Episode 6: How to Search and Connect with Contract Manufacturers

[Music] It's my favorite sparkling water brand. There's millions of them, but water lose my favorite. Nice. Welcome to Food Products FAQ. A podcast where we discuss how we make food products and the steps it takes to make yours. I'm Adam E. And I'm Brian Chow. And we are both independent food consultants who've been through the food industry for over a decade. And we're here to share with you how we make great food products that have been sold in thousands of stores. Welcome to Episode 6. It's all downhill from here, as they say. [Laughter] Yeah. I mean, this is a arguably Adam, one of the riskiest for a lot of businesses component, which is finding out the right contract manufacturer or going into a contract manufacturing search in it itself. Mm, definitely. Takes a lot of up from capital. It takes a lot of preparation. It is a hugely forward to the next age of your food business. And if you're not prepared, or if you don't know the right lingo or you don't understand how it works, you can be in a very precarious position pretty fast. I mean, there are some bad actors. I think arguably I heard the number around 300 within the United States that don't have good margins and they pry on the exploitation of other companies or new brands. And then there are thousands out there across different types of categories that are very good. It's just being able to figure out who's the good actor, who's the bad actor, who's the right fit at the end of the day. Yeah. Yeah. The fit is very important. Factories come in all different shapes and sizes and they're relatively hard to find. I think the common person will have a very hard time finding a co-backer. Yeah. It's very time consuming. They don't advertise themselves. And even if you give them a call, they'll know right away within the first 30 seconds if you're legitimate, if you're new in the game, or if you're veteran. And if you're new in the game, they're going to try to politely say no, or kind of turn you away in some way or you from another. Yeah. Go backers are an interesting business model. And I will say, you'd be surprised just how many factories there are. I was actually chatting with a VP of PepsiCo who we just had some report through a nonprofit project. And she was just telling me this is really before their own factories, but they had like seven factories in Texas making tortilla chips or Doritos. And I just find that like, what? That's a lot of factories. And you know, there are more factories than the United States that you think, specifically kind of in the middle of nowhere. But even in some areas like in California, New York, there are actually hubs that have factories on them. Yeah, especially if you know where to look. I think one thing I tell people is if you have the time, just look up Google Maps and follow the railroad tracks. Oh, really? That's actually really good. I know. Wow. Okay. You are correct. Yeah. Yeah. I would say probably 60% of the factories that I've gone to have been near railroad tracks or by the ocean. Yeah. It just makes it easier. If you're thinking about the old days of the United States when they're building out railroad, that was the main mode of fast transportation before cars came about. Manufacturing through railroad was the easiest way to ship products from say Illinois all the way to California or Texas over to mid-Atlantic and things of that nature. That's what connected a lot of freight. Now we have the opportunity of trucks. But if you want to even go further back, those who are close to waterways, rivers and oceans, that's even a cheaper form of freight. Because before railroads were built, you just had people shipping things up and down waterways. Yep. I mean, ships are amazing when you really dive into it. Even if we go expand the scope internationally, shipping is quite relatively cheap. It just takes a long time. But you know, the way the free source of energy versus gasoline, in the long term, it really adds up. And it's just freight is just this unbelievable industry that makes the world go around. We can't have any of our great products without freight and the people manufactured the products themselves. And that leads us to trying to understand contract manufacturing in general. One of the things that people ask about is, should I find a contract manufacturer that's close by to where I am? Or should I find somebody who can actually do the job? But they just happen to be two time zones away or more than 500 miles away from where I live. And I think that's an interesting question to ask. And I think it's all about the strategy of what kind of product is being developed. And what are your thoughts, Adam? I was going to ask your thoughts because I think I actually have a view that my counter yours. I actually think you should be, yes. So you're going to hear a common theme in this episode that it's all about the timing and where you're at in your business. I think it's the most important thing I want to prefer at first. In terms of me building up businesses, I've gone through two routes of this. One is going very local with subo foods. We decided to do the California manufacturer, even though California has extremely high labor payment. You have to pay a lot for labor. And also it stacks up with factories. When a factory is there, there's just a lot of stuff they have to figure out to make it commercially viable. That includes raising the costs. I mean, the Filipino factory that I went to, they would hire people from the Philippines because labor is cheaper there versus people in California. So, you know, there's just a lot of things going on there. But we know that because we went with them, the costs would be higher. But they're facility was just so top-notch. They just were very excited about our product. And more importantly, we can be there and watch the product be made relatively cheaply on our end to make sure everything was going according to plan. And also our cold chain made more sense to be in that area because we were only in California. We had to rely on frozen shipping, which every mile counts of that situation. And so we decided to go with them. There are some other places in LA, but these guys had just had better customer service and were more. They were just really. I really liked working with them, honestly. And another one with like better meat co is that we got a contact in Ohio and decided to make it there. This was a specific dry product that we were able to make for better meat co. And it was also being sent to one location as a B2B ingredient. And so that was a lot easier to manage because in a freight perspective, because we could have cheaper labor in, I think it was Ohio, and then shift it to Georgia for instance. So for at least how I've traditionally done it, it is a cost game. There's a certain point of scale where logistics don't seem to matter, but there has to be a lot to be done before you can get it out of that step. Yeah, I agree. It depends on the stage of the company. If you end the category at hand, if you're a smaller type of company and you're running more lean, then essentially a more local, even if it seems to be more expensive based off of labor or freight