Exploring the Issues Surrounding Private Label Manufacturing

July 24, 2006

17 Min Read
Exploring the Issues Surrounding Private Label Manufacturing

INSIDER assembled a group of executives from the contract manufacturing and private label arena to address issues including trends in the private label market, misconceptions about private label manufacturing, considerations in choosing a delivery form or developing a new product, and more.

INSIDER: What are key considerations a company should evaluate when deciding whether to outsource manufacturing processes, and when selecting their partner?

Sandra Herbert, customer service representative, and Jim Sarti, director of research and development and formulations, Arizona Nutritional Supplements, Chandler, Ariz.: A major consideration is whether the company can manufacture the product efficiently or whether someone else can manufacture the product more efficiently and cost effectively. Outsourcing also allows the customer to focus solely on the business of marketing their products. Finding a quality manufacturer that can deliver quality products in a timely manner at a competitive price is what all marketing driven companies should strive for.

Suhail Ishaq, president, GMP Laboratories of America Inc., Anaheim, Calif.:

It is important to know what capabilities the contract manufacturer has to be able to meet the specific needs of the customers. Customers requiring contract manufacturing can have very specific requests or, more often, more general ones. It is of high importance for the marketer to have confidence in the manufacturer’s qualifications and capabilities in assisting him with the product that he has in mind. Customers should ask detailed questions, including: What services does your company provide? What are your minimums for order quantities? Does your company follow cGMP (good manufacturing practice) guidelines? Do you haven an independent GMP certificate? and, What are your lead times?

Robin Koon, senior vice president of sales and marketing, Best Formulations, City of Industry, Calif.:

There are three primary issues to be considered. First is when companies are looking to fill in specialty manufacturing needs because they are unable to make the dosage form required (i.e., softgels, powders, teas, etc.). Second would be capacity; sometimes a company may not be able to keep up with their own in-house production orders and needs help. Outsourcing can achieve meeting customer due dates. Finally, it is the question of ability and expertise, as sometimes a company does not have the in-house ability to produce.

Karl Halpert, president, Private Label Select, Ranchos de Taos, N.M.:

The manufacturer must be able to present a clear and realistic sense of the process, timelines and costs involved. The manufacturer should be able respond to questions and product information/sample requests in a clear and timely manner. Confusing, contradictory or inconsistent information is an early warning. If the manufacturer cannot perform well on the front end, there will likely be problems in the future. The manufacturer should have the ability to provide the customer with the appropriate regulatory certifications and registrations, as may be applicable. The company seeking manufacturing services should feel as though the manufacturer is acting in their interests. Finally, the manufacturer should welcome a visit or tour of the facility; any hesitation on a manufacturer’s part to welcome the customer to the facility is a red flag.

Bob White, executive vice president, Nature’s Products Inc., Sunrise, Fla.:

While price is definitely a consideration, it should not be the main consideration. If several high-quality contract manufacturers are bidding on the same formulation and using similar quality ingredients, their final quotes should be within 5 percent of each other. If the difference is greater, a ‘red flag’ should be raised to determine exactly why there is such a difference. It may mean that cheaper and inferior quality raw materials are being used, incorrect amounts are being added or that the product is being formulated to only 100 percent or less of stated label claim. It is also imperative that a contract manufacturer be GMP certified by a recognized body and be duly registered with all applicable governmental agencies. Further, a contract manufacturer must have its own in-house laboratory so it can assay raw materials and finished products, but also routinely use independent outside laboratories to assay any ingredients that cannot be done in-house. A contract manufacturer should also have experienced and qualified formulators on staff to assist consumers in formula development and be available to assist customers with questions of a technical nature. A contract manufacturer should have a full set of published standard operating procedures (SOPs) for all areas of its operation, as well as ongoing GMP training for all individuals in their quality assurance, quality control (QA/QC) and manufacturing related departments. A knowledgeable and responsive customer service group that represents the interest of the customer should be mandatory, as they serve as the conduit between the customer and all departments within the contract manufacturer’s organization.

Frank J. King, founder, King Bio, Asheville, N.C.:

The principles of success function best when we do what we are gifted to do and farm out the rest. People who have followed this principle have experienced greater success, happiness and fulfillment in life. We provide formulating, educational expertise with patented formulations to protect and position clients in the marketplace.

