What are some key considerations food & beverage co-packers need to keep in mind?
In addition to having some kind of signed agreement that details the important points of the relationship with a brand customer (like lead order times, payment terms, inventory obsolescence, etc.) here are some other important items a co-packer needs to understand:
Are they “one and done”?
Is the brand just planning on using you to meet a short-term shortage or do they want a longer term relationship. As enticing as it might be to get some short term business, there is the opportunity cost to consider. Could the resources you allocated to the “one and done” fill have been better used to find longer-term business?
Will they start producing on their own once the business grows?
If the volumes grow, are they a company that will start producing on their own. Any brands do start out with a co-packer and then repatriate the production once it reaches a certain level. AS long as you know that in advance, you can prepare for it. If you don’t know that is their modus operandi, you could be in for a big surprise (and an under-utilized facility).
Who owns the recipe?
It’s straightforward if the brand hands you a recipe and says “here, make this”. It is less straightforward if you do the R&D and come up with a new product for them. Make sure both parties know who owns the recipe.
Will the brand help pay for equipment?
If volumes take off, will the brand help finance the purchase of new equipment. If they do, who owns the equipment and can you use it to produce other products for other customers. If they don’t help finance the new equipment, what happens if they pull the business and you are stuck with a product specific piece of equipment. Make sure you understand the ramifications of both scenarios and agree to an equitable solution up front – not after the business is pulled.
Don’t rely just on the contract!
Most co-packing agreements have a contract. However understand that even the tightest contracts have “outs”. Things like: making delivery times, quality minimums, sensory and organoleptic requirements. There are often many ways that a brand can “get out” of a contract if need be. To that end, you need to build a relationship with the brand, and don’t rely just on the contract.