Contract Manufacturing In Bakery Industry -Win -Win Arrangement

contract manufacturing in bakery

Have you wondered  that the biscuit pack or the bread in the poly bags  are manufactured by outsourced companies and not  produced by the principal brand or the manufacturer for which you have paid for .This arrangement for contract manufacturing is a win-win arrangement between the large companies with small to medium contract manufacturers . For your information all major bakery brands have their Co Packers ( CP ) or contract manufacturing unit ( CMU ) spread across the geography of country  . CMU could be as large as 50- 60 units affiliated to major brands .This is also the best method to test regional markets by large multinationals in any country thus avoiding large investment and infrastructure and making a quick exit in case of  failure of not making any inroads in the market segment .

Major Advantages of Large Companies  from  engaging Contract Manufacturers  are
1. No large investment in infrastructure
2. No major commitment for labour /workforce
3. No major legal compliances  and liason for legal from their side
4. Can start operations in short span with cmu in any defiecient market
5. Easy exit
6. Can have advantage such as  easy backward integration if possible with facility with the cp
7. Cost saving s in terms of salaries and emoluments
8.  Inventories with cmu
9.  Trials and development can be taken with cmu's


Advantage  for Contract Manufacturers

1. No expense on building brands
2. Steady income and low risk on investment
3. No marketing and brand building investment
4. No need have large sales force
5. No need for procurement department
6. With low investment and various financial arrangement with principals
7. Logistic and transportation inward/outward to be arranged by principals
8. Can build facilities alongwith plant for backward integration and earn additional income.
9. Can promote own brand with idle capacity
10.Consumer and customer issues with principals
11.Gets technical expertise with help of principals
12 .Raw material/packing material  arranged by principals as per their standards


Following entities enter into contract manufacturing

Large manufacturers and brands
Major Super markets and Malls
Private enterpreneurs
New entrant in segments

All Major brands of bakery  have network of contract manufacturers who produce s products as per the principals specification /standards /recipes . Quality is monitored by representatives of principals based at  contract manufacturing units . Technical help and developments are taken care by the principals . Machinery can be leased or supplied on bailment  to cmu's. Principals enters into contract  with certain  conversion rates per unit of product taking into account following cost

Labour cost
Fuel/electricity cost
Maintenance cost

Penalties  or deductions  are  worked out  for negative material variance if cmu or cp  fails to produce as per standard output .