Developing and Manufacturing Your Product

Your next step in getting your business started is called "product development" or "product commercialization."

This includes taking your initial market research and, perhaps, a simple homemade recipe and developing a physical version (or prototype) of your product, including a commercial recipe and the manufacturing technology needed.

You may have already developed a sample of your product at home. However, commercial recipes must still be developed for batch processing.

Choosing A Manufacturing Strategy

There are several ways you can proceed from this point, including:

• developing your own commercial recipe and manufacturing facility;
• obtaining the assistance of a product development specialist who will help you develop a commercial product; or
• developing your own commercial recipe and finding an existing food processor known as a co-packer, who will make the product according to your recipe.

You'll find that, as with market research, there is a great deal of support from groups that want to help you develop the best commercial product possible. These groups are experienced in new-product development, or they specialize in one part of the process, such as developing recipes.

Most groups will charge a fee for gathering specific information or preparing material customized to your needs. To avoid excessive fees, be clear about your objectives. Also determine whether you have the expertise to develop your own commercial recipe, analyze ingredients and fat levels and set up a manufacturing plant. Product development fees have been known to exceed $20,000.

Setting up your own manufacturing facility

If you decide to operate your own plant, you can either lease or purchase an already existing facility or you can construct a new building.

Choosing the Best Location

You need to look at many factors when you're deciding on a location. These include rental or purchase cost, customer and market location, labour force, raw material accessibility, trucking and freight access, leasing arrangements and industrial space availability. You should consider the following initial steps:

• understanding all the needs of the production process;
• determining if an existing building will satisfy those needs;
• trying to locate a facility that was originally designed for food processing operations (preferably one that's already federally or provincially registered);
• determining if the lessor will pay for renovations required for the business; and
• calculating whether it is cheaper to adapt an existing building or to build a new one.

Zoning

Be sure to check the zoning laws for the location you have selected. To find out if your business can obtain a permit, call the city planning department (the number will be in the Blue Pages of your phone book). You can also get a good indication of whether the area is zoned in your favour by looking at the surrounding businesses.

If the area you have chosen isn't zoned for business, you can apply for a re-zoning vote before city council. (Re-zoning isn't likely to happen if there is other land available in an appropriate zone.)

Also be aware that just because one inspection department checks your proposed business and, for example, certifies that it meets health and safety requirements, you can't assume you are a correctly zoned business. Each department is operated separately.

Talk to local economic development officers; they can be a great ally in helping you with all municipal concerns.

Food Plant Design

Naturally, you'll want your plant to operate as efficiently and cost-effectively as possible. As well, you'll have to meet certain federal, provincial and municipal requirements. Here are some questions and considerations to keep in mind:

• Your bank will ask for a Phase One environmental assessment if you are buying a site, and it could also be required if you are leasing or changing the use of an existing facility.
• If you are taking over an existing building, is there documentation to show that it was used for food processing?
• Is there room for future expansion?
• Does the facility need repairs?
• Do the hydro services fit your needs?
• Will you need space for a cooler?
• The production line should be as linear as possible; when cross-overs occur they result in inefficiencies, staff waiting time and loss of productivity.
• If possible, use rolling conveyors, for less walking, lifting and turning.
• Here's a general rule of thumb for size-1,000 square feet for $100,000 in sales, 2,000 square feet for $200,000 in sales, etc.
• Two doors-one for shipping, one for receiving-are best.

Also look at such requirements as floor drains, washable walls, suitable hand-washing facilities, washrooms that don't open onto the production floor, a change room and a separate area for storing packaging goods, ingredients and finished goods.       

Using A Product Development Facility

Product development facilities include laboratories, research stations and pilot plants.

Laboratories provide product development and testing facilities on a small benchmark scale. This is usually the first step if your product is totally new rather than a variation of similar or previously processed products.

The process may involve standardizing your home recipe and developing it to a commercial formula. This would include analytical tests, chemical analysis and shelf-life analysis.

Product Development Laboratories

You'll find a list of product development laboratories in the Resources section of this guide. For the names of other product development testing labs that operate in Ontario, contact the Ontario Ministry of Agriculture, Food and Rural Affairs-Business Development Branch, at 1-888-466-2372.

Guelph Food Technology Centre (GFTC)-Pilot Plant

The GFTC provides and maintains a state-of-the-art pilot plant with specialized facilities for fruits and vegetables, dairy, meat, cereals, baking, fermented products, confections and pet food.

You can access this pilot plant through a project at the GFTC or by arranging to lease or rent space to install and test equipment and new processes.

Leading equipment manufacturers have installed equipment in the pilot plant. They can demonstrate the operation of new equipment or carry out confidential development work with you.

Ingredient manufacturers use the facility to test the performance of new products in a range of processing environments. You can also use their other advisory services, covering product development, scale-up and nutrition labelling.

