The Outsource Option
The question would have been ludicrous in decades past, but times are definitely changing. Wave upon wave of new-breed food executives are entering the industry, armed with palm pilots and strategic plans but nary a processing plant in their business portfolios.
Take EAS Inc., a seven-year-old formulator of nutritional supplements based in Golden, Colo. When the firm introduced AdvantEdge, a ready-to-drink meal supplement, two years ago, it outsourced production and packaging. AdvantEdge proved to be a breakout product, and EAS has added additional contract packers to keep up with demand here and in Western Europe. “Manufacturing is not our core competency,” explains brand manager Heather Fitzgerald. Developing, distributing and marketing AdvantEdge and powdered products are where EAS excels; specialists can do blending and packaging more efficiently.
Another example is Horizon Organic Holding Corp., the Longmont, Colo., firm that has turned organic yogurt and milk into a $159 million business in 10 years. “We don’t own any brick and mortar,” acknowledges operations chief Steve Jacobson—nor is the company ever likely to. Even Horizon-owned dairy herds could be sold off to free capital for the all-important business of market development.
Most of Horizon’s processing and distribution is performed by Dean Foods Co. (formerly Suiza). That’s not surprising: Dean has a 13.2 percent stake in Horizon. It also has capacity to burn at its 128 plants.
Dean has been the victim of the downside of outsourcing. Three years ago, the company signed an energy management contract with Enron Energy Services, which was aggressively pursuing outsourcing deals with food companies and other manufacturers at the time.
After Enron filed for bankruptcy protection, it rescinded the energy outsourcing contracts. “We contracted to purchase electricity for (84) of our plants at a discounted rate for a 10-year period,” Dean’s 10-K report notes. “We do expect Enron’s bankruptcy, and its rejection of our contract, to adversely impact our results of operations.”
Undeterred, Dean continues to review a wide range of outsourcing options. An unlikely candidate: sanitation. In dairy processing, sanitation is a core competency, and outsourcing would be an unprecedented change. But contract sanitation is common practice in protein foods, and processors in other industry segments are taking a closer look at this option.Bernie Berigan, QA director and corporate safety director at Cincinnati-based DCS Sanitation Management Inc., recalls studying the outsourcing option 25 years ago while working at IBP. The beef processor concluded sanitation outsourcing was the best approach for its 17 plants, says Berigan. “The plant’s concern is getting product out the door, but you need a clean plant that is inspected every day to do that, and that requires more and more specialization. With outsourcing, plants gain control over sanitation because they’re focused on monitoring and measuring performance, rather than recruiting workers.”
HACCP mandates and the need for verifiable performance have sparked further interest. Service providers report increased inquiries from produce processors, bakers, snack food manufacturers and other food firms. With customers like Wal-Mart and McDonald’s demanding passing grades from third-party auditors, many processors are opting to outsource this function.
“We use nonhuman interfaces to objectively monitor and verify water pressure, flow rate, chemical concentration and other factors and certify that what was supposed to happen did, in fact, happen,” says Bob Bullard, president of Zee Company Inc., Chattanooga, Tenn. “A lot of copackers are becoming interested in this type of service because their large clients insist on objective measures of performance.”
At one time or another, most food manufacturers play the role of contract packer. The need to fill production schedules is the primary motivation, but now-and-again service providers face a buyer’s market. “Copacking is very cost competitive,” grouses one major food manufacturer. “Anyone going outside is doing it for one reason: it costs too much to do it inside.”
The brewing segment wrung out 24 million barrels of production through plant closings in the last five years yet still has capacity to burn. Some of the mothballed breweries have tried and failed at beverage copacking; others have invested in new capabilities. An example is City Brewery, which took over the shuttered G. Heileman plant in LaCrosse, Wis., two years ago.
City has annual capacity for 65 million cases, and its boutique beer labels require a fraction of that. The company copacks Smirnoff Ice flavored malt beverage, Arizona Iced Tea and a variety of energy drinks and other beverages on a contract basis.
“In the last two years we’ve put in equipment to make multiple streams of malted beverages and packaging equipment to do higher end labels and just about any type of glass or can container a customer might want,” says Randy Smith, City’s president.
The firm offers brewing and blending service, packaging, labeling and shipping
out of a warehouse that can handle 150 trucks and 10 rail cars a day. But one-stop
shops are an endangered species, and food manufacturers are wrestling with prioritizing
areas their plants should focus on and functions to be outsourced.
Manufacturers long have turned to A/E firms to manage new-plant and expansion projects. Now they’re asking those engineers to take on on-going assignments such as equipment procurement, energy programs and even facility management.
“We’re seeing a trend among processors toward turning over equipment procurement and management responsibility to A/E firms,” reports Scott Pribula, a vice president with Stahlman Engineering, New London, N.H. “It’s difficult for a processor to compare one supplier’s equipment to another’s. They’d like to have an unbiased engineering analysis.”
The 50 engineers on Stahlman’s staff have the expertise to render a critical evaluation of equipment needs and options, though it would mean adding procurement specialists and cost-accounting experts to the staff. “We would have to change the way we do business to provide hands-on support to day-to-day operations and manage capital expenditures,” Pribula reflects. “Business management is becoming a bigger part of the demand for our services.”
