Food contract manufacturing survey

In 2010 the Queensland Government surveyed over 500 Queensland food processing businesses to understand how the food processing industry uses contract manufacturing, whether contracting in or out.

Overall findings

The survey found that, of 500 surveyed Queensland food processing businesses:

• 19% of respondents reported that their business contracts out
• 28% contract in
• 15% do both to some degree
• 37% of participating businesses reported that they don't provide or receive contract products or services.

Of the businesses that engage in contract manufacturing:

• 67% reported that they contracted in functions and activities, tasks, and human resources including maintenance and specialised services
• 33% provide services to other businesses
• products and components were almost equally divided, with just over half contracting in and 47% out.

Reasons for contracting

Business growth was the main reason for engaging in contract manufacturing (83%), with 69% of businesses rating product expansion as the reason. Half said that lack of technical expertise, skills, availability of appropriate equipment, achieving economy of scale and the need to spread risk also contributed.

Half of the businesses provide contract services as part of their core business, with 12% stating that contract manufacturing was the core business. 24% provided contract manufacturing on an ad hoc basis.

While business and product expansion were reported as being the drivers for contract manufacturing, lack of technical skills and appropriate equipment to undertake the task were also reported as being strong drivers for business to contract work and services in by other providers.

While 37% of businesses who engaged in the survey stated they did not currently provide or use contract services, almost twice that (64%) reported that they believed there was potential for the business to gain greater efficiencies if it contracted work. This indicates considerable potential for businesses to outsource to other companies, including those that reported currently contracting only in (28%) or out (19%).

Drivers

Process efficiency was a key driver for just over half of businesses when it came to contracting:

• 38% attributed cost reduction
• 17% stated that lack of capital was a key factor
• 17% gave other reasons, which included lack of expertise and capabilities, and not wishing to go to a 24-hour shift (which they would have had to do if not for the ability to spread the work to other businesses).

With 66% of food processing businesses reporting that they engage in contract manufacturing to some extent, and a high number of businesses underusing their staff and other resources, it's clear that contracting is an important factor in business growth and product expansion.

By using another business's capabilities and resources a business can grow without having to inject significant capital to buy machinery or expertise that may only be required for a small amount of business activities.

The survey revealed that many businesses have not taken adequate steps to ensure they protect themselves in case of legal disputes over quality of products and services, or IP issues. Businesses should seek professional legal assistance in drawing up contracts to ensure they are protected in the event of product failure and other disputes.

Agreements

With 71% of businesses reported having formal agreements in place and almost 52% saying they relied on verbal agreements it appears a number of businesses have both formal and verbal agreements according to the scope of the contractual agreement. Of concern is that over half of the businesses operate on verbal agreements.

Over half of formal agreements were drawn up by the business itself, with 31% having documents drawn up by the legal profession. One-third stated that the other party had drawn up the agreement, indicating that some businesses have agreements drawn up by themselves and their customers.

Intellectual property (IP)

• 60% reported that there were IP agreements in place.
• 7% didn't have any agreements to protect their IP.
• 33% said they did not have any IP issues in regards to their contracts.

Transport

Responses indicate that some businesses have dual arrangements according to the business relationship.

• 72% of companies stated they delivered free into store, therefore carrying the cost and responsibility for delivery.
• 59% said the customer paid for transport.

Insurance

• 50% of surveyed companies said they were responsible for the insurance of goods in transit.
• 38% reported that the other party insured.
• Only 10% said that the transport company itself takes responsibility for the goods, and 1% stated that they didn't know who was responsible to carry the insurance.

The issue of product transportation is of concern when looking at how businesses see their responsibility for damage of goods in transit. While 72% report that their business delivers free into store, only 50% of those stated that they take responsibility for safely carrying goods.

Also, while 71% said that the customer pays for transport, only 38% reported that the customer is responsible for any damages. Transport companies only accounted for 10% of responsibility for goods, and 2% of businesses stated they didn't know who would be responsible for the goods. This potentially leaves them vulnerable if a dispute were to arise.

The responses indicate that while a number of businesses are aware of the risks and mitigate against them, some don't, and others have no clear understanding of liability of parties when transporting product. Without written agreements in place between the contracting parties or transport companies, there is potential for financial losses.

Conflicts can and often do arise between parties if a failure occurs through:

• breakdown of refrigerated transport
• failure to handle and deliver products correctly at point of dispatch or delivery
• expectations (such as delivery time frames) not being met.

When there is no clear agreement on which party is responsible, there is potential for the business with the greater power in the relationship to put pressure on the other. This can occur when a small food producer is reliant on a larger business for its survival.

Regardless of who is at fault, the larger business has the potential to pressure a small supplier into bearing losses if clear guidelines have not been established at the beginning of the relationship, or when the agreement changes. Many small businesses don't have the financial strength to withstand the loss of even 1 truck-load or container-load of product, even if not having to contend with potential compensation claims by the other business.

Quality testing

When asked if the surveyed business undertook quality testing of the food products before leaving the factory, 85% responded yes. Therefore, 15% do not test the product before it leaves the site. Regarding costs, 78% of tests were paid for by the business, with 22% by the customer.

As 15% of producers don't test their product prior to leaving the factory, there is potential for problems in terms of proof of quality in the event of it arriving at the final destination in a spoiled condition.

However, there is no knowledge of whether businesses are producing perishable or extended shelf life products or if they require refrigeration or special handling, which has bearing on the degree of importance of such tests, and can be expensive to undertake. The fact that 85% are testing is encouraging.

Resourcing and staff

• 45% of businesses believe they can better use their existing resources such as space, employees, etc.
• 55% state that they would not be able to use resources more effectively.
• 64% of businesses believed they would gain greater efficiencies if they were to start contracting out.

Staff

• 21% of businesses reported that their staff are used between 91% and 100% of the working shift.
• 48% stated that employees were used between 81% and 90% of a working shift.
• 14% reported using staff between 61% and 80% of the time.
• 17% reported that their employees were only used up to 60% of the time.

These responses indicate there is considerable opportunity for businesses to contract some of their resources out.