He Who Innovates…

If it is success that a company is after in the consumer-packaged-goods industry, the key to achieving that success is the regular and continuous introduction of new products. And those new products can mean a big investment, but who should be the most proactive with innovation is the question.

“It’s an ‘all-depends’ scenario, but [both brand owners and manufacturers] have a stake in the success of the product,” says Bill Gislason, director of business growth and development for Cincinnati-based Haney PRC, a packaging development organization. “The brand owner needs somebody — a partner — to help bring that product to market,” and contract manufacturers can make that happen.

Citing a study done by The Economist in 2002, Philip Best, vice president of design and innovation for Cincinnati-based design agency LPK notes that innovation is driven by connecting things that otherwise aren’t connected.

“Typically what happens is a brand owner or manufacturer or a designer will have an idea, and they put it together with bits and pieces of other ideas, and that’s where the best ideas come from,” Best says. “It’s when you put together the pieces that don’t seem to fit together that we find the most fertile ground for opportunity. It allows you to explore things that in a branding world would be positioned differently. It also allows you to explore the invention of new product features and benefits from the more technical side of the business.”

While collaboration between brand owners and manufacturers would be ideal, the most common occurrence is innovation coming from the brand owners, since they tend to have a bigger risk.

“The people who own the brands are the folks who put the most tangible money and time out,” explains Phil Federspiel, principal and chief executive officer of Group 4, a design consultancy in Avon, Conn. “The question gets turned around when it comes to production and there are tools to be built. Then the investment ratio can potentially change to a contract manufacturer. So the model on the back end varies, but the model on the investment on the invention and creative part is usually born by the brand owner.”

That’s not to say that the contract manufacturers can’t be the innovators of course; it’s just more often than not they’re…well, not.

“Manufacturers in general, by virtue of the mandates that are put upon them by the consumer-packaged-goods companies, are focused on being lean manufacturers,” Gislason says. “Innovation doesn’t typically take root in that environment, though there are exceptions. But in general, co-manufacturers look toward lean manufacturing to stay competitive with the competition and/or generate cost savings.” Gislason notes that innovation for contract manufacturers often comes in smaller, innovative ways of manufacturing, such as down-gauging materials.

Worth the Investment

It can be risky going forward on a new product. Success is never guaranteed, and while a product might sound perfect on paper, the reality of the development process might prove otherwise. There is no hard-and-fast rule of what is always worth the investment vs. what is never worth the investment, and experts agree that everyone involved has to take a close look at their company’s needs and wants before tackling a new product’s development.

“It depends on your perspective, and what drives your business,” LPK’s Best says. “Some companies have a constant drive around efficiency, and real innovation is more clearly focused on the effectiveness side of the equation, meaning how you deliver game-changing, positive results, and how you make your consumer or your customer think and interact differently with your brand or product. You can’t pre-judge what innovation is going to look like. Part of innovation is trying a lot of things and keeping what works, and the biggest killer of innovation is expecting that you can get a data proof on it before testing it out on people. You have to figure out what is worth keeping. Relative to your business plan, that’s anything that is going to drive your business, something that is new or differentiated, and creates equity behind the brand.”

“You have to recognize everyone’s expertise,” says Peter Everett, senior design manager at Group 4. “Developing new products can be beneficial to both brand owners and contract manufacturers. Usually depending on how the intellectual property is assigned there is something the contract manufacturer can offer as a service going forward, even if that didn’t succeed for a particular brand or application.”

An important thing to keep in mind is that in contract manufacturing being an innovator isn’t a one-shot deal. No one likes to be a one-hit wonder, but without continued drive and thoughts toward the future, that’s exactly what can happen.

“It’s important to take a long look at how they’re going to stand as a leader longer,” Best says. “They tend to be very short-term, profit-focused, and that makes them vulnerable in the marketplace to innovators who will invest. Once you grow and become large you make yourself a target for people who will innovate around you. Once you’re in a leadership position, you need to continue to lead. If you choose to be an innovator, you have to stay on that course. Otherwise you’ll go the way of a lot of brands or businesses that simply recede and sink to the bottom of the marketplace. It’s a constant challenge around what you’re going to do to lead, whether you’re on the branding side or the manufacturing side.”

New Machine-ations

You can’t put a price on new product innovation, but you can put a price on the machinery that helps create the new products.

“If you ask the brands who stands to make the greatest long-term gain from this, they are the ones who, from a principal standpoint, own the risk, and should make the investment in the equipment,” Best says. “If I want to grow my business, it’s up to me to grow my business. The other side of that, though, is that brand owners will tell their contract manufacturers that if they want to keep producing for them, they’ll invest as a partner.”

Smart contract manufacturers know that putting in at least some investment is going to be better in the long run. “There are entrepreneurs out there on both sides of the table who are investing for their future benefits,” Best notes. “And if manufacturers don’t invest in technology innovations that make them more flexible, more viable, and improve their efficiency, someone else will innovate in their market space.”

But just because investment in new equipment on the contractor’s side can be a boon, doesn’t mean that it should be done. As Haney PRC’s Gislason explains, if a manufacturer has only a single client with a certain equipment need, then the investment probably isn’t worth it. But if new equipment would be useful with other clients of the contract manufacturer, then recognizing the trend at hand and making the investment from the manufacturer’s end is a safe option.

“A partnership really needs to be there when you’re talking about your client relationships,” Gislason says. “If I’m a contract manufacturer, and I don’t have strong relationships, I’m going to be ponying up a lot of capital.” He adds that in today’s contract manufacturing environment, more contractors are willing to make the investment in equipment, but only if there are guarantees in place.

“A lot of times contract manufacturers will agree to make a million-dollar investment, but in return they want five years’ worth of the volume of the brand owner. It’s one of all sorts of vehicles you can put in place to deal with capital issues,” Gislason notes. “It’s a shared risk,” he adds. “Most of the innovation that consumer packaged goods companies are coming to contract manufacturers with is not a commodity by definition. It’s a new innovation; a lot of times brand owners want exclusivity over it, whether it’s the bottle shape or a package design. And sometimes that investment can’t be completely shouldered by the contract manufacturer because it’s specific for that application, and that’s where the partnership comes in.”

The level of success from investing in, developing and producing new products that will bring equity to brand owners and continued business to contract manufactures can’t be defined by a dollar figure. Profits will vary wildly for a successful new product, depending on the level of innovation, volume and many more factors. Some new product innovations prove to be gigantic and life-changing, such as a new way to clean, and some are simply as incremental as a new reclosable feature on an existing product. Whichever way innovation manifests itself, both brand owners and contract manufacturers know that new products are not serendipitous, they are necessary for continued progress.