Co-Man Risk Management: What You Don’t Know Could Hurt You

Hello, thank you for joining.

I am Melissa Travers, Director of Community here at BevNET Inosh, and I am pleased to welcome you to The Nombase Podcast.

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It's where you can find episodes of this podcast and so much more.

Co-manufacturing is a critical engine in the CPG industry, and when a key production partner falters, brands can find themselves scrambling to protect their supply chains.

The recent news around Flow Water's foreclosure put a spotlight on just how vulnerable even well-known brands can be when a co-manufacturer runs into trouble.

That story inspired us to take a deeper look at co-manufacturer risk management and how brands can plan ahead to avoid disruption.

Joining us from the brand side is Brad Woodgate, founder of Joyburst, The No Sugar Company, and Wellnx Life Sciences, a multi-business entrepreneur who has built and scaled several CPG brands while navigating the challenges of specialized packaging and co-man relationships.

Bringing in operations and consulting perspective is Brandon Hernandez, co-founder of Whole Brain Consulting, who works with brands across the food and beverage space to evaluate, negotiate, and safeguard their manufacturing partnerships.

Today, we are going to talk about how to choose and manage co-manufacturers, how to secure your assets and contracts, what contingency planning really looks like, and how both startups and established brands can protect themselves from disruption.

Brad and Brandon, thank you so much for joining us today.

I'm excited to get into this and I think that our audience will very much appreciate this conversation, especially now.

Brad, why don't we start with you?

First of all, I really do want to appreciate you again so much for being so transparent and taking us behind the scenes into co-manufacturing and giving us a real look at what it really looks like.

You've built and scaled Joyburst, No Sugar Company, Wellnx Life Sciences.

For listeners who may not know you, can you walk us through your portfolio and how manufacturing strategy fits into your growth plans?

For sure.

Thanks for having me on.

I'm a serial entrepreneur.

I started my entrepreneurial right out of college in my last year in 2000.

So I've been doing this for 25 years.

I launched Wellnx Life Sciences with my brother in 2000.

It was primarily a supplement sports nutrition company.

I still own that business today.

I bought my brother out in 2015.

So I've been going solo on the Wellnx side from the past 10 years.

And then in 2018, I started The No Sugar Company.

I couldn't believe that that trademark was available.

Like given how much sugar reduction and no added sugar and all these things were coming into play, I thought it was something that was going to be big for the next few decades.

And that sugar was really going to be regarded as like the current smoking in terms from a health hazard.

So I trademarked the name, had explosive growth in many different categories.

We at one point were upwards of 37 different manufacturers.

So heavily manufacturer intensive because of all the different portfolios of products that we got no sugar in.

And then I always had an itch to get into the beverage space.

So in 2022, I launched the Joyburst Beverage Company.

We did a national Superbowl commercial to gain attention because even despite the success of Wellnx Life Sciences and No Sugar, both scaling to sales in excess of $2 billion in sales, I still could not get a beverage brand to get acceptance in the majors because it's just that competitive.

So we decided to kind of really up the ante, do a national Superbowl ad to get a test.

The retailers thought we were crazy.

We survived that, got a test and here we are today.

And I'm happy to say that in its fourth year, we're going to exceed 100 million in sales on just Joyburst alone.

So we've had exceptional growth.

We've had many manufacturing challenges.

The latest with Flow is just part of the course of navigating entrepreneurship.

But it's certainly been a headache and it's certainly been something that we wish we could have avoided.

But here we are today.

Well, as our audience knows, certainly beverage is incredibly competitive.

So those are super impressive numbers across all of those businesses that you have.

How do you think about manufacturing at a strategic level?

So we're going to get into the nitty gritty.

But how do you think about it strategically, capacity, geography, partnerships, before you even start evaluating specific co-manufacturers?

I learned early on that the beverage industry is very much built on how you find manufacturers closest to you or customer base.

Like that was pretty much instilled in me from the very beginning because shipping cost plays so much of a role in your cost in a beverage.

But I had to almost throw that out the window because when you're starting a beverage company, you don't have the pick of the litter to decide where you can go and manufacture.

It's based on so many different factors like do they have the line capacity, do they have the pricing that makes sense, do they have the technology to do the packaging you're trying to do, which in the case of this was Tetra Pak.

So it definitely limits the field.

And I think that as you get more mature, you can start looking at those options of finding manufacturers closest to your customer base.

