Manufacturing Strategy Considerations

Developing a manufacturing strategy is critical for both emerging companies and established manufacturers that are scaling-up production for the first time or pursuing a new market. It is the quintessential “make” or “buy” decision. Companies that are successful in this regard generally have a plan to address manufacturing and iterates along the way to respond to market changes.

Two Primary Approaches

There are two primary approaches when it comes to manufacturing strategy: producing in your own facility (“make”) or outsourcing to a contract manufacturer (“buy”). With the in-house approach, a further decision can be made. Do you own the facility, lease a building for your needs? Or even if it is your facility, do you operate it with internal personnel or outsource the operating function? (Think of capital/asset light or manufacturing-as-a-service). For contract manufacturing, you can consider outsourcing the entire manufacturing function, or just a portion of it – for example, just the process or just the packaging. As we compare the options, some areas to consider include financial (capital), flexibility, quality, schedule, and other logistics.

The upfront capital expenditure (CapEx) is generally higher for your own facility than with a contract manufacturer. There might be limited flexibility for directional shifts – you might be less agile in reacting to failures or making pivots based on equipment and facility design. Those shifts could be changes in your process, or reacting to broader market conditions (e.g., COVID impacts and the general shift from food service to retail). Having your own facility also could introduce some capacity constraints for future growth – the facility needs to be “right-sized,” but there is only so much capital that can be committed to future growth. What happens when the product takes off and you can’t quickly respond to market demand, thereby creating a market for your competitors? Conversely, if the product does not succeed, you then have committed, idle assets. You also will need to become an operations expert, hiring a manufacturing/operations team, including maintenance personnel. Maintaining IP and trade secrets in-house though (not through a third party) may provide a level of confidence. In your own facility, you also have “total control” over product quality and production schedule.

Although the in-house approach may have a higher upfront capital requirement, generally the contract manufacturing approach will result in higher unit costs over the long term. There may be greater flexibility in production and volume (both packaging and capacity – changing your package format or increasing capacity). For product testing, using a contract manufacturer probably will result in quicker small batch availability. Particularly in the food-tech space, technology transfer needs to be considered. Can you train an outside manufacturer in your process? You may need to share your IP and secrets with the contract manufacturer (an outside entity), which could increase your disclosure risk. Quality control is another factor, which will generally be governed contractually. Can you adequately supervise that quality? If a product recall happens, what is the potential damage to your brand? As part of the convenience of the contract manufacturer, you also are ceding certain logistics control, in particular schedule. Could production be delayed by higher-priority products?

Weighing Your Options

By now, you probably are thinking about the pros and cons of your own facility versus a contract manufacturer. Which is better? In-house or contract? What is the right approach? Well, there is no magical answer – it depends on your situation.

You could consider a hybrid approach and try to get the best of both approaches. Could you make the raw product base or substrate (especially for IP concerns) and send to the contract manufacturer for final processing and/or packaging? Drawing an analogy to baking, could you make the cake mix and have the contract manufacturer make the final product?

A Balanced Approach

Balancing flexibility all around will be critical as you hone in on the right approach for your manufacturing strategy. Financial, schedule, process and packaging flexibility are areas to consider. Startups sometimes default to the contract manufacturing approach, which can be right for some applications but perhaps not for others. As with all choices, there are tradeoffs that should be critically considered and risks assessed and analyzed to make an informed decision and move forward toward successful product commercialization.

_ Previously featured in The Future of Protein Production, Jan/Feb 2023