Contracting out vs. staying in-house

Steve May of Wisdom Natural Brands explains why divesting of manufacturing was the best choice for his company while Paul Chamberlain reveals why Solgar Vitamin and Herb Co believes in retaining full control of manufacturing

Wisdom Natural Brands
A family-owned marketer of natural consumer brands such as SweetLeaf Stevia and Wisdom of the Ancients YerbaMate, among other product offerings.

In 1995, our company owned a production facility in Paraguay where indigenous people picked, packed and shipped consumer-ready products that accounted for 100 per cent of its sales. By the end of 2004, Wisdom Natural Brands will be completely divested of manufacturing facilities and will focus all of its energy on marketing the products made by its partners.

Outsourcing has allowed our company to grow more than 30 per cent per year since 1997, without selling equity. During this period, cash flow has allowed us to pay off significant debts acquired since the founding of the company in 1982, as well as to buy out all significant nonfamily investors. For Wisdom, outsourcing means opportunity, flexibility and focus.

Our initial evolution toward complete outsourcing began with the development of our SweetLeaf Stevia brand. Acquiring the single machine we needed to make our now ubiquitous green packets would have cost $350,000. At the time we would have been able to use it only to about 15 per cent of its capacity.

We now sell millions of packets each month and could put several of these machines to full capacity. We would never have been able to enter the market with this product without a willing manufacturing partner. Few investors would have believed in the potential of the product, and no banks would lend us that amount.

In addition to removing a major barrier to entry on new products, outsourcing has improved our cash flow significantly. Our vendors offer net 30 terms or better. Thanks to our improved inventory management from these relationships, we typically carry inventory costs for less than 30 days. Our balance sheet doesn?t show our greatest assets: our brands. Our value is in our distribution and in the trust customers place in our brands. Sometimes that makes traditional financing complex or impossible. But some banks are cash-flow based rather than asset-based lenders. We have learned to work closely with the former.

Frequently, manufacturers of branded products become slaves to their machinery instead of servants to consumer demand. They must make what their machines produce, instead of selling what their customers want. We lived that life once. Now we are burdened only by our own forecast errors and not concerned about idle machinery.

In addition, new technology in packaging and ingredients and even novel ideas contribute to our ever-falling cost of goods. We can take advantage of these improvements by asking our partners to upgrade, or, when necessary, to change to partners who embrace this increased efficiency. We recently decreased our cost of goods on a major item by 10 per cent when we changed our bottle shape in order to accommodate a faster powder-filling machine. Our long-time partner would not purchase a new machine, so we moved.

For consumer brands, the opportunity cost of management concern for manufacturing instead of marketing is incalculable. Manufacturing is both science and art. It requires full focus, as does marketing. Manufacturing is employee intensive. Marketing doesn?t need to be.

I am often amused when traditional manufacturers ask me how many employees we have. There are 21 people who work in my building, but I don?t even technically work for my own company — I?ve outsourced human resources as well! There are scores of people who make our products on four different continents — many of them dedicated full time to our line — but they are not our employees.

In Paraguay, we are engaged in what is essentially an experiment for that region. Outsourcing is mostly unheard of. For years I have tried to convince existing companies to manufacture products for us to no avail. Yet recently I was able to help create a new and independent company that will become the exporter of our YerbaMate teas — and another company engaged in other activities will now produce those teas. Our cost of goods will decrease by 30 per cent or more, and our employees are now entrepreneurs. Importantly, we uphold our corporate philosophy to help and to respect the indigenous people of Paraguay.

We have repeatedly analyzed the economics of outsourcing for us and have concluded almost without exception that our partnerships yield greater real profits than we could yield with our own facilities. In one case I was convinced that we could save 20 per cent of the cost of goods by bringing the work in-house. The volume was significant enough to warrant us starting a new division and hiring new personnel. I had made arrangements for new financing.

But I knew that my partner could change some processes and save money for both of us. The Wisdom management team worked for about two years to convince our manufacturer to make the changes. They made minor cost-saving changes along the way, but ultimately we were able to achieve just under the amount I estimated we could save by doing it ourselves — without the risk, the headache or the start-up capital.

For business owners, outsourcing just might cost a point or two on the P&L. But the enhanced quality of life through the reduction of risk, stress, capital needs and employee headcount is worth many multiples of the potential savings.

Steve May is chief operating officer of Wisdom Natural Brands.

In-house manufacturing: an assurance of quality
Solgar Vitamin & Herb Co
Solgar Vitamin and Herb is a leading authority in nutritional science, technology and education. It is an operating unit of Wyeth Consumer Healthcare. Solgar?s headquarters and major manufacturing facility are located in New Jersey, and the company distributes in 45 countries.

In-house manufacturing of supplements has always been a key part of Solgar?s strategy. Manufacturing more than 2,000 SKUs a year for markets across the globe, this commitment to in-house manufacturing requires enormous investment in both time and money, but we feel it?s the only way to guarantee consumer satisfaction. In-house manufacturing means that we have total control — from choosing the finest raw materials, to state-of-the-art manufacturing, to the package that appears on the shelf.

For example, there are stringent demands on our buying team to secure the finest raw materials. In-house manufacturing means we can make these demands and control the quality of all of those raw materials. All the raws are tested for purity and potency before they enter the Solgar warehouse, and we constantly reject materials that don?t meet our standards. In fact, on the rare occasion we change our raw materials suppliers, they are often very surprised that when we say we only accept the best, we mean it.

Solgar manufactures in small batches, which means stock levels of raw materials have to be checked on a daily basis and monitored carefully. We truly believe that we would not be able to operate at this level of detail with a contract manufacturer.

We hold the paper trails in-house to prove the quality and efficacy of all of our products. Our on-site quality assurance laboratories employ a rigorous system of quality controls to ensure every batch meets our Gold Standard for purity and potency, and detailed records and a dual signature sign-off are required for each step of the manufacturing process.

Manufacturing our own products even means that we can adhere to the environmental standards that are so important to us. For example, we can make sure that our herbal raws are sustainably sourced. Solgar uses purified water and green cleaners to clean the equipment; utilises air filtration systems and sound buffers; and uses recyclable- grade glass to package the products. We know that when we tell a customer that our machinery is stripped down and cleaned after every batch, it?s true.

But perhaps one of the main advantages of in-house manufacturing is, we have only one customer: Solgar. Our company does not have to compete against other brands for manufacturing space and time, and there are no conflicts of interest during the manufacturing process from either inception of the formulation through to final product.

Paul Chamberlain is director of technical affairs at Solgar Vitamin and Herb Co in the UK.
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