But when you're beginning, you can try that.

But those three things I just mentioned at the forefront are way more important.

The actual rates, their willingness to work with you on timelines, their financial terms that they're willing to give you, those things play way more of a role than finding, hey, I have a customer in Pittsburgh, so I got to find a manufacturer in Pittsburgh.

You can find one there in a needle in the haystack, and its pricing, its lead times, its financial terms, its cooperation, its service levels make it so unattractive that it doesn't matter that they're in the same city, it's not going to help you.

Well, I'm sure that that's advice that Brandon Hernandez can certainly relate to.

Brandon, thank you so much for joining us from Whole Brain Consulting.

You have spent years advising brands on co-manufacturing and supply chain.

Can you give us a quick overview of the kinds of work that you help brands with and also the kinds of challenges that you help brands solve?

First, thanks for having me.

Again, kudos to Brad for stepping out of what most people's comfort zone might be for sharing his story because there's not a lot of people that would share that.

So what we do is we're an outsourced operations firm.

So we'll do supply chain, logistics, QAQC, food safety for USDA, FDA, TTB alcohol.

So comand sourcing selection as well as private equity diligence.

And so we kind of run the see the full spectrum of the supply chain, whether it's a technical jam up or whether it's comand sourcing for a brand, such as Brad's or anybody is looking for any size or scale of production.

We go all the way down to the million dollar year, maybe even a little sub all the way up to a couple of the Fortune 500.

So again, we get to see a wide swath of the industry as a whole.

Understanding that you certainly help a number of emerging brands, you may have founders who have never really seriously thought about comand risk before at all.

How do you explain why it's such a critical issue and what they need to be aware of in the environment that we're in today?

Well, I think not that I want to bring it back to everybody's nightmare, but COVID really pushed a lot of this to the forefront from the perspective of, I fielded maybe one or two calls a year with respect to recall and traceability issues.

That one year of lockdown and COVID alone, I fielded over a dozen, which if you think about just how quickly that escalated and where it all comes down to is, when you're especially a small and emerging brand, you get locked into this cycle of, I just need to date anybody.

Anybody that will run my stuff, anybody that will take, will quote unquote help me fill my orders.

They're the best ones to date because they're either close to my house or they're close to my 3PL, or they're close to whatever the excuse may be, or maybe they're a friend of somebody on my board, my advisory board or whatever.

What I always tell everybody is to counsel patients with respect to that because there's some red flags that you really have to look for.

And this again is what sort of flushed itself out in the pandemic, which is, well, I found somebody that'll do it for the price point I want, but I have no agreement.

I have no contractual agreement.

I don't have a one pager.

I don't have anything that says, here's what my cost is.

Is it partial turnkey, full turnkey?

Do I have the raw materials?

Who has it?

And then, secondarily to all that, in the event of a recall or in what brought us to this conversation, the event that my manufacturer shuts down, what happens to my material, what happens to my intellectual property, my proprietary ingredients, whatever the case may be, if you don't have those things fleshed out, they can come back to haunt you very quickly.

So, don't romanticize while this person's willing to do it for X amount of dollars.

Don't get so desperate to be in business that you'll do anything to stay in business, right?

Make sure that you vet your partners and that you have some protections in place.

Even, I tell everybody, even if it's just a two or three page agreement that outlines costs, deliverables and recall protection, at the very least have that.

Because if you don't, as the brand, the first thing the manufacturer is going to do is go, well, that's a you problem.

Well, I got to recall the stuff.

Hey, I made it and you picked it up.

That's your problem.

So, you want to make sure that you have your bases covered at a very base level, even when you're starting out because the math becomes very simple.

In a courtroom, it is not about how you feel, how they feel, how you feel, what's morally right, what's morally objectionable.

Courtrooms are about what side of the law are they on?

It's not about, and again, it's not a moral court.

It's about what did you sign and who signed what, and where are they within the law?

Can you prove that they were outside the boundaries of the law?

Oftentimes, co-manufacturers, the math is simple for them, which is I have more money than you, which means that I have more money to outlast you in court, or continuances, discoveries.

I can force all this stuff and out-survive you.

So if I crash your brand, it doesn't mean anything to me because I got 50 other ones that are waiting to run with me.

Again, morally objectionable, but not against the law, and that's what people need to think about when they start out.

