Jessica Alba may have some explaining to do or, more precisely, her contract manufacturer may have some explaining to do. The actress-turned-entrepreneur has turned The Honest Company into a billion-dollar-plus business, but in recent weeks, there have been rumors of dishonesty at the household and personal care lifestyle brand.


Alba made headlines for something other than acting when reports surfaced that The Honest Company’s laundry detergent contains SLS, a charge that Alba and company vehemently deny. The soap opera over what’s in and what’s out of a product formula comes more into focus these days as more companies outsource production. And it’s not just startups and starlets leaving manufacturing to somebody else. Multinationals from Johnson & Johnson to General Mills turn to contract manufacturers to reduce headaches, improve their bottom lines and focus on what they do best—developing new products and creating great marketing campaigns.



Why Outsource?


Brian Slobodow of Golden Gate Capital has a unique perspective on the benefits of contract manufacturing and he shared that perspective during a recent Foundation for Strategic Sourcing (F4SS) meeting. Today, his private equity company has interests in several CMs, but back in 2004, he was on the team that convinced J&J management to make the move to outsourcing for a range of consumer product brands including Johnson’s, Neutrogena and Aveeno.


“It was extremely challenging,” he recalled. “When we initially met with the J&J CEO, she was a naysayer.”


The decision to outsource production of 100 million units of J&J consumer products didn’t come easily. The J&J plant slated for closure had been around since the 1800s.


“There was a lot of emotion,” remembered Slobodow. “When you close a heritage facility you get a lot of resistance.”


Resistance came from every corner of the organization; from the emotional, “I-can-only-work-with-people-I-know crowd” to analytical bean counters who argued that outsourcing would increase costs. The latter group, said Slobodow, insisted that internal costs are variable cash only (materials and some direct labor). At the same time, opponents marked up CM costs by as much as 20%.

“The way we got around it at J&J was to level the playing field in the manufacture of 100 million pieces,” explained Slobodow. “We challenged the costs on the CM side and on the internal manufacturing side.”


The J&J plant in question was sitting on a $40 million lot; the best way to unlock the value of the site? Sell it! Resistance came with signing long-term contracts, too. Opponents viewed long-term agreements as inflexible; if things don’t work out, J&J would be stuck with a manufacturing partner it didn’t want. Slobodow and the CM team had to convince management that with no real commitment, J&J would pay more. Similarly, opponents argued that if CM volumes became too big, J&J could simply bring production in-house, without realizing that potential partners would price the move into their bids. At the same time, naysayers tried to link manufacturing costs to small orders—not full runs.


“And that’s not reality,” cautioned Slobodow.


Also unrealistic was the idea that J&J had advantages in logistics and purchasing power. In fact, CMs had the upper hand because they purchased materials across a variety of platforms and they were willing to at least look at used equipment.


“J&J management turned its nose up at used equipment,” recalled Slobodow. “Most CMs will look at used equipment; they are always thinking total value.”


Finally, naysayers insisted that by producing products in-house, J&J could maintain product quality. But in fact, when reviewing the CPG landscape across all quality issues, CMs haven’t had as many problems with quality as the home team, according to Slobodow.


“You have more quality control with a contract manufacturer—you can fire them,” he insisted. “How do you fire yourself? Sure, you can get rid of one or two bad apples, but you’re still stuck with yourself.”


The key to a successful transition from in-house to outsource is unbiased analysis, Slobodow argued.


“We took all their biases and answered them with numbers and facts.”


Still, to ease some of that pushback and quiet a chorus of doubters, the J&J team took baby steps, at first, by mothballing a liquid filling facility in San Antonio, an initial move that paid instant benefits and convinced management to proceed with the CM initiative.


And what about that skeptical CEO? According to Slobodow, after seeing the benefits of CM, she became a leader who urged, “let’s do it yesterday.”


Unlock Your Potential

Unlocking a company’s potential, its cash, and even its NPD prowess, say industry observers, are all possible via contract manufacturing. As a result, questions such as “who makes that?” become “who can source that?” or “who will formulate that?” or “who can fix that?”


