As our industries emerged from the COVID pandemic over the last couple of years, volatility has persisted, especially in labor scarcity and inflationary pressures. This combination of factors has led many companies to take a fresh look at automation as a way to manage costs, solve labor shortages, and move their organizations forward in general. Both contract manufacturing/contract packaging (CM/CP) companies and their branded customers have witnessed this trend.
Automation for CM/CP companies can be clear and simple at times. If a customer has a clearly articulated need that fits with an automated solution, then the investment in automation by the CM or the CP is a straightforward exercise. Typical spend vs. savings (or cost avoidance) and return on investment calculations can quickly provide a rational way to guide the decision process.
However, decisions become more complicated when a brand owner customer of a CM/CP is working on an idea or application of an existing technology that is completely new to them and/or the CM/CP. This situation often comes with uncertainty about volumes and labor requirements in terms of both capability and capacity to support the new technology. If it involves new equipment, space requirements in the CM/CP’s facility may also be a consideration.
Less obvious or lesser-known considerations can present a greater risk for both parties. In a situation with this kind of risk, clear communication between both parties becomes important. The CM/CP wants the business but not at any cost. The brand owner is likely engaged with the CM/CP because they are also trying to mitigate risk and cost. Both parties want to make it work but need to be open about the risks and challenges—perhaps even more so than for a routine engagement.
This is the point where clear boundaries and expectations become critical. Some CM/CP companies may be fully ready to “take a chance” on the new technology. But prudence suggests that there should be some discussion about exclusivity, or another means for the CM/CP to recoup costs in case the new product driving the automation spend does not become an ongoing market success.
Without getting into common project processes like requests for proposals, return on investment calculations, or even factory acceptance tests, let’s look at a few unique questions for a CM/CP to consider when there are automation projects that are new to them:
1. What is the brand owner’s go-to-market plan for the product resulting from the new tech or new equipment?
- Will this support a test or launch of the new product?
- If a launch, will it be broad or more narrowly or regionally focused?
2. How will the automation be carried out?
Are you automating easy tasks or hard tasks?
Is the automation driven by cost and labor management, or is it required for the product to be made at all? Your answer to this question will impact how critical automation is during the initial development, test, and/or launch of the new product(s).
3. Are there other applications for the automation?
Does the CM/CP have or want the freedom to utilize the new technology for other customers or other applications? This plays a role in determining who pays and how much.
Would the automation have any other application if the initial target product went away?
4. Who pays?
I’ve written on this topic in previous columns but suffice it to say that the risk profile and other questions listed above should seed a healthy conversation between CM/CPs and their customers.
There may also be contract and/or development agreement applications and solutions to help guide how the parties answer the question of who pays.
5. Watchouts
Finally, consider what happens if there is an early end to the product test or launch. Knowing this upfront can prevent many issues and angst later. Remember that most new products fail, and CM/CP providers are often called upon because of this! Be sure you are ready to discuss finding the right balance between being an all-in partner in the venture and one that is stuck with more equipment for your boneyard!
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