Brad, we talked a little bit about how you were fairly well set up for what happened with Flow Water, not that anybody could be well set up for it, but you were already investigating other manufacturers, I'm sure based on the experience that you've had in this industry.

Back when you were first getting started, did you have any you problems?

Did you find yourself in any situations where you hadn't covered your bases the way that now is an experienced entrepreneur that you have today?

100 percent.

Yeah.

I think that what Brandon is saying is 100 percent right.

You are so excited about filling the opportunity that the sales retailer, B2B, B2C has presented itself that you just want to get the manufacturing done as quickly as possible because you're focusing as an entrepreneur, as a new brand on selling and the back part of it in terms of fulfillment is the secondary part and that usually comes at a very, at the beginning, a crunch timeline.

And so it is definitely important to take the time to do those things and to know what is the absolute minimum.

So I totally agree with what Brandon said is the absolute minimum and chances are those manufacturers are all going to be bigger than you and all going to be to withstand more legal hurdles than you are.

Even if you have a contract that's well written, they can also still just figure out legal maneuvers to outlast you.

So there definitely is a need for you to do that.

But we had our fair share of manufacturers who have gone bankrupt and actually like don't exist anymore as opposed to where in Flow's case it's much more protected.

The manufacturing part is still ongoing as it stands, but we've had full shutdowns and full shutdowns is not pretty.

It goes to insurance companies, it goes to legal cases, it goes to insolvency situations.

So it gets quite complex.

We have those ongoing as we speak right now.

We had a manufacturer called Niagara Distillery.

They unfortunately went bankrupt.

They produced one of our products.

We had leaking cans.

Those cans developed mold.

We can obviously ship them out.

And there's a he said, she said in terms of issues.

And so leaking cans, when you think of all the things of like you need to have in a contract, you never kind of expect something as basic as a leaking can is going to be in there.

And you think more of like, did you, you know, did it did not have the right ingredients?

Did it not taste right?

Did it not deliver on time?

Was like all those things, leaking cans, you're thinking like that's, that's what they do for a living.

There's no possible way, but that happens too.

And they went bankrupt.

So we've dealt with the gamut of it.

I think that it goes to, you know, you do, and I say this to all entrepreneurs, and I say this to all companies, you have to visit every single manufacturer that you're about to do business with.

You need to see their facilities.

You need to see the cleanliness.

You need to see how the operations work.

You need to see whether or not they're actually legitimate in what they say.

You need to see the other brands that they're looking for when you're touring the facility to say, hey, that looks like a route.

That's a pretty big brand.

I know that they wouldn't be here if they didn't fulfill their agreements.

So those are all things you need to invest in.

And I know it's foreign because, like I said, when I go to Walmart and Costco to get opportunities, I'm flying there.

They're not flying to my place.

So it's just you got to kind of change your mindset that you're there not because of you want to be there.

You're there to check out the facilities that are going to actually manufacture your products.

Let's get into that a little bit more.

So when you're evaluating a potential co-manufacturing partner, what are some of those first deep dive steps?

You mentioned a few of them, but what are you specifically looking for when you're doing that walkthrough in their financials, in their operations, in their track record?

What are some of those specifics that you're looking for to make sure that they're going to be a good partner for you?

Here's a funny story.

I'm not the cleanest guy in my personal life in terms of that.

My house, my wife would probably say that I'm not, but in a manufacturing facility, the first thing you look for is cleanliness.

You need to make sure that they have their ingredients in proper order and marked, that it's a sanitary place, that they're wearing nets, that they're doing all the things that you need from a quality control perspective.

Because if they can't keep the basics in line, there's going to be cross-contamination issues, there's going to be just inefficiencies.

So the first thing I actually look for is the cleanliness of the actual facility.

The second thing, because I've done this long enough to know, is just, you know, is the manufacturing plant set up efficiently?

Is the bottling line, the packaging line, the ingredient line and everything set up in a way that I think is actually efficient?

That takes some, obviously some years of experience.

You wouldn't necessarily know that from the onset, but you need to make sure that what they're doing is efficient because if they're doing things inefficiently, chances are your tolling rate, as it's called, the price that you pay them to manufacture your products is probably not going to be the best because they have inefficiencies from the get-go that makes the price go higher.

Higher labor costs, higher packout costs, higher wastage fees, those all things add into your price and if it's not done efficiently from the onset, you're not going to be efficient with your best price to your retailers.

