Contract manufacturing is the engine that propels many a small business. Few startups have the equipment, experience and money needed to produce in-house. A contract manufacturer can be a trusted partner, tweaking prototypes and offering suggestions, recommending fulfillment houses and key vendors, even working overtime to prevent a stock-out. If not managed properly, however, your co-packer can be a nightmare. Consider the case of 600 Lb Gorillas.
600 Lb Gorillas, was a purveyor of cookies and frozen novelties with extensive US distribution and some notable customers (Costco, Walmart). Four years ago, its sales exceeded $7 million and management looked forward to significant revenue growth. Then the bottom fell out. Customers started to complain about the product quality. The ice cream sandwiches were described as watery and tasteless; they looked “as if they had been left out in the sun.” When contacted by 600 Lb Gorilla’s management, the co-packer, Mister Cookie Face, blamed retail (temperature) abuse. The company attributed the problem to out-of-spec product. The matter is now in court and 600 Lb Gorillas is out of business.
What could they have done differently?
No one appreciates an armchair quarterback, so I will confine my comments to comparable situations from my entrepreneurial past. Here are some hard-earned lessons from an extended contract manufacturing apprenticeship:
Test Every Batch Independently
Reputable contract manufacturers test each production run and retain samples for future testing and validation. Yet, even the best quality systems can fail. One should never assume (continued) perfection. Consider this hypothetical scenario: It’s late in the last production run of the week and your product has been flagged as nonconforming by a line worker. QA intervenes and a committee reviews the product. One committee member is the Production Supervisor, who is rewarded on the basis of orders filled on time. If this batch is rejected, your order will ship next week, late. He deems the product acceptable. The QA Manager considers the product as falling outside of established quality parameters, but is outvoted when the third committee member just wants to get home and and enjoy his weekend. Your product ships. Far fetched? Not really. While running my Concord Seafoods dip business, even though my co-packer forwarded unfailingly satisfactory test reports, I sent some product to a 3rd party laboratory for testing. The independent lab’s results necessitated an immediate product recall. I lost my key account, BJ’s Wholesale Club, but prevented an even greater problem. Test every batch independently.
Taste Every Batch
Most contract manufacturers mandate quarantine periods during which product is held pending satisfactory test results. That’s fine but consider also that initial test results can be misleading. A plate count of <10 on a micro test may be perfectly acceptable, allowing a product to be released. That measure, however, does not mean that the product will necessarily remain tasty or even safe throughout its shelf life. At Cognate Nutritionals, we had a sample batch test successfully at the plant only to exhibit a very bitter taste not long thereafter during a critical demo event. Don’t get complacent. Taste samples from every production run. Frequently.
Fully Define Product Specifications
While this sounds like obvious advice, it is surprising how often small companies fail to fully define their product specifications. At SeaTaste Chile, for instance, we purchased container loads of frozen calamari steaks in Chile and Peru, shipping them to industrial customers here in the US. The individual, white fillets were separated by blue plastic sheets, allowing our clients to separate them easily. The product had been packed in this manner for years. . . until the day we received twenty thousand pounds of fillets with clear plastic sheets instead. It was nearly impossible to distinguish the plastic from the fillets. The entire container was rejected by our client. We had little recourse, having meticulously specified the species, fillet size, glaze and countless other attributes. . . but not the color of the plastic.
On Site Presence
The best option, when allowed, is to pay for an onsite observer/expert to monitor production runs. He/she can spot problems and offer corrective actions. After all, product quality is paramount. One would be surprised how often I’ve seen small businesses balk at the cost of such oversight, only to suffer far more costly product returns and lost business.
Mr. Dragone has spent the past fifteen years as an acting/consulting CFO for a number of start-ups in a wide range of industries. Peter’s prior experience is that of a serial entrepreneur, managing various start-up and turnaround projects. He was a co-founder of Keurig, Inc.
Previously, Mr. Dragone was a senior financial/operational manager for Chiquita Brands International. He moved to Chiquita after working in international banking at BankBoston.
He has an MBA from Harvard Business School, an MA (in Spanish) from Middlebury College and a BA from Colby College.