J.A. Jones Inc. in Charlotte, N.C., has taken the lead in facilities management services in the food industry. Responsibility for staffing, payroll, training and every other aspect of plant operation is assumed by Jones. Jones personnel operated the Future Beef plant in Arkansas City, Kan., until the parent corporation petitioned the bankruptcy court for reorganization protection last March.
More recently, Jones assumed management duties for the 30,000 quick-service restaurants of Yum Brands Inc., a $22 billion global corporation that counts Kentucky Fried Chicken and Taco Bell among its holdings.
“The outsourcing initiative was created by the federal government, and it’s just entering the food and beverage industry now,” says Mike Kubal, vice president of Jones’ global services division. The Department of Defense awarded Jones a 50-year contract to build, maintain and lease out housing for soldiers at Fort Carson. Jones personnel are responsible for “everything but loading and shooting the missile” at the Naval Submarine Base in Kings Bay, Ga., Kubal says.
Cost savings remain the primary driver for outsourcing, but “No. 2 is quality, and part of that is reduced attrition,” Kubal says. “The person working for Jones has an easier time moving up in, for example, the maintenance area than he does working for Yum Brands.”
Pete Rosso, president of Tulsa, Okla.-based Whitlock Packaging Corp., seconds that. A major copacker of aseptic and hot-filled juices, sports and energy drinks, Whitlock has placed a premium on giving key managers and trainees a clear career path. “We have to be very competitive on benefits and salaries, particularly at our Wharton, N.J., plant where skills are transferable to pharmaceutical plants in the area,” he says. “But you also have to create an environment where people see the company as a place to have a career.”
Maintenance services are a prime candidate for outsourcing in today’s business environment, according to Ken Dietz of Boise, Idaho-based Washington Group International. “Maintenance services are a special animal, and we have started to see interest in the food industry in outsourcing that on a contract basis,” Dietz says. “Our national contract for union maintenance personnel is with the building trades, so we can control our workforce more easily than a manufacturer who is locked into a local contract.”
Some industries have outsourced maintenance for 40 years, he says, but food and beverage has been slow to embrace the concept. That could change soon. “We’ve talked to one of the bigger dairy processors about contract maintenance, in particular,” says Dietz.
Warehousing and distribution is another area ripe for outsourcing. Contracting with specialists to set up, manage and run a state-of-the-art DC appealed to IBM. A facilities management contract at its worldwide parts DC in Mechanicsburg, Pa., gradually expanded until 600 Washington Group employees assumed all duties associated with the operation.
Converting a variable expense to a fixed cost can be a powerful inducement to outsource, points out Geoff Campbell, vice president of sales & business development at Power Packaging, St. Charles, Ill. “Because companies are focusing on their core competencies, they would rather rely on copackers to purchase all their raw materials, handle the processing, inventorying and roll it up into a finished case cost.”Power operates eight production facilities in the U.S. and Canada, providing dry product and beverage processing, and is part of a group that provides logistics services. The wholesale value of products moving through its plants last year exceeded $3 billion.
Working with a wide range of clients, copackers are exposed to a variety of processes and techniques and can readily identify the most efficient approach to a given situation, Campbell maintains. “The diversity of things puts us in a position to help other companies.”
While acquisitions have raised Power Packaging’s profile in the beverage arena, it’s far behind Whitlock Packaging in output. Whitlock’s two plants fill almost 60 million cases of beverages a year, and the firm is eyeing additional facilities on the West Coast. There has been an explosion in energy drinks and other new beverages, and manufacturing consolidation has left the developers of those beverages with fewer organizations like Whitlock to provide the high-speed filling needed to produce them.
“Rosso estimates Whitlock’s capital investments at more than $25 million in the last three years, with eight new aseptic fillers and two single-serve PET lines enhancing the firm’s hot- and cold-fill capabilities. Efficiency rates have increased 9.5 percent annually in the last two years, and the goal is 5-6 percent per annum improvements over the next five.
“What has driven that is being better at changeovers, CIPs and implementation of other process changes,” Rosso says. “Now the focus is on automation.”
The flexibility to offer glass, PET, brik and pouch packaging in a variety of sizes and an assortment of multipacks is critical to the copacker’s success, Rosso believes. But flexibility is imperative for any manufacturer’s survival in an era when the long, steady production run is a thing of the past. The manufacturers who can execute it efficiently will thrive. For others, the likelihood of outsourcing looms.
For more information:
Randy Hull, City Brewery, 508-785-4296, www.citybrewery.com
Bernie Berigan, DCS Sanitation Management, 800-837-8737
J.A. Jones Inc., 800-522-6637, www.jajones.com
Geoff Campbell, Power Packaging, 630-443-2125
Scott Pribula, Stahlman Engineering, 603-526-2585
Rod Hunt, Washington Group, 208-386-5254
Pete Rosso, Whitlock Packaging, 918-478-4300
Bob Bullard, Zee Company Inc., 423-265-7090