So those are the things that I look for.

I also look for the leadership group.

Who is the team who's actually making the decisions for their plants?

How long they've been in business?

What's their expertise been in this field?

Is it just in canning?

Is it just in hydration?

Is it just in protein water?

Is it just in RTDs?

Like what do they actually specialize in?

And then last but not least is I literally want to see the production manager.

The production manager is similar to like on a movie set.

There could be a director, but the show runner runs the show.

The production manager runs the day to day operations.

They know how to make everything run on time with the volume of business that they have, with the amount of suppliers that they have, with the amount of ingredients that they have coming in.

I want to get to know that particular person to see how buttoned up they are with efficiencies.

When you think about it, any single product that you make, you're only as good as your last component.

If you miss one component, and in some beverages there could be 10 ingredients, in some beverages there could be 50 ingredients.

You're only as good as your last component because then it can't run.

And if all those things don't come in from the canned top to the printed cans, to the ingredients that are there, the packaging, the boxes, you just can't make it.

So that is a coordination in itself.

I've gone to facilities where it's still done on handwritten spreadsheets.

That's not good.

This should be way more automated and controlled, and those are kind of the indications and things that I look for.

Brandon, I'm sure that a lot of that resonates with you.

What are some of the top red flags, green flags that you look for from a consulting standpoint when you're helping your clients vet a co-manufacturer?

Well, I mean, some of the first things that we look for, he's correct, like you need to visit.

That's one of the first things that we tell.

Visit once, visit twice.

I always tell everybody, if you feel like you got to be there every production run, you walk through and you're like, I got to be there at every run to make sure it goes well, you're in the wrong place.

To Brad's point, I'm paying them for a service.

So at some point, I need to trust that that service is being fulfilled.

That doesn't mean ignoring them all together.

I always recommend that you have a visitation schedule every six months, once a quarter, depending on how often you're running, because you can glean a lot of information off of just visiting on a regular basis.

Again, there's places I've been like, you knew there was a tour today, right?

Like you knew I was coming.

Like why is there trash all over the floor?

Why are there, why is business being conducted if they knew a visit was coming?

And oftentimes as they get comfortable with you and you get comfortable with them, those ongoing visitations become important for what you're doing.

Secondarily, if you're the person that, as the brand that shows up with swag and you're the ones that bring the pizza party to people, that sounds weird.

Like why should I be the one doing it?

But you'd be surprised what you could get your production teams to do if you come and share in that.

Now, red flags would be, again, no agreement.

I have zero agreement, not one pager, not a two pager.

I usually will run people through two to three years worth of food safety audits, forcing them to give me all of their least three years worth of food safety audits.

If there's something that's particular to your brand or your branding, organic, kosher, certified vegan, I would force them to give those audits to me so that I know and I can go through and see because each audit has a readout that says, here's all their deficiencies.

It's a literal report that says, here's where we got them for all the problems.

And it's not just a, can they, can they satisfy me for the hour, couple hours that I'm there the day?

What have they done previously?

And have they been able to maintain that?

When it comes to the spreadsheets and the tracking traceability and tracking of inventory generally depends on the size and scale.

Again, I don't necessarily care how the sausage is made as much as I care about how much the, if I have a recall event, how quickly, can they keep me legally compliant with sourcing that material?

There are some manufacturers just can't afford it.

And because ERP systems are not cheap.

And so depending on the margins that they're running with, a good, well-running co-manufacturer generally speaking will have a net margin between two and 4% after they've paid operations and everything else.

So ERP can be a component of it for sure.

But if they can conduct a recall in a reasonable amount of time while I'm there, I can forgive that a little bit.

So that's really for the green flags are there, they're welcoming.

The other thing I always tell people, again, it's sort of like getting married or it's kind of speed dating, like get a couple of references.

If they've got people there and they stand on doing good business, they should have no problem providing references to you for people that they have or they currently are producing for.

They shouldn't have a problem doing that.

You know, I worked at a number of co-packers prior to going into consulting, and we always had a list of, okay, here's our biggest contacts at our biggest brands, and if anybody wants to talk to them, they can talk to them.

If I'm above board, I shouldn't be afraid to share some of those things.

The last thing would be, and it's something that people don't think about or do or run down very often, is that recalls or FDA and USDA, well, FDA warning letters are public knowledge, which means that if I go to the FDA website and I look up the manufacturer, if they've been cited, I know they go back to at least the mid-90s for publishing that information, you can find it.