INSIDER: What are the primary misconceptions you encounter regarding the capabilities of private labelers?

Herbert and Sarti:

Many people assume that to produce your own label you must have a high minimum and high start-up fees when, in fact, our private label has no minimum and no start-up fees. Most people believe that private label products are cheap and low quality. What many people do not understand is that most of the quality private label products out there are made in the same facilities, with the same SOPs and using the same raw ingredients as the “national brand” products. Private labels are able to cut many of the distribution, stocking and marketing costs associated with the “national brands.”

Lucy MacLoughlin, chief operating officer, Rhema Industries, Bellingham, Wash.:

A common misconception is that you can translate a concept into a finished product in an unrealistic period of time. Many companies don’t allow enough time for the product development process which, unfortunately, can limit the manufacturer’s ability to provide them with a product that optimally meets all their objectives.

Peter Sokoloski, private label manager, NOW Foods, Bloomingdale, Ill.:

There is an unfortunate misconception that quality is the primary concern, when, in fact, this might not be the case. Companies vary and it is important to find a private labeler that has the same or similar mission and values as the customer. This will make it a really effective relationship.

Halpert:

Potential customers often have a false sense of the time and costs involved in developing a product and getting it from the planning stage to the store shelf. The development of the product and its packaging, and any necessary testing typically involves myriad details involving dozens of people and numerous vendors—more so if there are multiple SKU’s. Additionally, start-up expenses and development costs are often minimized or overlooked altogether.

INSIDER: What are some recent changes or trends in private label manufacturing and how are you satisfying those needs?

White:

Due to increasing regulatory concerns, we have been approached by a number of companies who are not currently our customers for assistance in reviewing their existing label copy to make sure that what is in the product is correctly stated on the label. Thankfully, many companies are finally beginning to understand that they have a responsibility to make sure that their products are labeled correctly.We are also seeing companies that are interested in learning how they can set their packaged product apart from other products on store shelves. Fortunately, we have full range packaging capabilities that allow us to be very creative in our packaging capabilities. For example, we offer canning, bottling and single-dose packaging for powders. For tablet, hard-shell and softgel dosage forms, we offer a multitude of packing options that go well beyond just putting the product into a bottle. Also, as more and more companies are exploring entries into foreign markets, we have seen an increase in the number of companies coming to us, due to our expertise in providing

Dave Sandoval, chief executive officer (CEO), Organic by Nature Inc., Long Beach, Calif.:

Customers want more than simply a product. They want scientific justification, proof of potency and assistance creating effective marketing materials. We assist them by providing expert formulation, product justifications and the personalities to help them understand and promote these products to the market.

MacLoughlin:

There is increasing demand for more technical information about materials, such as whether they are nongenetically modified, certified organic, BSTfree, GRAS (generally recognized as safe), etc. Rhema requests that its raw material vendors complete a Material Profile Questionnaire, which assists us in responding to these types of inquiries from customers.

Tim Lally, president, Optimal Nutrients, Foster City, Calif.:

Customers are looking for new ways to market their brand into their marketplace.We deal mostly with health food stores, and are working with our top customers to create new advertising models that will draw new customers into their stores. Our customers are always looking for the latest nutrients or formulas that they can offer to their customers.”

Sokoloski:

Many potential customers are now looking to custom formulas as a step beyond traditional stock private label formulas. We are meeting these needs by improving our processes for price quotes, specifications and production, as well as offering the services of our staff nutritionists to help with formulation.

INSIDER: How do you work with clients to develop new products, enhance formulations or determine the best delivery form for a specific product, particularly if you offer specialty delivery forms?

MacLoughlin:

We determine or review the objectives or intended purpose of the product, its target market(s), competitors in the category, distribution channels and positioning. We then evaluate the physical properties of the materials in the formula to determine the optimum dosage form keeping in mind price thresholds. In the end we arrive at the best balance of all these parameters. It’s critical to take advantage of a manufacturer’s experience and core competencies. With certain products especially, working with a company who knows the idiosyncrasies of a particular manufacturing process can be the difference between success and failure.