costs, it's going to work out better for you. And I say that because you can actually be on sites more frequently to manage any of the risks, or if they call upon you to ask questions about changing the formulation based off of any issues at hand, you'd be readily available. Now, there are also caveats to that, and it really depends on the category. So sometimes let's say if you're in the New England area and you may not have the appropriate manufacturing infrastructure set up, you may have to go to the mid-Atlantic or the Midwest to be able to find the appropriate infrastructure. So you probably want to say, try local as much as possible if you're a smaller type of company, if you're in the startup phase in things of that nature. There's a lot of room for growth and improvement, and that's essentially what you're trying to do. If you are more established, then essentially you're looking for two things. One is a pilot plant trial to run as quickly as possible. And then two is to figure out what is not the minimum, but the actual maximum output, because if you're large enough, let's say you're the General Mills or the Kellogg's of the World or even Mars, and you want to outsource some of the manufacturing capabilities that you may not have in-house, then essentially you want to understand what is the maximum output, because they are looking to grow very fast in launching products, especially if there's innovative from the processing side of things, the innovation for the processing side of things. So there's two outweigh outlooks to this. I'd say one is to kind of think or take a step back and think about, do you want to have one contract manufacturer that you mainly work with and grow with them, or do you want to have multiple contract manufacturers where you grow out of capacity from one company to another? contract manufacturer and then you move into a medium size and or larger size as you grow from there. That's not to say you can't have backup contract manufacturers, but it is to say where this contract manufacturer is located and their capabilities are in tandem as you're trying to make a decision. So this brings a good point. When the clients you work with and I know you work with a lot of different clients, how do you how did they usually beg you to find a co-packer? Like because I feel like a lot of the clientele don't know where to look and if they do look it's very impressive. I feel like it's something like, wow, I didn't know these guys co-pack. But I'm just curious about when people approach you to search for a co-man. So what did they usually ask for and how to use a respond or like what kind of questions you ask your clients to go to the right direction? Yeah, some of them they don't have a contract manufacturer, manufacturing search manager themselves in the in the company and this could be medium to large size companies and that might be because they have historically owned their own means of production, their own infrastructure and they may be slow to these new innovations whether it's in the plant-based side of things or functional foods or supplements that they may want to get into. So in that capacity what I typically ask them is, you know, what is your strategy in trying to figure out how to work with a contract manufacturer? Send me your product brief in terms of what you want from a contract manufacturer when you're looking for from a contract manufacturer and the estimated volumes would be helpful. What your suggested retail price is, what your cogs range would be, how many units you want to launch within the next year in a pilot run versus that of an actual production run because all of those type of questions are going to make or break their decision making because a lot of these larger brands, the Fortune 500, they essentially want everything that's going to be checked off from a marketing brief. And so we want to be able to prioritize everything that they're requesting from. So in a sense this is a step before R&D. Some of them only want me to just do a comment search but I'm going to put on my R&D cap and say, okay, in order for me to actually or your team to actually do the development, we want to understand what their capabilities are, but we also want to understand your insight on how you want to create a product and see if there's any way to have flexibility so that when we learn from a contract manufacturer that no, they cannot do what you're asking them to do, do you have the flexibility to actually shift the formulation accordingly? If it's supply chain oriented, let's say this is an ingredient company that right now I'm trying to close out a nut butter and jam jelly co-man search and essentially the ingredient company wants to supply their sweetener. So we're trying to figure out, okay, well can these manufacturers onboard the sweetener because it's a new ingredient or do they prefer their own sweetener equivalent? The serums that these contract manufacturers have contracted out with for their own nut butters and or jams, jellies and spreads may be more localized to them. So what does the cost look like versus that of how the ingredients manufacturer is going to benefit in the long term? So those are all overall questions in terms of capabilities in terms of capacity and I think arguably most important and this is more for the contract manufacturer, but ends up looking around the world of cogs, the cost of goods sold is the question about allergens, are you as an ingredient manufacturer or Fortune 500 brand bringing on ingredients that may impact allergens or do you not want to have allergens that we have to be looking out for from this contract manufacturer that they may have the allergens or they may not have the allergens. So that goes into the decision making process as well. Yes, 100%. All yours are surprisingly pretty important. It's specifically I remember helping a popcorn brand out and we found a popcorn place but they were a vegan popcorn place. They sold vegan popcorn so they couldn't have any butter or anything like that or cheese or because those are allergens and it was it was essentially a no deal and allergens do cost a lot of money. They do cost a lot of money to put in their system to sort out in the facility which FDA really cares about and also to implement a cleaning process while we do it. I recall in the drinks industry they start first with spring water or like reverse osmosis water first before they go to the other types of more complex drinks. So I always find that pretty interesting in the co-packer realm. I guess like when you when you have talked to your clients do they know a lot about co-packing or they have no idea like what what to ask for at all. A lot of them don't know even if you're Fortune 500. Like if you're Fortune 500 essentially you own your own manufacturing. So you don't know what other people have. So essentially you're imagining like oh why don't they just do what we do. But that's the thing is if you're asking for a contract manufacturing search you have exhausted your own network and or you have burned connections or you don't understand how to improve your own processes or do not put in a cap-ex to improve your own processes and some other company essentially has a new innovative