So a couple of things, different things you can do to kind of run things to ground.

And to make sure that you're in an above board operation for sure.

It's a great checklist for anybody who's vetting a coman.

Brad, certainly with scaling your beverage business, the way that you are, I'm sure that you are really set on making sure that you're testing your comans capacity and capabilities.

How do you do that?

How do you make sure that they're not only going to be able to run what you need now, but they're going to be able to run what you might need in two, three, five years from now?

I think the something that is so underused and just not talked to a bit of it is like proper communication.

So when we get wins and we get opportunities, and we are working on opportunities that actually aren't even confirmed, but they're significant opportunities that if they do become confirmed, it's going to put a big stress on the coman as well as ourselves.

We're involving pre-planning with the manufacturer, the packaging suppliers, the green suppliers saying, hey, if this comes to fruition and if we get this, because Costco is a prime retailer who is able to move things on a dime, and if this actually comes to fruition, we're actually going to right now.

This is what we'll need to do and this will be like either a Gantt chart, if it's a new innovation or if it's a current production of a current skew, these are the things that need to be signed off on to ensure that we hit that delivery time zone.

But communication, some people hold that information near and dear to their heart thinking like they want to, as I call it, be the hero of the news.

The hero of the news just gets you late.

The best way is to get your key partners actually involved in the process.

As if you trust them and they trust you, they're not going to divulge this information first and foremost.

Secondly, they're going to understand, sometimes you're going to do this pre-work and it's not going to work out.

The confirmation doesn't happen.

But on the times that it does work out and we all benefit from a significant increase in business, we are at least given the times to pre-plan and prepare so that we're not making a whole bunch of additional mistakes just based on things being so chaotic and rushed.

That's one of the first things that I instruct my innovation teams, my operations teams, obviously even myself because I'm involved with the sales as well, that you have to diverge information and you have to set up weekly meetings.

Now, as I said, between Joyburst, Wellnx and No Sugar, I still think we're upwards of 30 different third-party co-manufacturers.

And so what I say to each of those groups is, they need to set up meetings at least once every two weeks as a touch point for a half an hour.

But even if the ones that were running full tilt, like Flow as an example, we'd be touching base of them at least on a weekly basis.

Brandon, what are some of the non-negotiable contract clauses that you have your clients look out for?

We referenced that a little bit earlier with the leaking cans, but what are some of those things that you make sure your clients watch out for when they go to sign that contract?

Recall coverage with respect to who's responsible for paying in a recall.

Insurance coverage, who's insured for what and for how much.

Recalls are not cheap.

The other thing, don't plan on dying on the hill of what I would have made if it had sold in retail.

Generally speaking, they won't cover that.

They'll cover the wholesale price.

So just prepare mentally for that.

Secondarily, QA, QC with respect to efficiencies, tear down schedules for can lids.

So you would set those in an addendum, provide them specifications for what you expect to be made, because the clauses will often have workmanship clauses, things like that to them, which is fine.

But provide that information.

And then secondarily, tolling, how often you can revisit your pricing, what your pricing includes.

Are there any sort of economic order quantities, whether it's raw materials, tolling finished goods, or a combination of both?

I mean, it depends again who's buying the material.

But with respect to your pricing, how locked in is it?

How often can it be changed?

How often can they pass through?

Secondarily, who's going to contract for your major raw materials, if anybody's going to do it?

One of the first things that we go in, whether it's supply chain at the brand side or the manufacturer side, is looking at, okay, what could you contract for?

What makes sense to contract for?

Because you don't want to be subject to the ebbs and flows of the raw material market, whether that's for packaging or for material inputs.

So you definitely want to review those and who's responsible for those contracts or for holding the material.

And then, you know, after that, the other ones become more mechanics of the court.

Again, this is one of those instances where I tell everybody, pay the $1,500 to a lawyer now, because you'll pay 10 times that later if this goes bad.

So besides having somebody vetting out the actual processor themselves, having that last mile of legal review done is definitely worth it in the long run, just to make sure that you get all the I's dotted and the T's crossed.

What I'll say is, and I think it's important to note, and I'm obviously, I always come across and try to give advice as it relates to entrepreneurship, because that's how I define myself and my business careers as an entrepreneur.

But many manufacturers will not give you recall coverage.

They will not give you coverage of issues being done.