Today’s contract manufacturers do much more than fill orders, bottles and tubes. Many of the leading third-party manufacturers to the household and personal products industry perform a host of functions before that skin care cream, shampoo or household cleaner is ever in the hands of the consumer.


There are so many reasons why companies look beyond their walls for a manufacturing partner. According F4SS, marketers are outsourcing more than ever due to four trends:

• A shift in the organization toward core competencies; i.e., marketing, sales and R&D;
• Improvement in speed to market;
• A need for suppliers with flexibility and capability, with turnkey capabilities; and
• Cost savings vs. internal operations.

For these and other reasons, outsourcing across all industries has been growing, on average, by 15% during the past several years. F4SS estimates that 56% of marketers outsource 11-25% of their volume and enjoy an average savings from outsourcing of 30% of the fully-loaded costs.


Moving Markets


What finished product trends are having the biggest impact on CM’s business these days? Several executives who spoke to Happi noted that men’s grooming is finally taking off after years of stops and starts. Demand for men’s hair care products has become so big at GAR, for example, that the company built an entire hot fill department to process the tremendous amounts of hair pomades that it is creating.

During the past decade, there has been a shift toward more natural and even organic products, but Chris Amato, chief executive officer of Cosmedx Science, said the fervor for organic products is tempered by new regulations on the term. Still, Cosmedx Science has created Phytoproactive Technology, a new system that relies on plant stem cells to create better efficacy among skin care formulas. Anti-aging is driving business at Cosmedx Science, according to Amato, who assured Happi that he has one of the best formulating chemists in southern California.


“We can take product from concept to finish or a customer can bring in a sample and we can reverse engineer it,” he explained.


Gordon Laboratories has been called upon to reverse engineer formulas, too.


“We are not a manufacturer who will hold formulas hostage…we want you to do business with us because it is a good partnership,” explained Lana Tennant, VP-sales and marketing. “We often have to quickly reverse engineer complicated formulas because manufacturers will not give long-time customers’ formulas—even if they are unable to handle growing demands.”


A Vote for Independents


Of course, the rise of indie brands in the beauty and personal care space has been a boon for contract manufacturers. Brands as diverse as NER:D, Ittse and Stiks got their start with little more than a concept. It’s up to the CM to make the vision a reality.


According to Sundeep Gill, founder, Sundeep Cosmetics, one of the benefits of working with small independent brand owners is that they have the marketing bandwidth to try interesting new ideas and concepts.


“Some of the new marketing concepts end up shaping the cosmetic industry in a small and sometimes a large way,” he said.


Other CM executives agree.


“It has been exciting to be part of the growth and success of the indie brands,” agreed Karla Horton of Unicep. “These brands have certainly contributed to our growth and have also challenged us from a package innovation standpoint.”


Horton noted indie brands like to stand out from the crowd; and explained that Unicep has the ability to create custom packaging solutions to create a product experience that will keep indie customers loyal.


“At GAR Labs we have noticed that the sheer amount of indies has risen dramatically primary due to Amazon.com letting people set up virtual businesses and sell their products through their website,” noted Tom Raffy, president. “Selling through Amazon dramatically lowers the overall cost to enter the market place.”


Much of the growth at Advanced Cosmetics Research Labs (ACRL) is coming from the indies and company executive Tom Nickel credited the internet, entrepreneurs and international markets for that growth.


“The retail domestic market is very difficult to break into because of consolidation within the established chains and the high cost of entry,” Nickel explained. “A few indies are successful with the big chains but it is a lot easier for an indie to do business with another indie or, for that matter, with a small chain than to get distribution of their product into the mass market.”


ACRL is strictly a contract manufacturer; it has no brands of its own, noted Nickel.


“This means we do not compete with any of our customers and they like that,” he said. “Another thing that sets us apart is that we are not a one trick pony. We specialize, and have years of experience, in a wide range of categories.”


