Contract Manufacturing: The Make or Buy Decision

The decision to make your own products or outsource the function is a quandary for many a decision-maker.

Darrin C. Duber-Smith, MS, MBABy Darrin C. Duber-Smith, MS, MBA
[email protected]

Contract manufacturing represents a major segment of any industry’s supply chain. The decision to make your own products or outsource the function is a quandary for many a decision-maker. As is the case with many other issues, there are both pros and cons to using an outside firm to manufacture your products, and these will be discussed shortly. Rising costs, lack of manufacturing acumen, and the desire to decrease debt among many marketers are just a few of the variables that may drive the decision to utilize a contract manufacturer.

In the personal care industry, it is interesting to note that the vast majority of mainstream marketers utilize contract manufacturers to produce their products, while in the natural personal care segment, the majority of marketers both manufacture and market their own products. This is largely due to the relative maturity of both areas. The mainstream personal care market has been around a long time and because of this longevity, these companies have a wide range of contract manufacturing resources available to them, as there are a host of contract manufacturers from which to choose. For natural personal care marketers, it is the opposite situation. There are only very few contract manufacturers that specialize in making natural products, so the option is not readily available to them.

The Argument For

When looking at overall strategy, it makes little sense for an organization to engage in activities at which they are not proficient. In other words, if manufacturing is not a “core competency,” then it is considered poor strategy to engage in such an activity. It is always best to focus on what you do best, and consider outsourcing everything else to those better suited for the function. Contract manufacturers specialize in production, and do not engage in costly and time-consuming end-user branding activities. This leaves the marketer to do what it does best – perform marketing activities. The appropriate partnership between your organization and a contract manufacturer can lower costs through various efficiencies, including investment in equipment, physical plant, personnel, inventory costs, and overall expertise.

The Argument Against

Whenever an organization decides to outsource a function, whether it is marketing, sales, or production, there is a certain loss of control in the various processes involved as well as the ultimate product or service. Many marketers are reticent to put their label on something that they did not product themselves, and sometimes with good reason. Without proper management and oversight, the presence of yet another layer in the supply chain can produce organizational inefficiencies as well as possibly jeopardize the equity invested in the brand itself. Detractors of using contract manufacturers hold that these factors can only be mitigated to a certain degree and that it is irresponsible to trust another organization to do things properly.

The Verdict

Both camps have valid points, but there are obvious reasons to utilize a contract manufacturer when it makes financial and operational sense, and when the relationship is managed properly. There are a few basic variables to consider when engaging in a contract manufacturing relationship:

*Do your homework. Obtain references and choose a supplier with a good reputation and a documented Good Manufacturing Practices program. Ensure a proper fit with your clearly defined objectives.

*Protect your brand with intellectual property by developing proprietary formulations that cannot be copied. When you simply private label an existing formulation or commodity ingredient, you cannot guarantee your competitive advantage through product differentiation.

*Create a signed Standard Operating Procedure agreement that fully outlines all processes, expectations and contractual obligations. Have your attorney review and approve it.

*Maintain constant oversight over raw material sourcing, production, bottling, labeling, packaging, warehousing, and shipping functions. Appoint a special liaison between your organization and the contract manufacturer whose sole purpose is to ensure a smooth relationship.

Obviously, the lack of contract manufacturing opportunities with regard to natural products is a huge barrier for natural personal care marketers that may wish to outsource their manufacturing functions. Yet, there is an opportunity for a natural personal care manufacturer to expand its operations to meet the growing interest in natural products among the mainstream companies and begin to market their manufacturing core competency to the mainstream in the form of private label goods. At the same time, for mainstream marketers who wish to enter the natural products market, a forward-thinking company may decide to utilize an existing natural manufacturer/marketer to make their products.

The appropriate partnership can be a “match made in heaven,” so to speak, and careful attention to the points outlined above can mitigate many of the issues these types of arrangements commonly face. With clearly defined requirements and proper oversight, there is no reason that using a contract manufacturer cannot be an excellent strategic decision.


Darrin C. Duber-Smith, MS, MBA, is president of Green Marketing, Inc., a Colorado-based strategic planning firm offering marketing planning, marketing plan implementation, and other consulting services to natural products companies in all stages of growth. He has 15 years of specialized expertise in the natural products industry and is also Visiting Assistant Professor of Marketing at the Metropolitan State College School of Business in Denver, CO, as well as executive director of the International Association of Natural Product Producers. He can be reached at [email protected].

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