And these are some of the biggest manufacturers in the CPG space.

They don't want to because it's a legal liability.

Eventually through business and through how important of a customer you become, you can change those types of things.

And there are some who will take it on from the beginning, but it's not just like, hey, expect that every single manufacturer is going to give you all these things that are best practices from the onset.

They just won't.

Your business case to them doesn't make sense.

The other thing that I would say is that we've always been a big proponent is, we want to see breakdown detailed costing of every single fee that you have.

And most of the time you'll find that most of the manufacturers will have upcharges that you're not even aware of.

So you'll think you're paying a tolling rate, but on the ingredients, there'll be an upcharge.

On this, there'll be an upcharge.

The storage will be an upcharge.

There'll be upcharges all over the place.

So that's another thing to kind of best as you can to get, you know, full transparency of pricing.

And that does take some time, because that's something that most manufacturers don't want to share.

But if you can, it only provides you better control of your own businesses and the inputs and the friction points.

And some of the times you can actually negotiate the raw material cost better than a manufacturer, because if you're an entrepreneur, that your life's depending on a cost, you're gonna fight for that protein cost or that flavor cost or that input cost just so much more.

It's just, you mean, they're running a business that is just based on, you know, large scale.

So I think those are some of the things that you can really do.

But I just wanted to caution that the things that you want as Beck's practices and the things that Brandon mentions and that I'm mentioning, they're great to know of.

You should be aware of them.

You should strive towards them.

But many different times, depending on who you're dealing with, it won't be available all the time.

And you have to be able to make business decisions or cases saying, is there enough there for me to continue on in this partnership knowing that as we grow, things will get better.

And also, you're trying to, as an entrepreneur, find manufacturers who are willing and able to do what's called one-stop shop.

They're the ones procuring the ingredients.

They're the ones giving you 30 or 60 or 90-day terms so that you can financially afford to build products, have enough money for marketing, and then get your money back from your retailer, and then you have to pay your manufacturer.

That's a best-case scenario.

A manufacturer is trying to do the exact opposite.

You get the ingredients, you pay for the ingredients, you pay me up front and over.

Those are the pushes and pulls that you need to be aware of.

But ultimately, if you can get in, we have plenty, many, many, many of our manufacturing are one-stop shop, but that has taken a lot of time to establish, and full visibility to the outputs of their costs does take a lot of time.

That's what you should strive towards it.

Our prism is different, right?

The Brad's is different because of how he had to go out.

Mine is more, we're established in being comand sourcing, and you know, that when I walk in, when any of my employees that are comand sourcing walk in, and we get too much flak, again, those are red flags, but that were also known like, I have a co-packer at the bench that's 15,000 deep.

So if you don't wanna do it, that's fine, but I will go and I will find somebody that will.

So my prism is through that, and obviously Brad is not incorrect in stating that if you're going it alone, and this is not me pitching a service, this is me saying that, but if you have people on your site, whether it's your advisory board, on your board itself, you need to leverage some of those relationships for the best deal possible for you.

That way you don't get caught in a situation where you've lost the business based on somebody else's poor conduct.

Earlier in the conversation, I alluded to how Brad had already started vetting another co-manufacturer in addition to Flow Water.

So certainly having redundancy in your co-manufacturers can come in handy, especially if something like this comes up.

Brandon, what's your recommended approach for building up a backup co-man plan and when should brands start that process, especially understanding that we're also speaking to emerging brands and not just the Fortune 500 brands out there?

Nobody's going to hear this because everybody has plenty to do on a show floor.

But carving out a little bit of time at your Expo West, your Expo East, that's the one time that manufacturers will come to you as opposed to you having to go to them.

Secondarily, there is the PLMA show, the private label manufacturers show in Chicago that you could go and start to vet.

And I always tell everybody it's like chasing your next round of funding, right?

As soon as that round closes, it's time to start looking for the next one.

So from my perspective, it's never too early to start those conversations because it's, if you spend the time at least becoming friendly, with whomever it is, right?

You start a warm conversation and it goes for two or three years before you may actually even use them as a manufacturer.

You've already started with your moving in the right direction by befriending them, them getting to know you, your brand.

You survive two or three years, so they know you're around, which makes you a more serious business case when you finally do go to them seriously.

But beyond that, it's never too early to start.

You got in this business, Brad knows this, as well as any, you got to kiss a lot of frogs before you find right where you want to be.

