The advantages and challenges of in-house manufacturing
Should consumer product startups manufacture in-house or partner with a copacker?
One of the first steps in launching a consumer products business is determining whether to manufacture in-house or to partner with a copacker.
For the creator turned entrepreneur, the natural path is often in-house manufacturing, where one can stay close to their product, allowing for greater control over quality and operational workflows. This was the case for me in building my brand Schmidt’s Naturals, which started in my kitchen as a passion project. Before long, what had begun as making quickly grew to full-scale manufacturing.
But not everyone is interested in building a cost-intensive factory alongside growing operations, which brings additional responsibility to an already high-pressure startup environment. This is why partnering with a copacker is the preferred choice of many. However, the benefits of in-house manufacturing can offer real competitive advantages.
When we outsource production to a copacker, we risk losing oversight of quality. With Schmidt’s, I’d worked tirelessly to perfect my deodorant recipe, coming to understand the intricacies around melting and mixing techniques and temperatures. It was important for me to stay close to my product to maintain its intended quality.
Ensuring that a copacker meets your own high standards of quality takes a significant investment of time and money. It also means that your product will be made with the partner's pre-existing machinery and processes. The end result may be a product that lacks the differentiation that could be achieved by manufacturing in-house.
Predicting demand is one of the biggest challenges in any fast-growing consumer products startup. While this is still an issue with in-house manufacturing, it is much easier to manage than attempting to predict volumes with a copacker who often requires several months’ notice to secure line time.
By controlling production, it's also easier to innovate, test, and produce new formulas quickly. This can be especially valuable with limited-edition or seasonal products where smaller batch sizes and shorter lead times are needed. Engaging a partner to do limited runs often comes with high minimum order costs, and the ability to iterate product on the fly is not a consistently available option.
Sharing formulas and recipes with an outside party can expose a business to competitive threats. By manufacturing in-house, I was able to protect my custom recipes. Later, when I added a copacker to support demand, I took measures like implementing a system where we premixed all powders and oils at our facility before shipping them to the copacker. That way, they wouldn’t have access to my precise formulas.
With copackers, terms often require up-front payment for a large volume order. This can mean a significant amount of capital is tied up in inventory. Manufacturing in-house allows you to produce to meet immediate demand, enabling flexibility and healthier cash flow.
To keep costs at a minimum, investment in space and machinery can scale with demand, with equipment upgrades and line expansions over time versus going all in up front. Cost benefits of producing in high volume will generally come with greater scale. For any startup, negotiations and the development of healthy relationships with suppliers will be critical for maintaining a low cost of goods.
Building your own manufacturing operations creates jobs and supports the local economy. It also forms kinship and camaraderie amongst team members, rallying them in support of your business. Contributing to your community is highly rewarding and brings more attention to the business. For example, Schmidt’s was once recognized as Manufacturing Company of the Year by Portland Business Journal and New Exporter of the Year by the Port of Portland. Once you get large enough, the city too may recognize your success in the form of tax incentives.
Despite the advantages, the decision to manufacture in-house can't be taken lightly, and there are serious considerations that should not be overlooked.
The responsibility of sourcing ingredients and packaging is on you. This requires building relationships with suppliers and ensuring proper backups are in place for all materials. I’ve experienced delays due to weather, shortness of supply, even a truck that tipped and spilled all my ingredients across the highway.
It’s especially important to understand the importance and potential in negotiating pricing and terms with suppliers. But getting off the ground is hard—keep in mind that in those early days of ordering small quantities, those without negotiating leverage can be significantly disadvantaged.
Running a factory means a larger employee pool to manage. With leaner teams it’s easy to know everyone on a more intimate level, but you have to work harder to establish those relationships on the shop floor. Non-disclosure agreements are especially critical as turnover is generally higher in manufacturing environments. OSHA compliance and employee safety must be a priority, which requires considerations around things like dress code, training on equipment use, and more.
Scaling in-house operations requires an increased emphasis on human resources, personnel development, and people management—these all come with a significant investment of time and money.
Navigating the complexities of equipment and machinery takes time and research. There are decisions around leasing versus buying, old versus new (I learned a $15,000 lesson in buying a used labeler), and when to add more staff vs making a larger investment in an automated system or building out additional production lines. Electrical requirements, pallet racking, and machine maintenance are other hefty expenses.
Inventory planning and tracking of raw materials and finished goods is an important part of ensuring smooth and cost-effective operations. It’s a balancing act between not wanting to run out and having too much capital tied up in raw materials or finished goods.
There is also substantial impact on end-of-year taxes. And, changes in demand puts pressure on production schedules. Imagine the juggling act required in scaling from batch sizes of twenty deodorants to 50,000.
Hiring consultants to help streamline operations might be necessary. With Schmidt’s, I hired Oregon Manufacturing Extension Partnership who worked with us to reconfigure production lines and develop a more intuitive and efficient floor plan. Their work in instituting a lean manufacturing approach helped save time and money, and it improved cross-department communications. While the benefit of their support far outweighed the necessary financial investment, it was not without stress or a considerable commitment of time.
Even with scaled in-house manufacturing, it might make business sense to eventually partner with a copacker. I ended up doing this with Schmidt’s to support increasing demand and act as a backup in the event of a major setback in our factory. This was also a necessary step in expanding our product lines. And while I hadn’t created the new product offerings from scratch with my own hands, I was well-equipped to ensure best practices at the partner facility, holding all products to the same high standards I’d set for myself in my early days as a deodorant maker.
No matter which route you choose for your products business, getting clear about what excellence means to you, and then returning to the commitment time and time again, it will pay off.
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