People often mix up private label supplement manufacturing and contract supplement manufacturing as complimentary terms since they assume both processes to be one and the same. Let us first see why they appear the same before looking up the point of difference. Both processes are outsourcing of manufacturing to a dedicated company that is prepared to give up all branding rights and just focus on production. The same product is made for multiple businesses that will brand and sell it under different labels. Now, if any one of these businesses wants something different in the product, then it will require customization. That is because it is an exclusive requirement thereby making it what is known as contract supplement manufacturing. Read about Contract vs Private Label Supplement Manufacturing below.
It’s all about economies of scale
When private label supplement manufacturers take up production of a particular product, they have to ensure that it will be economical for them to do so. There is something called a ‘production run’ in manufacturing wherein utilization of resources like labor, material, equipment and machinery is calculated against the total quantity to be produced and sold.
In this production run, if the utilization cost of the resources exceeds the sales revenue, then it is not worth it for the manufacturer. Since this kind of private label manufacturing is used by small marketing businesses, it usually takes quite a few of them to fill up the minimum quantity slot for the production run to be profitable and worthwhile.
Importance of minimum order quantity
When a marketing company wants their private label supplements to be made as per their specifications it becomes contract manufacturing. In this case, the first objective of the manufacturer is to ensure that the buyer can meet the minimum order quantity.
This minimum order quantity will justify the cost of the production run and also make it profitable. Here, the private label supplement manufacturer becomes a contract supplement manufacturer. Beyond the minimum order quantity, there are other input costs that are considered such as, product innovation, use of more or different ingredients as well as hiring a specialist.
Contract manufacturing is expensive
Contract supplement manufacturing is certainly far more expensive than what private label supplement manufacturers can afford. It is suitable for large brands with their own manufacturing setups that need to outsource their manufacturing sometimes in order to meet market demand.
However, a mid-sized or even a small dietary supplement manufacturer that is able to handle the cost can go with this kind of contract supplement manufacturing if it suits their strategy. It needs to be remembered that despite the higher cost, it is just a fraction of what it takes to set up a manufacturing unit and then running it profitably.
Contract supplement manufacturing is another form of private label supplement manufacturing where there is just one buyer as against the multiple buyers in routine private label deals. This is just an overview of two distinct approaches of outsourced manufacturing because the process is wide open with opportunities for the stakeholders to work out the best deals. In the end it should benefit both the buyer and the seller as the markets are becoming increasingly competitive.