So you might as well get to it as soon as you can.

Brad, with the vast network of comands that you have, how do you think about a redundancy plan, especially taking into consideration that you have so many co-manufacturers?

I think you have to have a redundancy plan for every single product that you make.

I mean, the news that from Flow is an example that wasn't end up being catastrophic, but it was certainly a wake up call, it forces you to have backup for everything.

So in a best case scenario, you have a minimum of two, and in the best case scenario, you have a minimum of two that are on opposite sides of the country from a logistics perspective, if you can actually pick it that way.

If you're dialing in as best you can, you're having one in opposite sides of the country, and they're both comands that are fully capable and able to do it.

It also helps you from a leverage perspective.

Any manufacturer that knows they're the only game in town, it's gonna be a much different negotiation than if they know you have the opportunity to comand at different places.

And that's just the nature of the business.

So I totally agree with Brandon.

As soon as you set up one, or as soon as you get your funding, you should be starting the next process, you should be doing that.

You mentioned that you should always visit your co-manufacturer before you sign on.

Do you also make sure to visit your co-man at some point?

I don't know, yearly, how do you think about kind of checking in with your co-manufacturer after you've signed on?

I personally, I've visited every single co-man that we've ever done business with in the past 25 years.

I honestly don't think there's a co-man we've ever done business that I haven't actually seen.

But my team is responsible, whether innovation or operations, to visit them.

I would say yearly is probably the average, but depending on the product, depending on the complexity, depending on the volume, it could definitely be more frequent than that.

We're fortunate, obviously, we're in just outside of Toronto, Yaya, which is a big beverage manufacturer, is just down the street.

There are canning commands, flow is just down the street.

So it's easier in some cases than others, but no, you need to be on the floor, at least on a yearly basis, if not more.

And it just goes to, you have to pick and choose where your most operations is going to and account for those firsts.

When your team goes into those co-manufacturers, are there things they're looking for to be able to tell that the co-manufacturers in good standing, that they are in good financial health?

And those things may be very similar to the things they're looking for when you're doing that initial vetting.

But for folks who are doing that yearly checkup, what are those things they should be looking for just to make sure that their co-manufacturer will be running as long as they need them to?

Again, these are basic things, but I think that every single meeting always has to have first and foremost an agenda.

And the agenda has to be sent in advance.

What we do on these meetings is have a scorecard.

The scorecard is, it can't just be like, here are all the things you've done wrong.

And the scorecard is, here are some great things that you guys did, here are great things that we did in terms of additional volume, great things in terms of communication.

Here are some products that were late or consistently late.

Here are some products that had higher wastage.

Here are products that basically, and you can go through a scorecard from everything from benefits to weaknesses to almost like a SWOT analysis.

Those are the things that you can go through in terms of if you're doing a yearly scorecard.

Most of the time though, they're combining those things with tasks at hand is, we have another big launch coming, how are we all preparing for this?

We have a new product innovation coming, how are we preparing for this?

And dialing in on efficiencies as best you possibly can in terms of bulk purchasing, where's our procurement team in terms of bulk purchasing and using cross ingredients for multiple products that you're launching with them?

But all those things need to be discussed, but I think obviously an agenda and a SWOT analysis so to speak, it goes a long way.

Brandon, for you and your team, what are some of the things on that scorecard that you're looking for to make sure that the co-manufacturer, even after they've been signed on, are in decent financial health?

So, I agree with the SWOT analysis style of what's their scorecard.

I always tell everybody if you go into every meeting with your co-manufacturer and all you do is berate them for what they didn't do right, you're gonna be the answer, you're gonna be the call that nobody wants to answer.

You're gonna be the, every time somebody sees you on the floor, they're gonna hang up or just ignore you.

So, from a financial standpoint, if they're not a publicly traded company, which makes it more difficult, right, oftentimes this goes into the, again, how often are you visiting?

Now, can you go more than once a year?

How many times can you go and still be comfortable with what they're doing?

And the reason that I tell, I encourage people to set that relationship up.

Generally speaking, if a principal change is a major management principle changes, a QA manager or director or VP or a COO or a plant manager, if there's a major shift, I generally want to visit relatively quickly to meet whomever the new head of that department is.

But then secondarily, you walk through and again, you befriend and you walk through to the floor employees because they're going to be the canary in the coal mine as it were with respect to other issues.