For more information, contact: Guelph Food Technology Centre 88 McGilvray Street Guelph, Ontario N1G 2W1 Tel: 519-821-1246 Fax: 519-836-1281 E-mail: gftc@gftc.ca

Research Laboratories

In addition to the GFTC, several laboratories provide food research services. You'll find a list in the Resources section of this guide. Note that the list isn't complete; for the names of other food research labs that operate in Ontario, contact the Ontario Ministry of Agriculture, Food and Rural Affairs-Food IndustryBusiness Development Branch, at 1-888-466-2372.

Co-Packing Your Product

A co-packer, or contract manufacturer, is a food processor that agrees to produce another company's product within their own facility. Manufacturers that pack products for others generally do it to use their own equipment to full capacity, which will cover some fixed costs.

Choose a co-packer carefully to ensure that it meets your criteria, because it is producing a product that will possess your name. After all, it's your reputation that will suffer if the end product doesn't meet client/consumer standards.

Advantages and Disadvantages

There are some definite advantages in having your product produced by an existing manufacturer. For example:

• no investment in facilities or equipment;
• conservation of cash;
• fewer personnel needs;
• reduced capital requirements;
• reduced start-up time required;
• able to bypass plant maintenance and equipment obsolescence;
• ongoing technical support by co-packer's personnel; and
• assistance with product development (some co-packers).

There are also some drawbacks to using a co-packer. However, they can be mitigated with your contractual agreement. Make sure your contract covers:

• control of your product (quality, safety and delivery);
• formula confidentiality; and
• cost and product agreement.

Because you can't be present for every production run, you must have mutual trust and confidence in your co-packer and your agreement.

Establishing Your Criteria for a Co-Packer

Before you contact potential co-packers, it is essential for you to define your specific needs. Some things you should consider include:

• the price you are willing to pay for their services;
• the quality that must be maintained;
• the volume you need produced;
• distribution and delivery methods required;
• your level of involvement in manufacturing;
• the timing of your needs; and
• the availability of warehousing.

You also need to determine whether you require a co-packer that specializes in a particular area (for example, canning equipment). This will depend on your specific equipment needs. Often it is difficult to find a co-packer with the exact equipment you require. In such a case, you must determine up front whether you are willing to purchase or lease the equipment to be installed on the co-packer's premises.

It's essential to prioritize which needs are the most important to you. It's unlikely that you will find a perfect match between your objectives and those of your co-packer. Trade-offs must often be made. By prioritizing your most important objectives, you can more easily determine which ones must be met and which can be compromised.

Where to Look for Co-Packers

Even many experienced entrepreneurs and workers within the food industry often don't know where to begin looking for a contract manufacturer. There are, in fact, very few publications that list potential co-packers. It's usually through work-related encounters that manufacturers are revealed.

For assistance in finding a co-packer, contact the Ministry of Agriculture, Food and Rural Affairs at 1-888-466-2372.

Other alternatives available to assist you include:

• food industry associations;
• Industrial Research Assistance Program advisors; and
• Private Label Directory, published annually by Private Label Magazine (for U.S. co-packers).

Selecting a Co-Packer

Once you have a list of co-packers, start contacting manufacturers to determine:

• if they are willing to co-pack; and
• if they are capable of satisfying your needs and objectives.

Ideally, the size of your business should be matched to that of the co-packer. That is, a small or medium-sized co-packer will probably service a small product line best.

After you have screened a number of co-packers and begun looking more closely at using a few facilities, you will want to schedule a tour of each potential plant. From this tour you will be able to get a good idea of their processing line set-up, general up-keep, sanitation, product loss factors, quality monitoring systems, etc. It might also be a good idea to ask to see:

• references from other clients;
• copies of federal and provincial processing licences (if applicable); and
• copies of previous quality control inspections.

Limit the amount of information that you give a potential co-packer about your product, formulas, processes, etc., until a confidentiality agreement has been signed between both parties. It's wise to not disclose confidential information to a co-packer, regardless of any agreement that has been signed by both parties, until you are absolutely certain that this is the co-packer that you are going to contract. You certainly don't want someone running away with your ideas.

A test run is usually completed before signing any agreement. Test runs not only determine if the product can be produced within the facility, but they also help to establish the costs assumed by the co-packer.

Other key points besides processing capabilities must be taken into consideration when you are selecting a co-packer. These factors are associated with the way the manufacturer does business and how it will affect the co-packer-the client relationship. When dealing with a co-packer, consider their openness, enthusiasm and corporate goals in addition to their facility.

Co-Packing Costs

In order to negotiate a mutually beneficial agreement with a co-packer, you need to know the costs of producing your product within their facility. The co-packer will provide you with a breakdown of the fixed and variable costs.

Generally, if you can offer a co-packer high volumes or long-term business, you will likely be able  to negotiate a better agreement.

In calculating what you can afford to have your product co-packed, you may need to consider the cost of mark-ups as the product moves from the co-packer to retail. In the food industry, mark-ups are calculated from the retail price working back, rather than from the cost price working up. As a rule of thumb, retailers' margins average around 30 percent. Distributors' margins can be as high as 30 percent as well, depending on the services provided.

