4 Key Contract Models for Successful Brand Partnerships

A crucial part of the partnership between brand owners and Contract Manufacturing/Contract Packing (CM/CP) Partners is establishing their contractual framework. The approach to collaboration can differ greatly, influenced by numerous variables. Here are some typical contractual structures observed in these partnerships.

 

Time and materials:

 

A fundamental approach to collaboration involves basing agreements on the time and resources used. In such setups, the brand owner may supply some of the materials and occasionally labor. The costs incurred by the brand owner include any usage of production lines, materials, and labor provided by the CM/CP partner. The line time rate typically encompasses labor, overhead, and profit. This pricing model is highly transparent, with bills reflecting the exact amount of time, materials, and manpower utilized by the CM/CP. It's up to the customer to associate these costs with a per-case price, not the provider. Charges are usually determined daily, per shift, or hourly. Materials are billed as they are used, or when opened, especially if they cannot be stored for long after opening. This model is particularly advantageous for development and trial phases, where formulas, processes, and specifications are still being finalized.

 

Tolling only:

 

On the opposite end, there's the full turnkey or "per case produced" contracting approach. Here, customers set the specifications and might also sign off on the formulas and processes used. The contract itself revolves around both parties agreeing to a set price per case (or another unit of measurement for the finished product). Essentially, the CM/CP is responsible for acquiring materials, manufacturing the product, and then selling it by the case to the customer. Typically, the customer will provide a production forecast, and the manufacturer needs to ensure that the finished products are ready to meet this demand. If the actual orders align well with the forecasts, billing usually occurs upon the shipment of these goods. Critical aspects to be clarified in the agreement include how to adjust for changes in material or transportation costs, as well as setting expectations around lead times for modifying orders and the minimum quantities required per order.

 

Mixed Model:

 

In a middle ground between the previously mentioned models lies a hybrid approach. This model allows each party to take charge of certain aspects where they hold a competitive edge. For example, the customer might oversee the procurement of materials in areas where they possess expertise, experience, or purchasing power. Similarly, the provider might handle materials that are either more generic or within their sphere of procurement proficiency. In this setup, the costs for labor, overhead, and profit remain constant. However, the overall pricing could be influenced by who purchases which materials and the management of production schedules. As with other models, acknowledging minimum production quantities in the contract is essential. The contract might also cover handling fluctuations in material or transportation costs and strategies for managing any finished products in inventory, especially since the cost of these items remains in a shared financial state until ownership is transferred.

 

If you're thinking that the four contracting models we've discussed don't fully encompass the diversity of sourcing agreements between a CM/CP Provider and their clients, you're on to something. Indeed, these models highlight the primary frameworks, yet the spectrum of potential contracts also includes hybrid or unique structures that blend elements of the outlined types. We hope this discussion sparks innovative thinking that could foster more cohesive and advantageous contract arrangements in the future. If that's the case, then we've achieved our objective with this piece. Wishing you the best in navigating these possibilities!

 

How to build successful brand-CM/CP relationships

 

Effective communication doesn't just help navigate supply chain challenges; it also fortifies the bond between Contract Manufacturers/Packers (CM/CPs) and Consumer Packaged Goods (CPG) companies. Carl Melville, from The Melville Group, highlights six key characteristics of thriving partnerships:

 

1. Operational Transparency: Open sharing of information regarding operations.
2. Team Alignment and Communication: Ensuring teams across both organizations are in sync.
3. Complementary Capabilities: Leveraging the unique strengths of each partner.
4. Cross-Company Collaboration: Working together seamlessly across organizational boundaries.
5. Early Engagement in Packaging Optimization: CPGs involving co-manufacturers or packers early to refine packaging processes.
6. Alignment on Strategic Outcomes: Ensuring both parties share common goals at every level.

 

Moreover, there's a growing expectation for CM/CPs to enhance their environmental sustainability efforts. However, sustainability often comes at a cost or requires an investment, making it crucial for CPG companies to support these initiatives actively. A notable example includes General Mills sponsoring its CM/CPs and suppliers to join the Supplier Leadership on Climate Transition Program (SLoCT), aimed at educating them on collecting crucial data to progress sustainability objectives.