When Food Manufacturers Must Choose Between In-House or Contract Manufacturing

Most food producers—at some point in their product’s lifecycle—arrive at a fork-in-the-road moment where they must decide to make their product in-house or outsource production to a contract manufacturer. Whether that moment occurs at the onset of a commercialization opportunity, once demand exceeds in-house capacity or when the economics reach a trigger point, determining the right production strategy can be complicated. Each option has plusses and minuses that must be understood and considered in harmony with the producer’s unique objectives and opportunities.

Certainly, the food industry’s use of contractors is growing rapidly. In the U.S., the contract manufacturing and packaging market is projected to grow at a nearly 10% annual rate, more than twice that of the packaged food market itself.  It is estimated that approximately two-thirds of food and beverage manufacturers outsource at least a portion of their production.

But is outsourcing production the right move for you, or are you better off manufacturing your products in-house? Maybe a combination of both? Let’s look at the plusses and minuses of each.

The case for using a contract manufacturer

There are many advantages to outsourcing manufacturing to a third-party contractor. Most obvious is avoiding having to invest in the facility, equipment and staff necessary to produce your product, particularly at commercial scale. Contract manufacturers have the infrastructure and skills to handle it all; from sourcing ingredients to shipping finished product, and everything in between. Concerns over finding, training and managing workers, complying with health and safety regulations, cleaning and maintaining equipment and other day-to-day challenges are the contractor’s problem, not yours.

This allows you to focus on the tasks that will grow your business, like sales, marketing and new product development.

Here are the key pros and cons of using a contract manufacturer:

Pros	Cons
· No capital investment for facility or equipment · No need to hire, train or manage staff · Ability to scale production to your need · Access to wide range of support services · Geographic flexibility for production	· Limited access to verify product quality · Potential for your product to be delayed in favor of a higher priority customer · Capabilities limited to the equipment available · Potential for competitive products to be manufactured at the same contractor · Risk of depending on the stability of a third-party business · Negative impact on margins

 

The case for manufacturing in-house

On the other hand, in-house manufacturing has its own advantages. Primary among them are issues around control. You can monitor and maintain much better control over product quality by manufacturing it yourself, ensuring that each batch is up to your standards. Production scheduling will also be under your control, so there is no chance that your urgent need for product by next week will get bumped from the contract manufacturer’s production schedule in favor of a bigger, more important customer’s demands.

Here are the key pros and cons of manufacturing in-house:

Pros	Cons
· Complete control over product quality and scheduling · Flexibility to customize processes and output to your needs · Higher margins	· Requires capital for facility and equipment · Requires staff, including knowledgeable production management · Requires operational structure to integrate offline elements (e.g., procurement, packaging, distribution)

 

The right choice for you will depend on your objectives—both short- and long-term—and your situation regarding facilities, equipment, personnel, customer base, access to capital, and tolerance for risk. Moreover, it is not uncommon to use a hybrid, where some of the production is done in-house and some is done by a contractor. This can be particularly useful during temporary demand spikes when you need overflow capacity, or when entering an unfamiliar geographic region.

Our application engineers have helped hundreds of food producers and dozens of contract manufacturers get the most from their manufacturing environment. We’d be happy to help you think through the best path for your food processing situation. Reach out to us here if you’d like to connect.

For a deeper look into this topic, be sure to download the entire whitepaper “When Food Manufacturers Must Choose Between In-House or Contract Manufacturing”.