Product Development

Whether you plan to develop the product yourself or use the assistance of a product development specialist, you need to take certain steps in preparation.

Food product development involves building on an idea and developing a product to the stage where it is suitable and acceptable for commercial sale.

Recipes used for commercial-scale production can be significantly different from the original recipe, because the commercial product must meet the requirements of the regulatory agencies. Many product development facilities can assist you in modifying your product so that it is suitable for commercial production and is accepted by consumers.

Before you approach a product development facility, you should establish certain criteria for choosing one that will be appropriate for your product.

By this stage, you will have identified the location and size of your target market, so you have an idea of the potential sales. You will have assessed your competitors' products, gathering such vital information as the ingredients and packaging (including package specifications and cost of packaging) and the positioning of the products in the marketplace. Sensory evaluation tests and physical and chemical analyses can also be performed on your competitors' products, which will provide further information on their composition.

Once you have assessed your competitors' products, you should have a clearer idea of what the final product should be like. For example:

• general description (fruit pies, cookies, etc.);
• basic process (fresh, frozen, etc.);
• flavour and aroma;
• key ingredients (blueberries, chocolate, etc.);
• texture;
• shelf life; and
• packaging.

You aren't trying to duplicate a competing product, but you may generate ideas for possible ingredients or packaging and combine them with your own unique ideas.

Product formulation involves a series of trials in which test batches are evaluated against a pre-determined set of quality criteria. Before you begin the product development process, set a budget for the amount of money you are willing to spend. This will help the product development facility to determine which services you require. It will also help you to identify the areas that are crucial to developing the product so that it is acceptable for commercial sale.

Equipment Sourcing

Sourcing equipment for the production of your product can also be a difficult process. One way to get the information you need is through the expertise of other food producers; they can provide trade publications, supplier lists and trade show information.

As well, people in research and development and product development will provide important information. Go to the Resources section of this guide for equipment sourcing contacts.

Trade shows also provide an opportunity to look at available food processing equipment. Trade shows are discussed further in Part 8: Strategic Marketing of this guide.

Ingredient and Raw Material Sourcing

A good place to start is with the Canadian Company Capabilities website at Industry Canada. The database, which profiles tens of thousands of Canadian companies, is used globally to find Canadian supply sources, investment partners, agents and joint venture projects.

You can also find other information sources for suppliers of raw materials through trade publications, trade directories, trade shows and other producers. One useful source is:

Canadian Food Brokers Association c/o Food & Consumer Products of Canada Tel: 416-510-8024 E-mail: info@fcpc.ca

Inventory

Inventory is the most visible and tangible aspect of a food processing operation. It includes all the raw materials you have on hand for manufacturing, the goods in progress and your finished products.

These items are a large portion of your business investment, and you must manage them well in order to maximize your profits. As a small business, you probably can't afford the losses that poorly managed inventory can cause.

Inventory Management

Successfully managing your inventory involves simultaneously balancing the costs and benefits of the inventory.

The costs of inventory are called holding costs. They include the costs of storage facilities, insurance on stocks, loss, breakage, deterioration, obsolescence and the interest on capital you could gain if the money weren't tied up in inventory.

In any business, you should aim to minimize holding costs. However, the benefit of inventory is sales revenue. Sufficient inventory will ensure that your customers can purchase products when they need them. If you hold too little inventory, you may lose a sale. But if you hold too much, you may have excessive holding costs.

Proper inventory management includes the following:

• keeping holding costs low while ensuring adequate supply for customers;
• increasing inventory turnover while maintaining adequate profits;
• keeping process material stocks as low as possible; and
• making volume purchases to get discounts while avoiding excess buying.

You can choose from many inventory management systems. One of the simplest is ABC Analysis.

ABC Analysis

ABC Analysis states that "80 percent of the firm's total inventory cost is caused by only 20 percent of all items." ABC analysis divides stock items into three classes-A, B and C-that is, those items accounting for 80, 13 and 7 percent of your total inventory costs. Once you can divide your stock into these classes, you can control the stock accordingly.

A computer can help you in this method of coding sales items into the three classes. Take the following steps to do your ABC analysis:

1. Determine the value of each item by multiplying the cost times the number of units sold.
2. Rank items on the basis of their dollar value and list these in ascending order.
3. Calculate the percentage of dollar value of each item.
4. Determine the cumulative percentage for: - the number of items; and - the dollar volume based on the totals for A and B
5. Classify the items according to A, B and C groupings.

Just-in-Time (JIT)

Another method of controlling stock is Just-In-Time. This means carrying a minimum inventory and buying only as it's needed or against orders in hand. This allows you to keep inventory costs at a minimum.

This form of inventory management requires working closely with suppliers and customers to ensure that shortages of product or ingredients don't occur.

Return to Contents