processing line. So let's say for example Keinbar Keinbar there's not a lot of knockoffs off of Keinbar and that's because their own processing is so unique in terms of getting that the particular chewiness is really about managing the type of syrups and being able to use say a vacuum cooking system to be able to get the right dexterous equivalent. And so that's one component that a lot of contract manufacturers may not have or that the Fortune 500 may not have. And so just that mindset alone of like why can't they copy you know our process. It just doesn't necessarily work. It's going to be a lot of negotiations of back and forth because you have to speak to the same terms of what exists unless you want to put your own capital expenditure money in the manufacturing floor of say contract manufacturer. But at that point a lot of these private equity backed or Fortune 500 type companies they might as well test out the contract manufacturer and then buy them out and actually go and and Coca Cola and Mars they buy out a lot of these companies that have these innovative innovations if you will. I mean the same applies to Conagra ADM etc. They buy out their competition so that they own the sole means of production that is innovative. They don't have to go searching for anybody else. That's really interesting to know and the wonder of it is seven different chip. I mean yeah when I work for Cargill's slaughterhouse division house and intern like all they did talk about was like oh yeah we bought out this meat company so we can have this factory and I just found it really funny. Cargill did that. They just bought all these slaughterhouses to just own the category so to say. I really did not know that literally giant companies would buy these things and it does make sense in terms of like an innovative standpoint. I think the protein bar industry is a good example or snack bar industry is a good example of people trying to copy it. Topp you a key player and not succeeding. They eventually get it but it does take a long time. One example or a few probably as I worked on was specifically like time bar knockoffs, Rx bar knockoffs, Quest bar knockoffs. So those are like the three of the trending bars at the time and we were all trying to copy them and I was working to call back or back of the day and then I switched to a CBG company that would make kind of their own branded versions of these bars and yeah the callbackers that we worked with we had a pretty hard time reverse engineering these products. Yeah it reverse engineering products could be from the product side of things and you know back to our episode about sourcing raw material but it could also just be the engineering and the processing side of things and that's that's the the two pronged approach that everybody has to think about. You hire somebody who's a good food science consultant like Adam or myself to be able to look through holistically both lenses of how do you work with a contract manufacturer and that's really where coming into a commercialization trial and having as onsite is important because we actually understand okay these are unique nuances in the equipment and we know the formulation very well up to this point because you approved of the golden standard that's where we come in to be able to say okay we can make this adjustment here on the pH or given the processing we know a natural emotion through high shear is going to break for some sort of sauce just because if you heat it up you start to have a curdling reaction and then the oil start to seep out so at that point should we opt for gums or should we opt for a different process that's more gentle than its approach or should we take a look at asking for tonopasturization rather than a heating and a kettle type of situation. So there's a lot of different things that we have to think about that goes into the contract manufacturing search that informs us to actually do the appropriate R&D. Yeah, and then when we're in the plant and the child on itself, we can talk to the factory workers or the, or kind of the main scientist on deck. And it becomes very easy for us to communicate with them because we know what's going on. We understand the equipment that's going through and we can communicate the changes on both ends, the factory end and the client end. Yeah, definitely. Now Adam, how do you find contract manufacturers? If somebody wants to come to you to find a contract manufacturer, how do you find a contract manufacturer? I ask you. Nice. Which gives you a bigger topic. I do ask my network specifically for a contract manufacturer recommendations. And sometimes they know them, sometimes they don't. Generally, I'm a very big word of mouth person just in general. That's how I buy my cars. That's how I buy like clothes or shoes. Like I just ask recommendations. So that's for specifically how I do it. If you are good enough at Google and the right keyword, you can find some too. And generally you will end up in a few call-backer manufacturing sites, which I think you can bring more insight later in the episode, like keychain or partner slate. I think in general, though, we've had pretty good luck with the network approach of just understanding who knows what. And I think one hack that we found that to be very useful is asking your raw material suppliers for fact, if you are in a good relationship with them, you can get a pretty good answer from them, honestly, because they have to sell to the factory anyways, especially it was like a unique flavor or a unique protein or unique sugar. As you said, like these people will know what to send. I do think though, they're generally keep it pretty se event until you're really good friends with them. Because I don't know if there's a cuff down there or anything like that. They probably is. But that's how I was in the main way I do it is through word of mouth. A lot of you don't have that luxury, but it is. I think just like anything you will buy or use or commit to, generally you want to hear a word of mouth response is probably the best type of marketing. Even a food product specifically sells really well if it really looks into the word of mouth. Marketing channel. Yeah. There are free resources out there. You can look up, I think specialty co packing and things of that nature and they'll list out some options for you. You can ask different forums and see if there's other startup or entrepreneurs that have utilized similar contract manufacturers and they'll give you a good review or not. Depending on the right relationship I had. Are you saying like start up CPG or other one? Yeah, something like start up CPG. I'm sure Google groups and Facebook groups exist and LinkedIn. Google groups people. Are you sure? I don't know if Google groups is still around, but there are, you know, there's plenty of groups out there, forums out there. I'm sure people ask on Reddit and maybe there's an news about it. Until it's a lot of time that's deep into this and that's really up to you as the listener. Do you have this bandwidth to do this search? Do you have a network of people that you can just ask around to figure out where are these local contract manufacturers that you can start speaking with? So there are a lot of