Koon:

We are always working with clients offering suggestions for new product ideas and with new formulations. If a client has a new formulation, we will review it; and, if we can, we will offer some suggestions for enhancement or improvements. Sometimes these suggestions are taken and other times not. Once a formulation is determined, then we will recommend the dosage form (tablet, capsule, softgel, etc.) that is most efficient and cost effective for the client. Many specialized delivery forms require specialized equipment and knowledgeable personnel to operate. Outsourcing clearly makes sense, unless one has enough volume to warrant purchasing the specialized equipment and bringing on experienced operators to manufacture the products.

Halpert:

The very first step is to listen and pay attention. What are the customer’s ultimate goals? After we have a true understanding, we are able to make specific recommendations regarding product feasibility, costs and timelines, such that the customer has a real sense of what may be involved. If the request is outside of our area of expertise, we do not hesitate to refer them appropriately. At this point we begin to develop and submit samples and prototypes as necessary. The key ingredient is regular communication with the customer.

White:

Our team of formulators works directly with customers and through the sales department to suggest alternatives that may make for a better formulation from day one when the product is first being developed. When a customer comes to us for a quotation on a product that they now have but is being made by another manufacturer, we review the formulation and if we feel that the formulation could be enhanced, we pass this along to our customer for consideration. Our team of formulators is constantly being updated on the latest scientific and technical advancements and routinely conveys this information to our customers.A number of our customers use us as their product development arm, and we are constantly presenting them with new ideas on how to improve their existing formulas or perhaps introduce a new formulation.

As far as specialized dosage forms, startup cost, manufacturing expertise and a long learning curve are three of the major reasons that companies establish relationships with contract manufacturers. Starting a manufacturing operation is very expensive in terms of capital cost and time; however, it is even more difficult to assemble a full staff of highly qualified people to run those operations properly and efficiently.

Ishaq:

Customers are seeking more ways to differentiate their products in the marketplace. By staying in tune with the latest technologies in dosage form formulations, GMP Laboratories is able to offer its customers various options in this area. Take tablets, for instance. We have the ability to formulate quick-dissolve tablets, also known as “melt away” tablets, which are increasingly becoming more popular. We also have an aqueous enteric coating system designed specifically to meet the regulatory requirements for dietary supplement, nutritional and herbal products. Our enteric coating system can be applied on tablets, capsules and softgels with reliable and reproducible enteric protection.We also offer a new tablet gum technology, which allows us to compress dietary ingredients into chewable gums. It’s an exciting new technology which we feel will become a new trend in the industry.

INSIDER: Are products with variable demands better or worse candidates for outsourcing than products with more calculable demand and formulation profiles?

Herbert and Sarti:

A contract manufacturer has the ability to manufacture a variety of products from month to month and may have inventory on the seasonal items a company that manufactures their own products may not. This can help turnaround times as well as costs. Because the contract manufacturer may be doing similar seasonal products for a variety of customers, their buying power may be much better. It may be easier for the customer to handle their own manufacturing on the reliable items if their costs are low and they are good at making those products consistently with a high level of quality and safety.

Sandoval:

We specialize in plantbased products, which are affected by seasonal shortages. There is a misconception that seasonal ingredients can be protected against price fluctuations. We overcome this by maintaining large inventories, which add to our overhead but increase our level of service and minimize shortages among our clientele.

Koon:

Unpredictable demands (seasonal, new product launch, etc.) are something we as contract manufacturers are very used to. Outsourcing can make a lot of sense as long as the manufacturer can handle the swings in production.

White:

A quality contract manufacturer is willing to ‘partner’ with their customers in such a way as to ensure that both of their businesses move forward. Products that have continued and proven demand are somewhat easier to handle, due to the fact that they have a history of usage and movement; thereby making it somewhat easier for both the brand owner and the contract manufacturer to anticipate future requirements. Seasonal or unpredictable demand products are more of a burden on all parties. However, a contract manufacturing partner will work with its customer to meet whatever is reasonably required, while never forgoing quality.

INSIDER: How large should a customer be to invest in private labeling, and what are the different challenges you face in working with major corporations or smaller businesses?

