Build vs. Buy: The Case for Buying: Advantages of Outsourcing Production

For many food brands, the decision to continue outsourcing production to contract manufacturers is driven by specific benefits that align with strategic business objectives and operational efficiencies. Here’s a detailed analysis of why buying might still be the preferred choice for some brands.

(The purpose of this document is to provide background information on this contract topic. Anyone contemplating engaging with a provider must perform their own due dilligence and seek trusted professional business and legal advice.)

Capital Expenditure

Avoidance of Significant Upfront Investments in Facilities and Equipment

One of the most compelling reasons to continue with contract manufacturers is the ability to avoid the substantial capital expenditures associated with setting up and maintaining in-house production facilities. This includes:

• Cost Avoidance: By outsourcing, brands can circumvent the high costs of purchasing land, building facilities, and acquiring expensive manufacturing equipment.
• Resource Allocation: Financial resources that would have been tied up in capital expenditure can instead be allocated towards marketing, product development, and other areas that directly contribute to revenue growth.
• Lower Financial Risk: The financial risk is significantly reduced when outsourcing production, as the brand does not bear the brunt of operational inefficiencies and the maintenance costs of equipment and facilities.

Flexibility

Ability to Scale Production Up or Down Without the Constraints of Fixed Capacity

Contract manufacturing provides brands with the flexibility to adjust production volumes as needed without being limited by their own fixed production capacities. This flexibility is particularly valuable for:

• Seasonal Variability: Brands that experience seasonal peaks in demand can scale up production quickly with contract manufacturers who have the capacity to handle such fluctuations.
• Market Testing: Outsourcing is ideal for testing new markets or products without the commitment of large-scale production investments.
• Adaptability: The ability to switch between different manufacturers or to use multiple suppliers can help brands manage supply chain disruptions more effectively.

Expertise and Efficiency

Leveraging the Established Expertise and Efficiencies of Experienced Manufacturers

Contract manufacturers often have years of specialized experience and have honed their processes to maximize efficiency and reduce costs. Partnering with these manufacturers provides several advantages:

• Expertise: Contract manufacturers usually possess advanced knowledge of best practices in production, safety standards, and regulatory compliance.
• Economies of Scale: Due to their optimized processes and larger operational scales, they can produce large volumes at a lower cost.
• Innovation Support: Many contract manufacturers invest in technology and process innovation, which can benefit brands without the direct investment cost.

Risk Management

Distribution of Risk, Especially in Compliance and Operational Continuity

Outsourcing production can be a risk management strategy, distributing the inherent manufacturing risks between the brand and the contract manufacturer. This is crucial in several ways:

• Compliance Risks: Contract manufacturers often handle multiple clients and stay on top of regulatory changes to maintain their business, mitigating compliance risks.
• Business Continuity: In case of operational failures or disasters, brands can shift production to other manufacturers, thus ensuring continuity of supply.
• Quality Control Risks: While in-house production provides greater control over quality, using reputable contract manufacturers with established quality control systems can offload the burden and complexity of managing these systems.

In summary, outsourcing production offers significant strategic benefits for many brands. These include financial flexibility, scalability, access to specialized expertise, and risk distribution. Each factor plays a crucial role in enabling brands to stay agile and competitive in the fast-paced food industry. For companies not ready to invest heavily in their own production facilities or those who value flexibility over control, continuing with contract manufacturing could represent the most viable and strategic option.

By Carl Melville Managing Partner, TMG and Founder of CoPack Connect