According to Nickel, quite often a customer comes to ACRL looking for say, salon hair care products, but gets drawn to ACRL’s expertise in sunless tanning, too.


“We also do spa, pet, adult and high-end skin care to mention a few of the categories we have available in our library,” he added.


The Benefits


Working with a successful CM can play a big role in whether a company makes it or not. For example, on GAR’s website, the FAQ Tab helps potential customers by reducing the amount of time they must spend sourcing the packaging.


“It lets new customers focus 90% of their time on marketing which gives them twice the chance of succeeding in the market place,” Raffy insisted.


Similarly, GAR can help customers find the right suppliers for their project. According to Raffy, despite the wonders of Google, specialty manufacturers have a very low profile on the internet.


“New customers are extremely grateful for the help we give them in overcoming this hurdle—which does feel good,” he added.


In contrast, Gordon Laboratories doesn’t deal with many startup companies, according to Tennant.


“Most of our customers are established in the industry; however, we happily create new formulations for them as part of our ongoing focus on customized innovation and service,” she explained.


Gordon Labs has learned to be very selective about its customers. Tennant noted that being a good fit is crucial for a successful partnership.


“Our mission statement truly reflects who and what we are today…and the ideal type of customer ‘fit’ for Gordon Laboratories, Inc.:  ‘To be the benchmark in the personal care contract manufacturing industry, offering our customers the highest possible product quality, transparency, innovation, and exceptional customer service.’”


According to Tennant, customers are definitely more knowledgeable about trends and ingredients due to consumers having more knowledge. 


“The average consumer is far more media-educated  and savvier about ingredient safety,” she explained. “Bottom line, today’s consumer simply demands more from the brand.”



What It Takes


The financial benefits of outsourcing are well known to multinational FMCG companies that have measured their results. Nearly every company in Happi’s Top 50 outsources at least a portion of their manufacturing. And all of them back up their business with extensive marketing budgets. Even smaller companies have bigger budgets.


“I am working with a company that is spending $2 million on a launch—they aren’t playing around; they’re going head to head with major companies,” explained Amato, who told Happi that at least $250,000 is mandatory to ensure proper inventory for a four or five SKU skin care line.


“Having the right marketing budget is critical,” he added.


But in order to have the right budget, company executives must establish their business model before they start production. Is it retail or direct-to-consumer?


“Social media is very powerful, but you have to leverage it or you’ll miss out,” Amato explained. “With all the Birchbox-type services, allowing someone to sample (your products), try it, and get familiar with it is very powerful.”


Today’s Specials


Not all contract manufacturers offer the same services or solutions. Unicep specializes in formulation, mixing/compounding and packaging specialized liquid, gel and cream products.


“We are experts in blow-fill-seal technologies that allow us to create unique, innovative packaging options for our customers,” according to Horton.


“The biggest trend right now is package innovation,” she continued. “Our skin care and beauty customers want to protect and preserve their delicate ingredients and they want creative packaging that matches their brand. They are approaching packaging with a creative mindset.”


Unicep also offers formulation assistance (whether it’s to create or improve a product), R&D support, package design and retail package support.


“Our success depends on making our customers successful in the marketplace,” said Horton. “This year marks our 25th anniversary, so we are proud to offer our customers years of industry expertise!”


Gordon Laboratories specializes in high performance, prestige skin and hair products, explained Tennant. 


“We are not a mass market manufacturer,” she  added. “Thirty percent of our employees are in our quality department; quality is our passion.”


Skin care marketers seek new manufacturing technology and more effective ingredients, according to Dieter Kuster, founder of CA Botana. Kuster has more than 50 years of experience and has developed several technologies during his career, including Alphasomes, which he describes as an advanced delivery system to increase product effectiveness. Other specialties include target-specific enzymes and superior peptide technology.


“(Our specialties would be) our nanotechnology, proprietary peptides and herbal extracts using CO2 extraction,” he told Happi.


