The food and beverage industry is continually trying to find ways to stay competitive, innovative and agile in response to rapidly changing customer trends, global disruptions and supply chain constraints.
In response to constant volatility, third-party manufacturing has become an increasingly popular production method enabling businesses to meet different strategic and operational objectives without having to invest in significant plant and equipment. Below is a summary of what you need to know.
What is third-party manufacturing?
Put simply this activity is when a business engages an external manufacturer (which is not related to the business) to make a product on their behalf. This can be a finished product or part of a finished product. Some common industries where third-party manufacturing is utilised include:
Food and beverage – Private label products that are sold by food and drink suppliers to end users
Skincare – Base emollients, oils and other ingredients are prepared by specialist skin care manufacturers based on agreed formulation for major skin and cosmetic companies.
Clothing – Many clothing labels engage industrial textile companies to produce their designs on mass.
How is third-party manufacturing used in foodservice?
- Trial of a new product prior to investing in internal capability. This enables a business to engage in a ‘low volume and high product mix’ model resulting in a quicker response to changing customer preferences.
- Increase supply capacity in the instance of capital limitations or production delays.
- Cost reduction i.e., cheaper to outsource manufacturing.
- Encourage competitive pricing on product ranging for example, distributors may engage a third party to manufacturer a house brand to influence participating suppliers within a category.
- Limited warehousing space particularly for perishable products.
What are the downsides of third party manufacturing?
- Limited product quality control.
- Risk of trade secrets such as recipes being inadvertently exposed to a competitor.
- Service levels need to be stipulated and enforced.
- Reputational damage and loss of sales in the event of disruptions to the third-party manufacturer.
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