opportunities. There are conferences. Of course that costs money. There's $495 to get into Prevalable Manufacturing Association PLMA for short. That's in the Rosemont, which is in the Chicago land area. Basically I think one or two train stops away from O'Hare Airport. You can go there. I think it's, I just went there a few weeks ago. I think it was like two full days. It takes up two floors. Basically you can walk the entire floor and you can see who's out there with their overseas or domestic to the United States that can produce your product. Most of them are there as a booth to sell their own Prevalable. If you are intending to just stick on your sticker and you like their product, it's more advantageous to go to that show. That's not to say that they can't do contract manufacturing. It's just they're there for preference. If we've already done a lot of R&D work or we reselled our own brand, we just want to focus more of the manufacturing and scaling up in that capacity. That's good. I've never been to PLMA. I've heard a lot of great things about it. I've heard that is the contract manufacturing is very warm there. They want business. They're there for a reason. They spent money, time and money and resources to be there. It is a very warm lead. Some other conferences that are helpful, I think supply side is a really good one for supplements. There are maybe like five or ten contract manufacturers that are pretty useful. What else? I don't know. There's not a lot of these contract manufacturer type companies sometimes if you dig in really deeply to some consumer brand ones like Expo West, you might be able to find a contract manufacturer or someone who needs some cash and will do it for you. There's a possibility there. The conferences are one way. I think PLMA is the best, but there is a high barrier to enter to get in there. That's not an exhaustive list. You have both international and domestic. If we're talking about geography is going to be important. A good amount are coming from say Canada or Mexico or China. Do you want to pay for that extra freight? With the incoming administration, are we anticipating tariffs? That starts to add on to your cost of goods sold. That gets you market up, but that means your MSRP is going to be higher as well. The retailer and the distributor doesn't want to take on the cost of the tariff of itself. The consumer is going to have to pay for that. Are you going to sacrifice your margins so you can actually push more velocity and volume? Are you going to increase it and slow down your velocity because consumers may not want to buy a more expensive nut butter or protein bar or something of that nature? International content creators always surprise me in who can contact them and if they're even a right fit. I always get it sketched out, but I've been doing a lot more. So, there's really consumer-backed good companies. They think international can be advantageous. One example I have is an Mexican co-op hacker called American Beef, which tells you a lot about who their market is. These guys are making plant-based burgers. Could you really have found a Mexican co-op hacker called American Beef that will try out to make a plant-based burger? A lot of these things can get very, very tricky in terms of who to contact and where to contact. Yeah. You could also flip the scripts. I mean, sometimes I'll have international people ask me, "Hey, can we set up manufacturing in the United States?" Or can you find as a contract manufacturer in the United States? And just because it's done overseas, there may be a different methodology or different processing that may not necessarily exist. Let's talk about banana chips, for example, or vacuum-frying technology. At some time Costco had a lot of mushroom chips. You just don't fry mushroom chips and expect it to be very dry. It's a long-frying process. And so vacuum technology allows you to shorthand the frying so that it's within 40 to 45 minutes in a vacuum-frying contraption or piece of equipment. You'd have a finished product that is historically high moisture. The same could also be said with some instant noodles. Instant noodles, ramen packets are historically done over in Asia. And you don't find much of the infrastructure in the United States. It's more built for different types of noodles or pastas in general. So you get your pros and cons and it depends on what is the specialty and what kind of category you're going to go into. Yeah. So do you recommend anyone who might want to search things on their own, any sites or any to like that that is easy to navigate? Yeah, I think you're looking at, I think a specialty co-packing is one of them. That's pretty easy to find. Do you keep in mind that they may not necessarily have updated their lists? And any list that you find that's free, I think StarterCBG has one of them. You have to really do your due diligence because after 2020, after lockdown and the pandemic and things of that nature, a lot of these startup or smaller contract manufacturers, they go out of business. They weren't able to keep up to the demands because of the volatility in the market. So you may have to actually do the search and figure it out yourself. Do they still exist? And that might be calling or emailing. Another, and we're going to dive deeper into this, is keychain versus partner slate. And I'm sure there's plenty more, but these are the top two that has garnered enough marketing and media attention. Partner slate operates kind of more of a brokerage model where you pay X amount of dollars for them to actually do the search and then they get paid even more so. because they seal the contract with the contract manufacturer. So they get paid both ways. So that's truly a marketplace, if you will. Whereas, keychain is basically you are able to go onto their website and ask them questions in terms of, "This is a project I'm trying to look for in terms of the volumes, the location, the type of category, allergens, marking certifications, etc." At that point, keychain will basically make introductions for you, if you're asking. Them too. Or, they'll give you recommendations and then you approve for the introduction end of itself. And in that capacity, it's free for you. They get paid, keychain gets paid by basically having assigned contract by the contract manufacturer. So they do love the marketing and sales on behalf of said contract manufacturers. Wow. I actually did not know those two business models. Yeah. What are your experiences both of those? Yeah. I experienced partner slate very early in the days before. I think it was the new, not new, but the current CEO, Vince, their model before they had a true marketplace was you pay a subscription and then you just sift through all these different contacts yourself. It's basically an SEM within partner slates, you know, database. And then you figure out, can they actually do what the contract manufacturer says they can do? Okay. Okay. So they just give you a bunch of contacts and you have to sit through them. It's like a phone book. Yeah. Essentially, paying for a phone book. Got it. That was the old model. And now the new model is you have to pay up front and see if they could find the right fit for you. And so I haven't