Food Engineering

The Case for Outsourcing

March 28, 2003
Contract manufacturers do what their customers sometimes can't -- get products to market with lightning speed, while maintaining quality, brand integrity and a high degree of customization.

Eating on the go, ready-to-serve meals, single-serve portions and reclosable bulk packages: These are becoming more commonplace in today's food market. As a result, retailers are making demands on processors for unique packaging, special pallet configurations and just-in-time distribution, all of which create increased manufacturing challenges.

In an effort to meet them, food processors are looking at alternative production methods, including outsourcing. In fact, according to Food Engineering's Best Manufacturing Practices Survey (see page 55 in this issue), nearly one-quarter of today's manufacturers outsource 1 percent to 10 percent of their operations.

Another 13 percent outsource up to 60 percent of their manufacturing operations. Support services are even stronger candidates for outsourcing. The survey found 18 percent of respondents outsource 91 percent to 100 percent of their microbiological testing. Almost one in five (17.6 percent) outsource more than 50 percent of engineering operations, and more than 8 percent have handed over most energy management functions to outside companies. The conclusion is simple: Outsourcing is gaining in the food industry, and, as the survey indicates, there is room for more growth.

The changing face of the food industry

Downsizing in the food industry is frequently cited as the driving force behind outsourcing, but other factors also are at play. "Downsizing is only one reason why contract manufacturers are gaining opportunities," says DeNea Fischer, sales manager, Custom Food Processors Inc., a Blue Earth, Mo., contract manufacturer of ready-to-eat cereals, snack foods and specialty ingredients.

"More companies are realizing that it is more cost-effective to outsource products to manufacturers that specialize in key technologies. While the reason to use a contract manufacturer varies, the common element is that processors are looking for ways to decrease their overhead costs.

Contract manufacturing has been one means of doing that." Ken Battista, senior vice president of business development for the Power Group, St. Charles, Ill., has a different take. "We don't see that the food industry is downsizing, but it is certainly changing. The 'three meals a day with the family' consumption patterns are virtually nonexistent. In the future, people are going to eat when they're hungry, not when the clock on the wall tells them to.

This means that the methods of delivering the food (packaging) will be more convenient, portable and consumer-friendly," Battista says. This changing environment has placed an even greater premium on getting products to market quicker. "Outsource providers have less red tape to deal with and can typically get into production more quickly and less expensively than a major or medium-sized food company," says Dale Rodeghero, national accounts manager for Power Packaging, the copacking division of parent company Power Group.

Frequently, acting fast means new product introductions requiring new processing and packaging equipment. "Capital is the most common reason food processors look to outsource their operations, "says Paul McCaig, vice president of Canadian marketing and business development for Morgan Foods, an Austin, Ind., manufacturer of canned soups.

"Capital investment is a major issue for businesses, particularly in the food processing industry. Business growth requiring new equipment and/or new facilities can hamper the timeliness of getting to market."

At the same time, food processors are focusing on their core competencies, which opens the door for contract packagers. "The food processor can concentrate on core competencies, such as marketing, sales and new product development rather than operations," adds Rodeghero.

"They can avoid the whole supply chain loop -- from projecting volumes through manufacturing to finished-good distribution. "The food processor typically does not have to add people to its staff when deciding to outsource. If the company does the manufacturing on its own, in-house, it may have to add a whole shift of people to operate the lines," Rodeghero says.

It's all in the timing

Customization is another reason processors outsource. "Whether it is an ingredient or a finished product, companies are looking for a superior level of customization," Custom Food Processors' Fischer maintains. "Some large companies are not set up to change their production schedules on a monthly basis.

By using contract manufacturers for products that are promotions, seasonal or otherwise, they can react to marketing demands much quicker with a contract manufacturer." Many products that are outsourced require technology that is expensive, new or specialized. "Food companies may not have the desire, financial strength or capability to make the dramatic change that will occur," Power Group's Battista points out.

"Creative packaging with more graphics, less package and more functionality will require new state-of-the-art processing and production technology, resulting in machinery with higher speeds, shorter runs and easier/quicker changeovers that are maintained by diagnostic tools and not people." But how does price play into all of this? "Yes, price is very important.

But it's not usually necessary to be the lowest-priced provider, as long as you give the most value for the price charged," Power Packaging's Rodeghero believes. Battista agrees: "Often times one hears that price isn't the issue. Wrong -- price is always an issue. But quality, consistency, value, speed, flexibility, location of facilities and other factors play important roles in the decision to outsource." Adds Laurence Lee, R&D director for Primera Foods' IFP Custom Processing Group, a Hayfield, Minn., co-packer of food-grade powders: "Large companies with large volumes consider price very important. They want lower prices because of large volumes."

