What is Contract Manufacturing and Private Labelling?
There seems to be a lot of people who are not clear about the difference between what is Private Label and what is contract manufacturing. Both styles of manufacturing are prevalent in many industries such as confectioneries, beauty products, health products, food products amongst others. There is a fair bit of confusion not only about the conceptual difference between the two, but also about advantages and disadvantages of these two styles of manufacturing. Both styles of manufacturing offer not only different profit margins and cost structures but also very different kind of access to the market. In a nutshell, the end goal of both private label and contract manufacturing is same, that is to produce great products that consumers will love and buy often.
Let us first see what is the meaning of these two ways of manufacturing.
What is Private Label manufacturing. These products are typically those that are made by one company but marketed under another (usually well-known and well selling) company’s label. The manufacturing company retains the control over the product (specifications, quality etc). In other terms, the manufacturer is the owner of the product. They are usually positioned as a low-cost alternative to well-known products of same or different brand. For example, many superstores sell their own brands along with other well-known brands. These are generally more profitable to the store, as compared to the well-known brands. This is also a good way to enter a new market with products that are different but can be associated with brand or product. (e.g garment company launching perfumes etc). A lot of small product manufacturers also use this channel to associate with a bigger brand and sell their products. It helps in building their own brand without the expenses associated with the marketing of the brand or cost associated with operating a store.
What is contract manufacturing. Contract manufacturing on the other hand is simply outsourcing of the manufacturing process to another company, while the first company retains the product ownership. The owner company gives the specification of the product to be manufactured to the contract manufacture along with specific units of the products to be made. The contract manufacturer has no say in changing the specification of the products (or product formula), even if it is to improve the products. Depending upon the agreement, the product owner will either supply the raw material, or use the manufacturer’s expertise to source the raw material to the exact specification that is supplied by the product owner. In another term, contract manufacturing is simply process execution. Generally, there is no recognition of brand of manufacturing company in marketing of the product and the margins are lower for the manufacturer. However, there are usually large assured volumes along with multiple clients, which increase the overall revenue. This is a well understood, well established practice in almost all industries.
Advantages of Private Label Manufacturing. There are several advantages in retaining ownership of the product and being associated with larger brands.
- Lower Marketing and selling costs. Here since the stores and marketing channels are owned by the larger store or brand, the cost associated with these business heads is virtually nil. You may need to spend on packaging and transportation, but after that the parent brand will take the ownership of selling the product to the customer.
- Control of product. The manufacturer retains the control of the product. He can change and tweak the specifications, the ingredients, the formula and other things as he sees fit. New varieties can be introduced depending upon the customer response.
- Better control over marketing. The manufacturer can decide upon the label design, give inputs on Logos and taglines. In many cases, the manufacturer even has a large say in the pricing of the product.
- Brand recognition. The store or the carrying Brand may be different, but the product still carries your brand. If customers like the product, they will come back to your brand, asking for more. That way one can establish his brand in the market and may possibly venture out on his own. Many good and well-recognized brands had actually started this way.
Advantages of Contract manufacturing. Contract manufacturing is an attractive option for those who are looking to reduce marketing risk and maximize on their operational efficiencies.
- Lower marketing risk. The production run is made to order for specific quantities. Thus, the sale is assured and there is practically zero marketing risk. All the marketing overheads and risks are absorbed by the marketing company.
- Economies of scale. Contract manufacturer usually takes bulk orders. They also usually work with multiple customers and take bulk orders from each of them too. This means that they can maximize on economies of scales. Their machines run to maximize efficiencies. The resources are stretched for maximum productivity. The raw materials quantities orders are very large and hence procured at much lower costs than what an in-house manufacturer could procure them for.
- Advanced skills. Since the manufacturer does not have to spend his resources on marketing, logistics and other business activities related to operating a brand, they develop their skills on improving production processes, improving quality and lowering costs. In many cases, they also have well developed relationships with not only the suppliers of their raw material but also with other suppliers such as packaging companies and logistics companies which result in better product at lower costs.
- Quality of the product. We are talking about adherence to the specifications here. In those terms, one can expect high level of adherence to the specification for each individual unit manufactured or each batch that is made. Six sigma is usually a norm, not just a management talk in contract manufacturing.
Private label manufacturing and Contract manufacturing are two different facets of how you want to run your business. Marketing is a tricky business and has lot of risks associated with it. Contract manufacturing, though with lower margins is a safer bet. One can even create his own brand of contract manufacturing amongst the marketing companies, to which these outsourcing companies come to, again and again. However, if you are ready to take the risks of and venture out with your own brand, the rewards are yours to pick.