tried the new model of paying for them. Because essentially, why would I pass on fees if they're going to do the work? So I would recommend anybody who wants to try out partner slate, you know, there's a set fee and it's up to you as the listener or the entrepreneur to figure out, are they the right fit as a marketplace for you? The other is key chain and that's relatively new. And I was able to speak with one of the co-founders, Jordan at PLMA. I don't know. And so he explained to me his model, he comes from private equity, actually Vince from part of slate comes from private equity or. Oh, wow. What's going on here? What? I mean, I think what we're seeing here is if you're looking through the lens of mergers and acquisitions, if you come from that background, there's a lot of focus in buying and selling these manufacturing facilities. Are you interested? If you speak with a lot of these older contract manufacturing facilities, they are run by 60, 70, 80 year old, typically men that may not have family that wants to take over the business or an exit plan. So they end up trying to talk to private equity and saying, we want to sell this. We want to exit out. We want to retire. How do we do that? And so I think from both of their perspectives, it's very cumbersome without the tech. There's a lot of tech being involved to figure out how do you connect a contract manufacturer and just save time to that of the entrepreneur or whomever. And so from from Jordan's end and Keychains end, what they're trying to do is try to figure out, you know, we want to work with consultants. We want to work with everybody and essentially figure out how can we connect the dots and make it faster from Vincent's end. Like, well, we already have a pretty robust system. So what we want to do is want to make sure that we are testing the model of a marketplace more so than a SaaS, if you will. I think Keychains is more like, here's a SaaS, but the SaaS is more applied to the manufacturer who can actually afford this than the actual entrepreneur themselves. So they're trying to augment and have this tool as pretty useful as much as possible. Yeah, I haven't experienced too much with them. I do know that nowadays when I search up co-backers, Keychains does pop up. And if you're savvy, then you can get all the information you need from Keychains. You'll have to sign up their email. If you know what you're doing, if you don't know what you're doing, it actually might be good to sign up for the email or put your email on their list. But at least for me, it seems like Keychains has a decent list of co-backers that I can just Google on myself with that information. But maybe it should give them a shot. Yeah, definitely. I mean, basically, my rates are pretty substantially higher than both of them. It's not free. And it's not, I think, it was like $199 or $99 or something of that range if you're using partners late. The point of differentiation is essentially, I build out a strategy with you. You can always find searching on your own in things of that nature. You don't hire me to just do a search. You hire me to phase one, do the search, phase two, make the introductions and facilitate, because if I talk to the contract manufacturer and I can speak the language, they're willing to speak with me. Once we get into the introductory stage, they don't know who you are as the listener, my clients. So I could be bringing them a Fortune 500 private equity back to type of company. And they'd be like, yes, I want to work with that type of company. And then if I bring them a new startup, then they're like, ah, they changed their tune. You're hell. So after the introductory call, they may say politely, I don't want to work with you. But of course, if you're new to this game, you may not actually hear that or interpret that as such. I'd actually have to come back and say, okay, we're going to have a pow well. And we're going to say, this is what we've heard from the introductory call. This is what we heard when you're present. And there's disconnect here. No, the top three choices that we present to you in phase two may not be the best fit. But we won't know until we actually have these introductory calls. And so phase two essentially is, let's present you in save you as much time as possible at the best options. And if those don't work, then I'm going to present you the next three. And then the next three. That way we're kind of narrowing down the scope. Phase three is to actually go on site and do proper due diligence know that they actually exist and it's not just a camera or a phone call and actually take a look at is their facility clean? How much of their business is allocated towards say the large Costco crogr's of the world, if you will, if they do have the opportunity. That is a good sign. But that might mean that if 80% of their business is locked into Costco or crogr, the remaining 20% of that space is you fighting for everybody up with everybody else. Yeah. And those clients have already over you every single time. Exactly. Because they take up 80% and you're taking it up like maybe a fraction of a percent. Yeah. Amazon the money. Yeah, exactly. So they always have bandwidth. They're just trying to figure out the best fit themselves too. So the phase three is trying to figure out, okay, how much of this is doable or feasible. They may be too large or maybe they're the right fit and they're hungry because they have a lot of downtime, especially if it's during the holiday seasons between November and December. That you anticipate a lot of manufacturing happening during the holiday season in the United States, just because that's where people consume a lot of food for the different holidays. If they are not busy, either the category doesn't do well for that particular season or that contract manufacturer doesn't have enough clients and they really need to onboard more people. So that might be something that's advantageous that you wouldn't know from an introductory call. And then the final phase is the selection process is we go through the whole strategy. Who's your primary? Who's your secondary in the case of force? Major. There's hurricanes. There's fires. There's earthquakes. There's mergers and acquisitions. So sometimes a business may be owned by an older person, no exit plan. That person passes away. Now the employees don't know what to do. And so you just have no management at all. And so those different moving factors do influence the production of your product, which is extremely risky. And we want to make sure that in the worst case scenario, you have option one, but you can quickly pivot to option two. In the case that option one doesn't work out or let's say they also do a they have a recall for for example, then you can work with option two as option one tries to figure out how to mitigate the the problems or commit to their recall procedures. Yeah. And this is why we kind of emphasize in the past episodes to own your formula. And this goes this can have a quite a lot in some companies do go under because of a co-packer's fault. Right. They either get sold off or they get bankrupt or they they can force you to move out. Yeah. There's a lot of risk at the contract manufacturing or manufacturing