Because as you befriend them and as you walk through and speak with them, they're going to start to tell you things that you, because they start to trust you and they should and you should trust them.

And so you start to build a relationship wherein you may just secondarily pick up information like oh, couldn't run last week or had to shut down an extra couple of days because we couldn't get ingredient XYZ in.

Or I've had this happen places I've actually worked as well as places that after years and over a decade in business walking in and somebody says, well, now everybody rushes to the bank to see who can check their or cash their check first.

Because if you're one of the last 10, your check may or may not clear.

Again, if they're having contractual issues with their raw material suppliers, you're probably going to have that flushed out by the floor employees relatively quickly.

We couldn't run here.

We couldn't run there.

We didn't have the opportunity to make this product last week because we were short on inventory.

You start to divine a lot of information from them that you wouldn't normally think that you would get and you certainly wouldn't get from the management team.

And then secondarily, as you're walking through, you'll be able to see it.

There'll be signs of it.

There's piles of stuff, places, people just they quit caring in general about the facility they're in because they're not incentivized to care at that point.

And it just it flushes itself out in just a dirty grungy place that you can tell is on a decline.

And Brandon, worst case scenario, what paperwork or proof should brands have in hand to reclaim any inventory or equipment from a co-manufacturer who can no longer service their needs?

So generally speaking, if I buy a piece of equipment, if one of the brands that we're taking somewhere decides to buy a line or to buy a specialty piece of equipment, we always say shoot the plate off of the piece of equipment itself.

So each piece of equipment has a serial number with its manufacture date and all that.

You take a picture of that as well as you keep a copy of the invoice that you did purchase it, that it is under your ownership.

And so generally that can become part of an agreement, maybe, maybe not, depending on if you're going to amortize the debt back to the co-man.

Again, more negotiating stuff that you can do.

But when it comes to raw material inventory, again, invoices, proof that you had inventory in-house and that it is indeed yours by payment and title.

Because your BOLs, your invoices, your cleared checks or however you do it, electronic or whatever, your backup from your QuickBooks or whatever that you actually did pay for the material and it is yours.

Now, the one caveat to this is that there are shutdowns of facilities that happen without anybody's prior knowledge, whether it's on the floor or not.

Meaning, locally here in Colorado, there was one that shut down during the lockdown that they just walked it.

The employees went home one night, walked in the next day and the bank had walked in and chained the door shut.

And everybody that had material there was basically told, well, you have to go through bankruptcy court.

You either have to go through bankruptcy court or foreclosure court.

Or in some instances, depending on where the manufacturer is, you may have an opportunity to go to like the sheriff's department or to local law enforcement to say, hey, I have material here.

It's being held.

Here's my proof of owning it.

Oftentimes you need a lawyer to do that, but you can get through relatively quickly to get your material out.

There are some forms of foreclosure where they say, you got to go through the court and you have to prove, because at this point, we, the bank or whomever's foreclosed are under the impression we get to liquidate everything that's in there.

So unless you can prove title to that material, we're going to keep it and we're going to liquidate it as part of closing the establishment.

So keep as much paper trail as possible on everything that you purchase.

Keep your agreement.

If you have an agreement where you own the raw materials, it's a partial turnkey.

Keep your agreement so you can have it that says, look, right here says, I'm going to buy material XYZ.

Here's my proof of buying material XYZ.

And here's how much roughly should be an inventory.

And that's mine and I need to get it back.

So as much detail as you can provide to a legal team, to local law enforcement, to the bankruptcy courts, that's going to be the fastest way to get your material back.

When it comes to equipment, same thing.

Now, generally, if the equipment will allow it, I generally would have the serial number engraved directly onto the frame, only because I've been in places where they've pried the plate off, and you can't actually prove at that point what that piece of equipment is.

So I've had people, if it doesn't create a food safety issue, having that serial number engraved somewhere special, maybe that you only know about, you work it out with the manufacturer of the equipment, and they will specialty engrave something somewhere where only you may know.

And that way, if they pride that plate off, at least you have some proof as to what that, some identifier that that equipment is indeed yours still.

Well, thank you so much, Brad Woodgate and Brandon Hernandez for joining me today on The Nombase Podcast, for sharing all of your insights on Coman Risk Management.

For everybody else out there, thank you for joining me on The Nombase Podcast, and we'll see you next time.

That concludes another episode of The Nombase Podcast.

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