DEEPER DIVES: The Real Reasons Your Co-Manufacturer Can't Make Your Stuff

Good Morning,

First, as always, thank you for joining.

Last week was great. The highlights were connecting with a few potential new clients and attending a Two Boxes event at The Pint in downtown Toronto.

If you’re on the fence about industry networking events, stop thinking about it and just go.

I got to meet a number of people I am connected with (but hadn’t met in person) as well as new faces from different parts of retail / eCommerce world.

And yes, I wore the Splatter Jacket 😀 

Here’s what this issue brings:

• Inspired by a post Joshua Palacios made on LinkedIn, I’m sharing insights on consumer packaged goods (CPG) manufacturing delays and reschedules
  

• If the world zigs, you zag. Amazon is directly getting into the low-priced goods arena. Drop shippers are pivoting and moving to high-ticket items to survive
  

What’s Really Holding Up Your Product Launch?

I wanted to follow up on the information I shared a couple of weeks ago about negotiating without sacrificing quality.

That article discussed ways you can keep your costs in check when someone else is making your product.

This time I want to get into why your planned production run might get cancelled or pushed back - which is incredibly stressful for a growing brand.

The majority of new brands you see in the CPG space work with co-manufacturers.

Their volume is low (or non-existent). Being able to have a full production facility for a product they are trying to get off the ground isn’t realistic.

And why run a plant if you don’t have to … right?

For 13 years worked in the food industry. For a company that is a producer / manufacturer. The work I did for them was secondary (even though it carried over $100M a year in OPEX) to what they made.

The real value they offered was transforming raw materials into finished goods.

Production and manufacturing was something that was talked about every day.

Here’s the question Joshua posted about:

What Causes These Issues?

The most important thing to remember about ANY physical operation is this … EVERYTHING has a maximum capacity.

There’s only so much that can be done by a person, a machine or with 24 hours in a day.

Even though you can buy a manufacturing slot, it’s a finite resource. Companies that are doing co-manufacturing are doing their own production first, then using the excess capacity in their system, to make yours.

Next, you aren’t their only customer. When there is available capacity in the system, it’s there most of the time. It will vary from day to day or week to week but it needs to be filled.

Common Misconception — That small volume orders don’t use up as much space and should be “easy” for the co-manufacturer.

While it’s true that lower volume won’t take as long once the line is up and running - any changes that need to be made to the line are usually a fixed time type of activity.

This setup and tear down time (or changeovers) happen when you are switching product types, packaging, ingredients, etc.

Prioritization. It’s important to get some sense of what the co-man is doing for themselves and what they are doing for others.

It may feel comforting to think that you are using the same supplier as a major national retailer, but that usually comes with the risk of smaller clients or orders being de-prioritized for a customer with a much larger spend.

Most plants want to hit the highest OEE (Overall Equipment Effectiveness) that they can. This means that their 5 day or 7 day a week schedule has to be used as effectively as it can. No one plans to operate a production facility with a lot of unscheduled or unplanned downtime built in.

Ingredient or packaging delays cause huge issues. Because these systems run so fast, everything needs to be in place when you want to start the production line. Delays getting any of the required items to the production floor often lead to a production manager cutting an order and moving onto the next thing in the queue.

Finally, like any business, manufacturers face breakdowns and challenges with labour. It is usually easier to address labour problems, these types of issues will cause runs to come out late.

Machine breakdowns where significant time is lost is more likely a reason for dramatic changes to production schedules. If you only have 2 hours a day for co-man activity and you lose 10 hours in downtime - you can’t make that up very easily.

My advice to anyone looking to have their products made by someone else:

1. Find a co-man that works well for the size of your business. Going to the largest or most well known player may feel like a way to guarantee your product quality, but it can come with additional risks while your volume is low
   

2. Don’t make a lot of changes to standard packaging, options or ingredients
   

3. Ensure all of your materials are in stock and passed any validations that need to happen 3 days before you are planned to produce

Would You Buy A $5,000 Sofa From a Dropshipper?

Tons of talk this week about Amazon announcing its plans to launch a new section on its site for low-price fashion and lifestyle items from China.

The new storefront will open the door for unbranded gadgets and novelties priced under $20.

This is a move to directly fend off the likes of Shein and Temu who have been exploding into the US.

Amazon is hoping by facilitating the logistics directly (delivery in 9-11 days), they will be able to wrestle away the advantages their competitors are using.

My point with all of that is this.

That the low value merch market is now dominated by billion dollar businesses, not independent merchants.

Dropshipping was built on low-value items being easily sourced from AliExpress or Oberlo for example, and resold by hundreds of different sites all transacting on price.

But there’s no point for this type of eCommerce activity to continue for dropshippers. There’s too much risk. Anything that gets success and starts selling can easily be moved to these bigger and more popular marketplaces (which have made it exceptionally easy for M2C activity to occur)

What we are seeing now is an exodus from low-ticket items to high-ticket items.

A recent blog post by Shopify highlighted the types of products that fit the bill for high-ticket transactions:

• Jewelry

• Outdoor equipment

• Furniture

• Electronics

What Makes High-Ticket Dropshipping Different Than Low-Ticket Dropshipping?

1. High Value Products - Sales items range from hundreds to thousands of dollars per piece
   

2. Requires Relationships - When dealing with low value goods, marketplaces worked well. For high end items dropshippers now need to source their own suppliers and develop relationships to get access to the best merchandise and pricing
   

3. More Work - A lot of high end manufacturers use direct ordering and communication. You’re either using email or their own proprietary system to place customer orders
   

4. Higher Margins, Higher Risk - Since the value of the goods is higher, a dropshipper needs to be more careful with cashflow. Things like returns or dealing with defects can be very costly. The more a customer spends, the higher their expectations.
   

5. You May Need To Track Shipping - With higher ticket items, dropshipping may now require more follow up and tracking from the dropshipper until it reaches their customers. Traditionally, low value items were a “set it and forget” operation.

Pay attention to ads and social feeds and you’ll notice an increasing number of people looking to sell higher priced goods versus the commodities they leveraged in the past.

That’s it for this week. Thanks for being here.