stage in general. If we actually take a look 20 years ago, not a lot of manufacturers were contract manufacturers were available to entrepreneurs. And you know, like you start to see 10 years ago, a lot a large movement and increase of more exhibitors at XBO West. and at fancy feature because there are smaller contract manufacturers that are popping up a little bit more so that they can start creating more products so that you don't have to focus on building out your own infrastructure. It takes time to build out this infrastructure. Right, it's not just I'm gonna buy a bunch of equipment, put it together and Ta-da, it's done. You have to test it. There is fat tests which is factors acceptance tests. There's regulations and permits. There's making sure that the food safety is met in terms of the updated fruit terrorism act and things of that nature. There's also pass control that people have to mitigate against. And then also the infrastructure itself can it withstand certain weather conditions. Right, there's a good amount in the mid-Atlantic especially in Georgia, but Georgia can also be hit by hurricanes or hurricane winds. We say Georgia because that's where Coca-Cola is and there's a lot of infrastructure around to kind of help Coca-Cola too. Definitely, that's a good point and you did mention co-backing is getting more and more common and co-backers know this, contrary to me if I was specifically I think our shifting business models actually to accept more customers. A big example is white label like Walmart. It's never used to actually, well, no one went in everyone to grocery, but it was very rare to have these big grocery chains or even just regular store chains go to a contract manufacturer to get products. Trade of Joe's whole business model is making contracts with these contract manufacturers to push out their products. And now celebrities, like a Tom Holland or a Jonas Brothers or a Kardashian, well talked to a contract manufacturer or their team will contact a contract manufacturer to make the products specifically for them. Yeah, I was at PLMA and you start to see pharmacy type stores like CVS and Walgreens roll out with their own when historically they don't. You also start to see that hardware stores are trying to not necessarily have their own private label. I mean, they have private label for their own tools and things of that nature, but you start to see them just testing out food products. And at some point they may start rolling out their own private label specifically designed to fit for say barbecue or hot sauce. Well, that's really smart. That's really smart. Oh, man. I can imagine Home Depot doing something like Home Depot Bargays sauce or white label bargays. Oh, man, that is just blew my mind right there. I mean, I think I saw I might have seen, but I can't confirm because you know buyers keep walking by. So I might have seen the badge tag say that. But I can't be possible. It's possible. Yeah. So I was like, oh, okay. So I think overall, if you take a look at contract manufacturing, it's about the time. It's about relationships. So you have your own set of relationships that you can tap into speaking with people at universe, universities have food science programs. They may have connections themselves too because there's a lot of sponsorships. There's also localized networks. So IFT, for example, and their local chapters. If you are part of a member, you can get tours of different facilities. Is that true? I guess so. Yeah. Contracted it out. Yeah. I mean, you pay for the event itself. It's usually suppliers night. It's networking. Yeah. And essentially, if you are willing to pay for IFT fees and the local chapter, you just sit through the different events that they have available and see if it's worthwhile for you. And it may not always be a manufacturing facility. They sometimes do some sort of laboratory or some sort of like event space, just a network. So it's more advantageous. Just to take a look if it's if you're privy to the calendar and has been most of the time is not necessarily open and available. But those are creative ways to find contract manufacturers. Another would be looking at food recalls. Because essentially that is listed publicly. Where is the manufacturing facility? And you can actually find out, let's say if it's Trader Joe's that contract manufacturers to somebody else. This whole world is unknown because of no marketing. And essentially, if there's a recall at Trader Joe's, you will know where it's the source is. And at that point, you can figure out, okay, is this big enough or small enough for me to actually work if I'm in that particular. And you can also probably ask yourself, maybe I'll wait a little bit longer and not immediately approach them because if they are going through a food recall, they're not going to pick up the phone. Yeah, that's true. They have that they have that thing that you're like saying their own business. What else can co backers offer? Have you noticed like some other services like fulfillment or anything like that? Yeah, I asked about turnkey services. So after the first three conversations or the first three questions about capabilities capacity and allergens, I started to dive a little bit more. Do they have turnkey services? Some do in terms of, yeah, we do three PL. Some of them can package into a secondary options like they go package into food service with a package into single serving pouches and things of that nature. Others may help out in logistics. If they if they are kind of combined in that capacity, others can also offer sourcing or procurement because they may have contracted out largely for say tomatoes to make a bunch of tomato sauces and you're going to use the same tomatoes anyway. Then you can actually leverage their large buying power. Others have white labeling opportunity and or R&D. They keep in mind that if you are bringing your own IP, you want to make sure that that contract manufacturer is going to steal your IP because that's going to be pretty critical. Those are kind of some extra services that help out in turnkey sense and some things that people like to have if you're in DDC is to best understand do they have a three PL and can you just store at their warehouse so they can just ship directly at that particular facility. So what are the six in that sense? It's come back to do a lot to offer in that regard to it's a you know I have an understanding like tell back to even offered to make a product even though they don't have the key to the list of my product right depends on their their free capacity. May factor they actually did not make dumplings until we approach some to make dumplings and we need to do all to input our machine into the factory and you know right now look for less chili Chris. May factors and apparently some of these guys are not advertising that they made a factor chili Chris but they do it anyway I've seen two co factors do this where yeah we have a chili Chris client we don't really say that we do it so it's just finally like really interesting I think you know co back is an in day our businesses they are. They are ran in a way of business is ran which means that they see opportunity to grow or to expand they they will