The nuts and bolts of the co-packing (also called co-manufacturing) arrangement typically involves:
- a ‘filling fee’ of some description: this recognises both the process and filling/depositing costs of production such as heat, light power, labour and potentially repairs and maintenance.
- raw material and packaging pricing: there are a variety of approaches, it can be baked into the filling fee, or run on an open book basis where there is joint collaboration to yield purchasing economies or the client arranges all purchases)
- an element of ‘capital contribution’: this typically amortises any investment cost over 3, 5 or 10 years and then loads it onto each unit produced, in other cases the client can pay for the investment outright.
- Some arrangements include an open book margin for the manufacturer, in others it is baked into one single fee per unit
- Volume commitments: sometimes expressed as a collar (e.g. maximum and minimum volumes) or a set allocation of units
For the brand owner there are a number of advantages:
- Access to new capacity (production volume, units/litres/packs)
- Access to new capability (pack formats, sizes, flavours, intermediate processing technologies such as roasting, drying, co-extrusion, enrobing, baking, fermentation etc).
- Increased agility – potentially quicker speed to market, lower Minimum Order Quantities (MOQs), ability to harness rapid prototyping, product testing and NPD
- Reduced risk – it offers a ‘test and learn’ approach perhaps as a prelude before, if the product is successful, taking production back in house
- Reduced cost – the third party may be able to manufacture the product cheaper
- Reduced complexity – offers the ability to remove shorter run, more complex volume from large factories, enabling streamlining of production
- Smarter and more sustainable supply chain e.g. either avoiding market barriers as in a Brexit scenario where current EU produced volumes could be moved to the UK to avoid taxes and tariffs; or moving production nearer the raw materials or the end consumer to reduce logistics cost and food miles
The attractions for the contract manufacturer are straightforward:
- Product portfolio improvement: co-packing contracts represent guaranteed, low risk volume and a set level of return versus other more higher risk contracts such as own label or branded NPD
- Skills transfer: through the collaboration the manufacturer gains new insights into process technology, other elements of NPD
- Trade profile: the manufacturer can benefit from association with leading brands and gain a trade reputation as ‘the people who make brand X’
- Financing: through the mechanism of the capital contribution fee, over the life of the contract, the client gradually purchases the equipment for the co-packer
- Lower costs of production – co packing makes a contribution to overhead, but beyond this it can allow the triggering of cost reductions in raw material purchasing, or give the volume required for the installation of more efficient energy or site services projects or smarter logistics and warehousing solutions