Herbert and Sarti:

Any customer selling vitamins should invest in private label. Our program is designed to work with any size customer, from the small mom-and-pops to a customer the size of Whole Foods. Working with larger clients means steady volume, guaranteed contracts, quality driven products and mutually beneficial relationships, but also tighter margins and more demands. In comparison, working with smaller clients means realizing the satisfaction of growing with a smaller company, closer relationships and flexibility; but, you often confront cash flow issues and companies interested in price instead of quality.

Sandoval:

Small customers attempting to enter the market with a new product comprise the bulk of private label business. However, even the giants of the industry farm out certain products that are not part of their core competencies. We require the client be capable of purchasing 1,200 pieces or more by their third order, due to the extensive infrastructure cost related to maintaining GMP standards of testing and time dating.

There are different challenges with customers of different size. Working with major clients provides guaranteed capacity for the manufacturing division, which helps amortize out infrastructure cost; but large companies also typically negotiate prices that are not as profitable as smaller runs and require significant investment in standing inventory. Smaller customers deliver increased profits and profitability, increased customer loyalty and the opportunity to grow with the client; however, we sometimes see unrealistic expectations, lack of experience and inconsistent order frequency.

King:

We have great manufacturing flexibility with more than 5,000 square feet of clean rooms, allowing us to offer services to large manufacturers and to individual stores ordering as few as 12 bottles per SKU. We provide support materials such as advertisement examples, brochures and posters, as well as the Your Personal Label program that features special designs that are customized for the client.

Koon:

Private labeling does require good forecasting and inventory control. Some private label orders are just for a few items, and others can be quite large—such a whole vitamin line. It’s really not how large the customer is, but rather how large their orders are.We have no requirements as to how large a customer is. Customers should be able to handle the inventory requirements, if they are to enter this market. When working with major customers, you have steady, large orders, but may run in to poor forecasting, need for quick turnarounds and heavy inventory investment. In addition, if you are reliant only on large customers, and that large customer leaves, it can significantly hurt the business.

Sokoloski:

We work with customers ranging from a one-person retail operation up to mail-order/Internet companies doing millions of dollars a year. But there are differences. Smaller operations are flexible and can make decisions more rapidly; unfortunately, they sometimes can’t meet minimums of certain SKUs, which can narrow their options. With major companies, minimums aren’t usually an issue, and usually they have their paperwork and forecasting in order. Large runs are also a benefit towards improved profitability for the manufacturer. On the flip side, decisionmaking can be slow, and they usually try to knock down the price due to their size.

MacLoughlin:

In general, a client should be large enough to require/utilize reasonable production volumes. Typically, for Rhema this means production batches of 200,000 tablets or capsules, though this figure may be adjusted depending on order-specific criteria. Now, the potential for sizeable revenue from a large client is a pro, as is the likelihood that they are well-established and have the resources to effectively launch and market the products we make for them. Cons are the potentially significant amount of time and resources it takes to maintain the account, which can slow prospecting efforts and consequently limit the diversity and number of clients.

On the other side, one of the pros of working with smaller customers is the opportunity to build a close, long-term relationship—often from early in the life of the customer’s business. If the manufacturer delivers quality product and good service from the beginning, hopefully the customer will continue to grow their business with the same manufacturer, who will be perceived as an important partner in their success. On the other hand, it is possible to allocate a significant amount of resources to a smaller customer and to find that the eventual yield does not justify the investment.

White:

We manufacture products for a number of large companies that are traded on the major stock exchanges, and they obviously tend to purchase in much higher volumes; however, we also provide contract manufacturing services to hundreds of much smaller companies. A number of our largest customers today were start-up companies that came to us years ago when their product volume was low, and we’ve enjoyed mutual growth. Because of this, we strive to treat all of our existing customers and potential customers with the same respect and consideration because we realize that everyone has to start small, but we also realize that we can help these small companies grow into larger and more successful companies. As a result of this philosophy and our commitment to quality, service and price, we tend to maintain relationships with our customers over long periods of time.

If the contract manufacturer provides proper support, quality, service and price, and if the customer fulfills their end of the equation, a harmonious relationship can go on for years. It’s also imperative for both sides to realize that they must act in a responsible manner and have reasonable expectations of each other. If a contract manufacturer asks a customer to do something unreasonable, a problem will arise. Conversely, if a customer is requesting something that is unreasonable, a problem will arise. They key is having realistic expectations of what each can do and work together to develop a relationship that benefits both parties.

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