Controlled manufacturing to CA Botana’s specifications results in the most effective and results oriented cosmetic products, according to Kuster.

CoValence is particularly adept at developing and manufacturing OTC, anti-aging cosmeceuticals/derm-cosmetics and on-trend retail products via natural, traditional or blended systems, according to Melinda Wochner.


“In addition to our novel formulas, we have a creative team that works closely with our clients to understand their brand strategies,” she explained. “In turn, we are better equipped at providing specific products and marketing to help our clients move ahead of their competitors.”


Patience: Virtue or Necessity?


During a recent F4SS Connect event, nearly every session touched on the “soft side” of the business; e.g., listening, leadership and patience. The goal, it seemed, was to make attendees not just better business people, but better people as well. Managing oneself must come before one can manage others, let alone a business unit or company.


“Difficult to manage relationships sabotage more businesses than anything else,” explained session leader Jeff Hurt of Velvet Chainsaw, a consulting group. “We feel before we think. You can’t have an adult conversation when you’ve been emotionally hijacked.”


To keep from getting hijacked, Hurt recommended the SOSS method:

• Stop
• Oxygenate (deep breathing works wonders on the psyche);
• Strengthen appreciation (develop an attitude of gratitude); and
• Seek information (Ask yourself, “what role did I play in creating this tension?”).
•  

Certainly, they’re words to live by for any relationship or conflict resolution, but they can play a critical role when customers and CMs are at odds.


“The independent customers are less patient and less sophisticated business people than I dealt with 10-20 years ago,” explained Raffy. “To deal with this reality, GAR Labs guides them to our FAQ Tab on our website so that they can quickly learn the proper steps and expected lead times for each step to fabricating a skin care or hair care product.”


At Cosmedx Science, the goal is to troubleshoot well before production starts.

“We help them understand the timelines,” explained Amato.


For example, very few startups realize that accelerated stability tests still require 90 days.


“So, if the approval process moves quickly, the entire process can take four months,” said Amato. “But when people start changing their minds, the process can take six months.”


According to Nickel, many of ACRL’s current and prospective customers don’t have traditional business backgrounds, “but they seem to be willing to ask questions and learn to do what it takes to become successful,” he explained.


Where startups slip up, Nickel explained, is not truly partnering with ACRL. That means that they don’t share their vision or marketing plans. Another sticking point is unrealistic time expectations for their project especially as it pertains to stability and compatibility testing. Further, not understanding the competitive environment regarding pricing, and not giving ACRL the best estimate of volume for their initial order are a few of the mistakes startups make.


CoValence has set up minimum order quantities and costs to aid startups, but Wochner noted that newcomers tend to underestimate the time and finances necessary to purchase unique components.


“Custom packaging can take six months or longer and requires a very large financial investment,” she explained.


CoValence’s education process includes regular communication as well as development and education summits at CoValence’s laboratory or at the client’s location, explained Wochner.


“In addition, our global compliance department helps clients complete the paperwork necessary to globally distribute products,” she said. “CoValence has always had a ‘global’ outreach vision, which has positioned us to help clients navigate OTC paperwork and complete exporting and importing paperwork.”


Some startups do tend to rush into the development phase with very rudimentary marketing briefs, Gill of Sundeep Cosmetics told Happi.


“We commonly say that the formulation development is often the fun and easy part, the marketing and positioning of the brand is the troubling part.”


Wochner noted that while indies often have extremely creative founders, these same executives often underestimate how difficult it is to get products into the hands of consumers.


According to Horton on Unicep, the biggest mistake that the startups make is not doing upfront research in the market and not having a solid business plan. She noted too, that, for the contract packager, there is risk in working with startup companies, but the rewards can be high, as well.


Raffy of GAR offers words of advice that he’s picked up along the way. He noted that the biggest mistake new customers make is trying to launch too many products at the start.


“I tell them, ‘When it comes to product launches, give birth to one baby at a time, don’t be the Octomom; it will kill your business.’”


If she’s truly honest, Jessica Alba would agree.