consider that opportunity and every time you every time a client on board the co backer it is a matter of them seeing opportunity in your business. Exactly and you touch on a very good point Adam if they don't have the appropriate equipment there could be a contract where you can bring in your own equipment. So they are going to be able to augment their their system so there could be you know for example let's talk about plant based proteins in general and in the way we're at extrusion processes but if it's like old school procedures or processes they may not have extrusion it may be very manual of a process or something of the nature so if you can bring in that set equipment and strike out a deal with them and effectively they are going to be able to do it. They are able to supply something that's new you could sign an agreement where you as the owner of the equipment can only utilize or they can only utilize your equipment during your own production. Yes yes. If you are you know if you don't really care that much but you can see value that essentially you had to convince them to buy a piece of equipment and just try to convince them like look you're opening up a new category. If you just add on this new piece of equipment to be a new sheeting line or something of that nature in some capacity that is flexible as well. Yeah it's a negotiation game in that sense you're definitely right about adding the contract if you import your machine over there they add it then they see market opportunity if they added themselves. So I do think if they add a piece of equipment you have to have a lot of street cred for the 50 that. Yeah at that point it's typically an ingredient manufacturer or ingredients individual that has a lot of funding behind it to say I'm going to have you invest in this so that you as the contract manufacturer of say new protein blend or new aseptic nut base or her legume based or plant based beverage and now. expand your opportunity for growth and you just supply the ingredient itself. I was just going to add in certifications is going to be pretty important too because if you are selling a product that's organic or kosher, halal, etc. you want to make sure the manufacturer also does it. It's not just the ingredients but also the manufacturer and the process can be lengthy depending on how many ingredients are new and or if they are the manufacturer is new to the whole organic certification process etc. Yeah, speaking of certification, that's a really good point. Manufacturers their own different types of certification too. So you're going to hear words like SQF. What's another one? Do you know of your head? BRC, that's the other safety. Yeah, so these are all third party audits that have pretty, I would say pretty good programs, pretty strict programs and making sure that you have the right ingredients that you're the right thing and they're hygienic and all that. Some of their retailer partners will ask for these at a certain point. I think generally these factories that pass these certifications are in good hands, I would say. They spent a lot of money, they spent all the resources and they do do the due diligence of really checking your stuff before going with them. So they do charge a premium but I would say that people who are certified in that, there's a reason why they're certified. Yes, it's essentially an extension of their own quote unquote branding as a contract manufacturer. We have the services of X, Y, Z certification that you're looking for and we also have the capabilities to produce this and these other turnkey services etc. For sure. So let's go to our final topic about payment terms, term payments. I guess do you even deal with this type of stuff? I'm touched on a little bit but I have some advice. I'm curious about it on your end. Yeah, it depends. I mean, there's always room for negotiation. There's a lot of the seed manufacturers. Yeah, that's the thing. A lot of manufacturers, it's all about cash flow. If they're going to produce, they need to pay their own people. So you can see on often I see 50% up front and then once you have finished production, the remaining 50% goes through and everything is going to be on an FOB basis. If you're dealing with overseas, that's different because that's even riskier. And I've seen that the numbers, like a lot of them is like, I want to see 70 or 80% up front because I have no idea who you are and I'm not just going to produce products and then just have it sitting and then once it leaves the country of origin and maybe it's on the ship. Once it's in the ocean, then you're paying the before it goes into the ocean, you're paying the remaining 20 to 30%. And this is going to be through a wire. They want maximum protection because they're like, why are we going to produce for somebody we don't know. And this brand may not even exist or may not work out. Yeah. Yeah, that's a good point. I mean, shipping all sticks are long time for it to get from point A to point B. Generally, at least compared to domestic. And you're right about the payment process as well. It is a, just like the word contract manufacturer is a contract that you have to sign for. And I think what's always right about contracts is that they do have it in writing about what you can negotiate. And specifically what I've learned is that it's always a volume game. And as you mentioned, a cash, which translates to cash flow, the more products they can create from your brand, the more you can leverage the price. And I would honestly suggest a lot of brands really nail down the ideal economics of your product first and then negotiate with the co-packer. Pretty hard, I would say, to get to the right, I do get as close to your ideal price as possible. And there might be some trade-offs though. And you just have to keep that in mind. Because that ideal price is probably going to be lower than they expect. And they might ask for a lot more volume, for instance, if you do that. But it's always good to have that ideal price. Ideal price that you sell specifically to distributors or wholesalers so you can get your margins really down and have that locked in. Yeah. One thing to also note is if you are speaking with their contract manufacturer, do not tell them right off the bat what your suggested retail price is. Because if they are good, or even if they are a bad actor, they can reverse the math. And then they go, oh, okay, I see where your margins are coming from. We're going to cut away at your margins. And essentially no deal otherwise. So you want to be mindful of that. You want to work off with the cost of goods sold specifically at the tolling fees. Because essentially you're paying them for the labor. If they can produce more products, then they're going to make more money off of that. They're going to make a little bit more margins. Overall, their margins are not as high as 50% 50% because you need to have as a brand owner, you need to have that much command because of how much money or risk you're putting into producing a product that may not have a return or may not have the velocity. And there's a lot of things that could go wrong in that context. From the manufacturing side of things, it's like they still have the assets, the actual