Communicate, evaluate, prioritize

But even if a contract packager seems to have all the right qualifications, one key element can make or break the deal: the relationship. "The relationship should be founded on solid business principles, aboveboard with sharing of ideas, thoughts and possibly even financials.

There needs to be a good cultural fit to assure results -- a quality, safe and cost-effective product delivered to the consumer," Battista says. "Like any new relationship, it doesn't usually happen instantaneously. It takes time, good communication and reliable exchanges. You have to learn to deal with a new partner. It takes effort," Rodeghero said.

A company also should look at matching its needs with the capabilities of the contract manufacturer. "Depending on the company's need, the co-packer should be willing to grow into new technologies, capabilities and new areas of the country -- even into Europe.

The co-packer should also have an excellent reputation. Some things to consider: Is the co-packer reliable? Has the co-packer been in business for a while? Does it have a proven track record? Does the outsource provider's 'culture and style' appear to be compatible with the client food company?" Rodeghero said.

Good customer service is a key part of this relationship. "Food processors value an organization that can fully manufacture, package and ship the product," says Fischer of Custom Food Processors. "Customer service plays a vital role in overall satisfaction -- good products, good service and, most importantly, a good solid manufacturing relationship." "Communicate expectations and results clearly and frequently," Rodeghero says. "Evaluations on an ongoing basis help make adjustments easier when they are needed -- don't wait.

Don't let small issues become major issues. They must be dealt with on a timely basis and in a way agreeable to both parties. Keep in mind the number-one priority: manufacturing a high-quality product on time and within budget."

A coarse, granular food product makes its way through a dual-fill vertical form/fill/seal machine and past a checkweigher enroute to the case packing area at Power Packaging's Batavia, Ill., facility. The co-packer contract-manufactures both foodservice and consumer products.

Sidebar: Developing Relationships with Co-Packers ?

When selecting a co-packer, suggests Paul McCaig, vice president of Canadian marketing and business development, Morgan Foods Inc., food processors should consider the following attributes: Familiarity with the product.

A processor should seek out a company that has experience in the specific products it wants produced or, at the very least, experience with a similar product. Familiarity with advanced industry technology and resources. Look for a company familiar with the technology and resources needed to make the product.

If outdated equipment is the reason to outsource, a partner with inferior technology won't help. Familiarity with production processes. If specific attributes are needed, such as USDA inspections or kosher certification, look for a company that provides these competencies.

Consulting with the National Food Processors Association or a similar trade association can provide guidance in finding those sources. Familiarity with industry guidelines, regulations, and FDA requirements.

Many food items have regulatory requirements or guidelines; a processor should seek a co-packer that can meet those special requirements. Familiarity with and dedication to the highest-quality control standards and inspection processes. Find a co-packer that meets the stringent requirements the processor requires of itself. Think of the co-packer as an extension of the brand.

Sidebar: Co-packer Helps Clients Segue to Equipment Purchasers

When a manufacturer is having trouble justifying the capital expense of a new piece of equipment, one option for an equipment manufacturer is to provide a live demonstration. That is exactly what Sabetha, Kan.-based Crosswind Foods, a division of Extru-Tech Inc., decided to do.

When clients come to Extru-Tech to evaluate equipment for a new extruded product line, "we provide our customers an interim solution until the customer can get their own line up and running," said Bob Niehues, vice president of sales and marketing for Crosswind Foods. Extru-Tech created Crosswind Foods as a contract manufacturing facility to provide manufacturing services to equipment customers.

"We assist with total manufacturing support," Niehues explains. "We do R&D work and manufacture a customer's product for one to two years, or as long as needed. This gives customers the ability to get a product to test market quickly without making the initial capital investment."

Contract manufacturing represents 25 to 30 percent of the parent company's overall business. Crosswind Foods has a 12,000-sq.-ft. plant dedicated to processing extruded products, such as direct expanded cereals, direct expanded snack foods, third-generation expanded snack pellets and textured vegetable protein.

Another division of Extru-Tech, Startech, introduced this concept to the pet food, animal feed and aqua feed industries more than a decade ago. While Crosswind offers unique processing facilities, it does not provide packaging services.

Product either is shipped back to the customer or sent to another outsourcer for packaging. "Many of the companies we provide outsourcing service to do not have the volume to go to a contract manufacturer. They may only need 20,000 to 30,000 pounds of product," Niehues said. "No one will produce these small quantities for them. Sometimes good products do not make it to market because of this."

Crosswind operates under the same guidelines as other contract manufacturers. "We sign confidentiality agreements, have controls to protect our customers, work out all the specifics up front," Niehues said. "Our plant is held to the same standards as other contract manufacturers. We have a Kosher Parve and a Kosher Dairy line. We are inspected by the American Institute of Baking [AIB]."