If the era of Covid was challenging for the food and beverage production supply chain, then the era after Covid has been positively tense. Problems and challenges, such as bottlenecks in the supply chain, labor shortages, radical shifts in consumer preferences, and escalating cost structures across the board, including labor, ingredients, materials, and energy, have seriously impacted the capability of food and beverage manufacturers to meet the demands of the marketplace.
Contract producers of branded food and beverage items face a significant number of the same challenges as their in-house counterparts. Along the whole supply chain, new winners and losers are being created as a result of this climate. Companies that are successful will give faultless execution in addition to relationship management strategies that are suitable for our current era of fast change.
Working with several brands and contract manufacturers over the course of 25 years has shown me that the fundamentals seldom ever shift. Both in business and in personal relationships, individuals are people. If you are able to handle this situation properly, there is a good chance that you will be successful. The particulars are what end up being different. We are confronted with a variety of difficulties, complexity, and possibilities. In order to satisfy them and make the most of opportunities, the best practices for relationship management need to be improved. Many of these procedures are encapsulated in our Six Characteristics of Highly Effective Brand/Contract Manufacturing Relationships, which are described in further detail down below.
Transparency in Operational Procedures
In times past, both brands and contract manufacturers guarded their secrets carefully and maintained a culture of strict confidentiality. The companies did not want to provide an excessive amount of information. Contract manufacturers were wary about brands having an excessive amount of information about their company or margins. Because of this, connections were kept at a distance, which made it difficult or even impossible to achieve tight integration. Transparency rose to a higher level as the sector progressed.
It is crucial for all parties engaged in a business transaction to have the amount of operational transparency that allows them to improve their corporate decision-making. This degree of openness is not total; rather, it is the minimum amount required to achieve maximum commercial success while maintaining the confidentiality of information that must be guarded. There are many instances of successful brands and contract manufacturers that successfully traverse this landscape. Unfortuitously, there are also a great number of people who do not comply with the standards. The establishment of fruitful, long-term relationships between brands and contract manufacturers requires that this primary phase be completed successfully.
Functional Harmony and Coherence
The meaning of the word “alignment” usually shifts depending on the context of the discourse. When we talk about coordination at the level of day-to-day execution, which is what we mean by “Functional Alignment,” we mean the alignment of daily actions, coordination, communications, and tasks. Are the daily operating targets, production throughputs, benchmarks, changeovers, and other aspects of the relationship between the brand and the contract manufacturer unclear? When there is a lack of functional alignment between different parts of a system, it is not unusual for a fantastic strategy to fail spectacularly because it was devised in a remote conference room. In order to achieve functional alignment that is successful on a day-to-day basis, it is crucial to verify and recheck that all relevant parties are aligned and informed at the proper level, frequency, and intensity.
Capabilities That Complement One Another
There are situations when a contract manufacturer will have skills or capacities that a brand might not have. In these kinds of situations, having complementary qualities is a no-brainer. There are instances when they are not as readily apparent. There are a few things that large companies are unable to achieve on their own that contract manufacturers are able to accomplish, but they have the option to do so. Then, what are the benefits of using contract manufacturers? There are often competing demands placed on a brand’s time, talent, and financial resources. The successful outsourcing of manufacturing tasks to a third party that is competent releases valuable resources. These resources may take the form of capacity, cash, skill, time, or any number of other highly desirable assets. The process of recognizing and placing a value on complementary competencies is an essential component of the value proposition that contract manufacturing presents to companies.
Collaboration on the Structural Level
Although individuals come and go, systems continue to function. The scenario of a successful brand’s relationship with a contract manufacturer that deteriorated when key personnel from either the brand or the contract manufacturer departed their jobs is all too common. On occasion, this is something that cannot be helped; nonetheless, the majority of the time, it can be traced back to a lack of structural collaboration. The issue is that by the time it is discovered after the fact, the harm has often already been done, and secondary damage has ensued, which has the potential to ruin both the value offer and the whole relationship.
The basic components of structural cooperation are the systematization of interactions through the establishment of agreed-upon norms, expectations, resources, and reporting systems. This has been the case from the beginning. On the other hand, the amount, complexity, and level of sophistication of the structural collaboration that is required now are far higher than the standards that were necessary in the past. Relationships between brands and contract manufacturers that are successful commit time and resources upfront and over time to ensure that the structural partnerships remain even if there are shifts in leadership, personnel, or other critical positions.
Alignment of Strategic Goals and Objectives
Brands and contract manufacturers very seldom, if ever, have the same aims; yet, the primary goal of operating as an ongoing company is one that is shared by all businesses. On the other hand, the particulars are quite variable. The fact that they are in agreement on their strategic outcomes is something that is really necessary. This comprises a variety of traditional benchmarks such as quality standards, financial performance, production capacity, and others. However, it also contains ethical sourcing requirements, sustainability objectives, resource use, and environmental, social, and governance measures in an increasing number of cases. Regardless of whether they are operationally aligned, functionally aligned, or structurally aligned, effective partnerships between brands and contract manufacturers that have different perspectives on these essential goals will be tough to achieve and likely won’t last very long.
Common Value Metrics
When it comes to evaluating these characteristics, the proverbial adage that “in God we trust, but all others must present data” rings especially true. The output quantity, as well as the quality of the product, are essential but lagging indications of all the inputs that we went through. Even while they are necessary, having only them is not enough. In a similar vein, subjective criteria such as gut checks, feel-good anecdotes, and soft parameters are not suitable substitutes for quantitative KPIs (key performance indicators), real-time reporting, consistent updates, or data obtained directly from its source.
Data-driven collaborations between brands and their contract manufacturers are extremely effective. Establishing standards across all of these characteristics (and more), and then being rigorous in their evaluation and development, can generate relationships that are superior and more long-lasting, as well as enhanced value generation for both sides. Any approach that is serious about establishing or improving the connection between a brand and a contract manufacturer absolutely has to use common value measurements.
Contract manufacturers are at their most effective when they are able to function, as closely as is practically practicable, as a seamless extension of the production and supply chain network of their customers. To do so in the marketplace as it exists now calls for a level of focus, rigor, and preparation that was unheard of even ten years ago. The world is just going to become a more complicated place. To get an idea of how much more potential there is for value creation in the connection between a brand and a contract manufacturer, one need only look at the interconnected supply chains that exist in industries such as the automobile, semiconductor, and consumer electronics industries.
Carl Melville is the managing partner of The Melville Group, which is a company that works solely with private equity-owned contract manufacturing companies in the food and beverage as well as consumer packaged goods (CPG) market. Additionally, The Melville Group is the author of the Contract Packaging Association State of the Business report, which is the research study that has sold the most copies on the topic of the contract manufacturing industry. ContractPackagingReport.com is where further details may be discovered.