equipment, they have people that they need to pay for. But at the end of the day, their game is not to sell products. It's to sell lying time. It's to sell labor. It's to sell the whole infrastructure. It's a very different mindset. Yeah, just some strategies on negotiation. At least how well we've done it is, you know, we make the R&D. We sign NDA and then we give them the formula and they look into it. And then we kind of hustle them to give us a price and then we push back on the price a little bit or at least go to some type of discussion where it's like, okay, we see the price and we want to, but we do kind of need this price. Do you have any strategies or other wise ways to negotiate pricing? Yeah, it's you're looking at annual volume, right? So it goes back to capabilities versus capacity and or capacity. So when I talk to contract manufacturers, I ask them what their ideal manufacturing run is. So then I know either they're breaking even or they're actually making a profit. Got it. And capacity is how frequent are they running? So then I kind of estimate on a annual basis, how much product and then kind of extrapolate from there. If we're to take a look at our ideal cogs, does that actually make sense? And then does that make sense for them? And then also, is this a multi year long type of contract? Because if you're able to schedule ahead of time, that's less work for them. Like they know if you're trying to break away from that contract, they'll still make some sort of money off of that and then they have extra time for that. So part of it is, could we sign into and this is more for the Fortune 500 type of companies? Could we sign a multi year type of contract? Could we leverage our weight as a huge brand? If it's a private equity owned or et cetera type of brand? Could we use that to our advantage? Could we use it, especially if it's private equity owned? The opportunity to say, we could buy you out as management and flip this business and can actually grow this business. So if you are at that right stage and you're looking to sell, this is a more, this is an easier way for us to give you money right now, give you a book of account and then be able to scale the book of account through line times and then find all the nuances that buy you out at appropriate time and then go from there. So that's another way. And another thing is as an entrepreneur specifically, if you are working with a contract manufacturer, most of the time these are small medium businesses and they're most likely going to be hungry for growth. So you leverage your own network to see how many other entrepreneurs like you can also work in the same facility. So that is just like to break down the volumes together if it's new ingredients and can hand hands the process. For me as a consultant, I do work with contract manufacturers as clients. Sometimes it's improving their fruit safety. Sometimes it's improving their efficiency. Sometimes it's providing a formulation that becomes private label for them. Sometimes they don't even have R&D and I come in and I bring them clients that actually have vetted formulations and if I already know their process, then there's a way to scale up. And then I speak with family offices from time to time because they asked me to do due diligence on a manufacturing facility or there was a venture capital group that asked a colleague Rachel Zemzer who then passed it on to me because it was all about fungi and this is a Citadel Chicago based company that grew because they found a microbial strain and I think it was like in Yellowstone. Oh, okay. I know. I know exactly the name because of the whole VC contract, but I did due diligence. Oh, actually. And essentially it's figuring out I can talk to said contract manufacturer and say I can bring you more business that actually is viable business and I could also if you don't have an exit strategy, connect you with the right people and grow you to the right size so you can actually sell your business or set up an appropriate exit exit strategy. Hmm. Yeah, that's a complex role I didn't know about. So that's interesting, but I'm sure if you've listened to this episode that you probably have been bombarded with a ton of terms and a ton of different, this whole new world of co-backing or condominium hatching is which is the same timeframe if you are to invest and make your own manufacturing facility because you don't manufacture you don't create a manufacturing facility overnight. It takes years. You need engineering firms, you'll need Electritions because it's about the electricity. It's about the water. It's about everything. That the zoning Yeah, zoning zoning is one of the biggest traps In terms of like the timeframe of it Yeah, so it could take five years to get established depending on the eyes to yeah, so co-backers you can do it in six months But yeah, they're there are trade-offs right of self-manufacturing and co-packing though I will say in our world the co-packing is very very common in terms of getting to the next step of your food business Yes, we're finding the right fits To augment that is quite complicated I mean, there's a lot of hoops that you have to go through But this is how people scale their food businesses. It's probably like the most common way people scale their food business Yeah, it's the more I guess lean approach because the other has you build out your own manufacturing Slowly and steadily and that really only applies for those in the precision fermentation world of things or if the infrastructure does not exist In the United States, so that applied to a kind bar that applied to I think cliff bar to a certain degree At the time, yeah, it's basically any new innovation that is very hard to copy if there's Processes that take a very long time That's more manual like this can apply to candy candy back in the day. It was very manual of a process very dangerous and If you're to say you want to have something that doesn't have sugar like white refined sugar in your in your final product It's not likely to Go through an automated process You probably would have to find a chocolate tier or a independent shop to kind of just test out feasibility Because that's probably the best way to launch our products. Well, I think this was very important I've said I actually learned a lot from this so thank you Brian next week we will You're welcome next week we'll talk about quality insurance and quality control This is important it makes you feel that your food is safe and secure We kind of touched on a little bit here But we'll get into a lot more detail so talk to you next time stay tuned Yeah, you know, it's funny funny. So I doubt earlier in the podcast I think I was a one or two we're talking about protein balls and how people would think it was a fun idea to just roll them I want to hold food yesterday. There's a whole line of white level protein balls Yeah, at Whole Foods and I just found out like wow five years ago people were just doing this by hand And now people found a way to manufacture them so that that's like it's a good insight about the timeline It takes to make these kind of new-ish innovations and it takes it takes like half a decade for them to become essentially mainstream technologies