counsel in how to develop a high functioning co-packer/customer relationship involves communication. It is difficult to over communicate in these situations. I recommend setting up a weekly or bi-weekly call between single points of contact at the co-packer and customer to review current projects and future needs.
I hope that this article will help in understanding how to smooth out the relationship between co-packer and customer. The more predictable you can make the relationship for the co-packer, the more they can plan, and the more they can lower costs for everyone.
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Have a great 2018,