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I read an article from Inc Magazine with a case study on a small CPG chocolate food company. The article described how the founders had received a sizeable order that could provide significant PR value to their company, but they were not certain they could fulfill the order in time.
The case study offered three recommendations from experts. Here is my perspective on each of these recommendations.
1. Focus on Quality. Don’t take the order.
I agree with this recommendation. It does not take much bad press or poor online reviews to sink your sales. It’s rare to find a food product that does not have direct competition or substitutes where customers will bolt if yours is inferior. But, I would also add that in addition to product quality, you need to focus on improving your product. Innovation is the best way to stay ahead of competition.
2. Build the Brand. Take the order.
I don’t agree with this recommendation because it takes time to get a reliable co-packer on board and trained to run your product. If they got the order in October 2010 for the Christmas season, that means they would have had to fulfill and ship in early November, at latest, so that the stores could be stocked. That is just not enough time to get a co-packer on board, so matter how hard you push. Any small CPG company needs to be thorough in doing test production runs to work out all the kinks. Rushing it and there is too much room for errors.
What the founder’s should have done from day one, which every small CPG company should do, is plan how to fulfill demand through third-party co-packers. Unless you are well-funded, building your own facility may not be feasible nor financially prudent, especially if you build it and your capacity sits idle. I have seen several companies in the last year that seem to insist on doing their own production or using the founder’s and employee time to closely manage production with a co-packer. This is not wise because the revenue side of any business is developing products, marketing and sales. Every other aspect of running a business is an expense. It’s best to train and outsource your production to third-party co-packers so you can stick to doing the task of building sales.
3. Expand Capacity. Don’t take the order.
I partially agree with this recommendation, for the reasons just mentioned. However, the recommendation is to invest in expanding their own capacity. I am not so sure about investing in your own operations to fulfill orders. It might tie up too much precious cash that can be used for sales and marketing. It might be best to have several co-packers, one that is larger and takes more lead time to fulfill orders, but can do the volume economically, and a smaller one that might be able to fulfill orders with less lead time.