Playing Both Sides of Contract Manufacturing

At the outset of a contract, AIPC’s George says initial meetings focus on the characteristics of the product, initial volume projections and a timeline for launching. “We’ll take that through our commercialization process, lay it into a project timeline and work hand-in-hand with the customer to bring their product to market.” It can take months or more than a year, depending on the complexity of the product and packaging.

While Emery says it’s generally easy to accommodate customers because of Pilgrim’s Pride’s size, there have been occasional challenges -- like the retail chain that wanted something relatively unheard of: a complete line of 69 exact-weight fresh-chicken items. To accommodate the request, the co-packing team got serious, visiting equipment suppliers in Greece, the U.K. and Iceland and processing facilities “all over the world,” says Emery.

Despite what initially was projected to be a huge investment, Pilgrim’s Pride managed to do it for a fraction of the estimated cost. “We figured it out,” says Emery, “and today it’s a major piece of business.”

To enter into a contract of such magnitude takes two very determined partners -- and sometimes more. When AIPC opened a state-of-the-art facility outside Phoenix, George says the decision hinged on “a commitment from the business community that they would support that factory -- and they have.” From factory controls to robotic palletizing, it’s a model of efficiency, with just over 50 people working four shifts, 24/7. “At any given time, you’re not likely to run into 10 people in the whole factory,” he says.

Size matters, of course. Many companies turn away smaller or lower-volume customers -- like Whole Bakers, a PacMoore account that Bekermeier concedes is “fairly manual, fairly labor-intensive,” especially compared to the work he did at prior job ConAgra. “But now that we’re up and running, we can start looking at every aspect of the process to drive the cost down and help that company grow.”

Bekermeier says the company was willing to take on smaller accounts like this one because, as a dedicated contract house, PacMoore is itself “small, and privately held. We can be more patient.”

If the goal is to find the perfect match, Stewart seems to have baked-up a match made in heaven. She says the day she partnered with PacMoore was “the most overwhelming, joyous day of my life,” adding that she feels “completely blessed.”

“We’re happy we can be a part of helping Whole Bakers,” says Bill Moore, president of PacMoore, who puts his spirituality alongside trust and good business sense. “Yeah, we mix powders, we pack cookies ... yeah, we think profits are important. But at the end of the day, none of that’s eternal.”

Other partnerships strike a more mundane note; often starting with a figurative “knock on the door,” says Wisner, “and the question: ‘Hey, can you make this for me?’ And you say, ‘Well let's see, I think we can do that.’ ”

Note to Accounting

At the outset of a contract manufacturing relationship, the very structure of the deal can greatly affect profitability – for both sides -- and smooth partner relations.

For starters, does the contract encompass the full product life-cycle, starting with R&D and ending with store deliver? Or is it limited to production, filling and packaging?

Are you empowered to make changes that lead to cost savings? “Generally, when we bring in a cost savings, both the customer and our company benefit, so there’s an incentive,” says Dan Emery, vice president of marketing at Pilgrim’s Pride. “But you have to remember that changes in the product also require changes in the labeling.”

In all areas of the business, he says, “all costs are going up -- the price of oil, the corn we fed our chickens. Any number of pressures in our business right now are driving us to drive our costs down. Any savings measure is a welcome goal for both us and our customers.

“It’s all about eliminating waste and improving speed and efficiency,” he says, citing everything from replacing cardboard with reusable plastic totes to plant automation improvements. “In the end, [we] find ways to operate more efficiently while delivering a high-quality product at a fair price.”

“The trick is really getting into Activity Based Cost analysis,” says Jim Wisner, president of Wisner Marketing Group. Product and service costs for a contracted item are assigned specific values according to their consumption of plant assets, activities and resources. A predominant method for determining manufacturing costs, it’s also useful on the customer side of the contract, where it can help a marketer determine whether it’s more cost-effective to produce a product in-house or outsource it.

There are caveats, of course. For one, it’s difficult to ascribe costs to some overhead items, from executive salaries to wildly fluctuating transportation costs. The key, says Wisner, is to get as specific as possible and avoid too much generalization or averaging, to “really break down all the cost components every step of the way. Once you do that, it allows you to in effect run a P&L on every item, in a very specific way, with a very clear understanding of the impact is on your entire organization.”