Strategies for Crafting an Effective Co-Manufacturing Agreement

Many startups and founders reach the point where demand outgrows the capacity of their commercial kitchen. Though something to celebrate, it takes time and financial investments to keep growing. Options include investing millions in creating an owned dedicated production facility or finding the right contract manufacturer (co-man) to help grow and scale the business.  

For those interested in partnering with a co-man, one of the keys to success is alignment on an agreement or contract that works best for both parties.  

This guide provides a detailed look into how to build an effective co-man contract and what it should include.

Identify whether it’s a good fit.  

Manufacturers are key strategic partners for your business, so it's important to find one you're aligned with. This means finding a partner you have good communication with, has the right equipment capabilities, and fits your minimum order quantities. While some manufacturing partners may be flexible on the quantity of product they produce for their customers, the long-term goal is to optimize the run size.

For some co-manufacturers, it can take up to 3-5 manufacturing runs to make a profit, so they need to find growing brands that are a good fit to invest in.

Transparency.

Up & coming brands need to sell themselves to the co-man about their business model and products. They need to prove the capability to execute those plans and have proof of financial backing. As a strategic partner, a co-man will be interested in your distribution and sales strategy. And many will require a demand forecast, which will provide details regarding a brand's viability.

It's easy to inflate your sales forecasts to meet your co-man minimums, but brands who do so risk overestimating, producing less, and ultimately disappointing their manufacturing partner.  

Key components of a contract to look for.  

This is a fundamental and key relationship for any brand. It needs to be an open, collaborative, transparent ‘partnering’ of the parties. The business relationship must be good for both parties or it will be good for neither. Some key attributes of a good contract:

1. Transparent pricing model – When the co-man is ‘turnkey,’ which means they procure some or all the raw materials and/or packaging, brands need to have visibility to those itemized costs. The finished product costs need to be a build of material costs, tolling or conversion costs, and budgeted scrap rates.
2. Promote collaboration to optimize – Opportunities to find mutually beneficial ways to optimize require communication and joint efforts. The contract should build the mechanism to promote and incentivize that.
3. Protect intellectual property - Protect ownership of finished products including formulas, processes, trademarks, trade secrets, and proprietary information. This includes any changes or tweaks made at/by the co-man to produce the products in their facility.
4. Appropriate access to facilities and records – Ensure adequate access to the co-man facilities that are relevant to your products and base materials.  Also, make it a requirement to gain access to any quality or food safety and production records related to your products and production.
5. Regular cadence of communication – Regular communication between the brand and co-man on all issues is key to success. In addition to covering day-to-day matters, a schedule of business review updates promotes ‘buy-in’ and the sense of ‘partnership’ and helps both to understand business goals, objectives, and needs.
6. Clear product specs and requirements regarding certifications and claims – This is critical to identify and ensure adherence to product standards against which performance can be graded.
7. Require robust food safety/quality programs – Require adherence to industry standard programs such as the Global Foods Safety Initiative (GFSI) and receipt of any 3rd party audits as well as deficiency reports and corrective action reports.
8. Clearly defined responsibilities to investigate consumer complaints – The co-man should commit to prompt investigation of any manufacturing or packaging issue related to consumer complaints and to providing a written Corrective Action/Preventative Action (CAPA) report.
9. Articulate responsibilities in the event of a product recall – Clearly defined roles and responsibilities in the event of a mandatory or voluntary recall.
10. Define termination for cause & notice requirements for termination without cause – Articulate the breaches and any timelines and remedies to correct them.  In the event of a termination without cause by the co-man, provide an adequate timeline for the brand to identify, validate and onboard a new co-man.

JPG is a boutique consulting firm specializing in innovation strategy and execution with a dedicated focus on the packaged food and beverage space. If you need help finding a co-man and crafting the ideal contract, visit us here.

JPG also offers coaching, where industry experts help you work through specific challenges you may be facing – including co-man support. Visit our coaching page to learn more.