Manufacturing Cosmetics - Internal or Outsourced?

Recently, I've noticed a lot of cosmetic brands on Instagram sharing #texturetuesday posts of bulk product mixing or #oddlysatisfying videos of packaging components coming down a conveyor belt to be filled. Some brands such as Lush even have Youtube channels with videos on how products are made. Who knew my career spent monitoring batches in manufacturing plants could have contributed to some quality social media content? To make up for lost time, here's a gif I made from a video on Maybelline mascara:

I was inspired by those posts and videos to discuss manufacturing options for producing cosmetic products. Specifically, I would like to talk about the differences between making products in-house vs. working with a third party manufacturer.

Third Party Manufacturers

Also called contract manufacturers or contract labs, a third party manufacturer is exactly what it sounds like, a company that isn't the cosmetic brand itself that makes the products. There are a few different reasons to use one:

1. Lack of internal product knowledge - Lots of cosmetic brands are launched by celebrities, entrepreneurs, or marketing experts who don't have a chemistry background. They have a vision for the products, but don't have the expertise on bringing that vision to life. Working with a knowledgeable laboratory fills that gap. A contract manufacturer can offer off-the-shelf formula and stock packaging options that the customer can personalize with labeling. If the niche that the company is looking to fill is more focused on excluding certain ingredients or building a direct-to-consumer marketplace, this may be a great option. The innovation isn't the formula, but the branding and marketing. This also allows for quick speed to market, as there are no delays for product development work.

2. Financial implications for startups - Even if a brand is founded by a cosmetic chemist who can put together an innovative formula on paper, it's generally not logical for them to build an entire manufacturing process from scratch to make their product. There is only so much you can do in your kitchen, garage, or small laboratory before you outgrow the space. When working with a contract manufacturer, using their stock formulas is not a requirement. Brands can also come to the table with their own formula and packaging and just have the manufacturer make and fill the product. For a startup brand that is looking to grow, this is typically the best financial option. It is difficult to scale operations when there is a single manufacturer that owns the formula. If they can't meet production needs, the brand is stuck. They also have all the leverage when negotiating rates. When the brand owns the formula, they can use as many contract manufacturers as they need. This mitigates risk in case one lab cannot support the full production demand.

3. Financial implications for large corporations - Large companies may also decide that is it more financially prudent to outsource their manufacturing. Even if they already have an internal manufacturing plant, they may still outsource products that are outside their core competency. For example, many large cosmetic companies sell cleansing wipes. The process to make wipes is very different from the production of washes and lotions and requires specialized equipment. Additionally, if the internal research and development and operations departments are experts in liquid products, they may not be the best source of innovative wipes formulations. As a result, it may make the most sense financially and technically to produce wipes at a specialized manufacturer instead of investing in the equipment and expertise internally.

There are several reasons to use external manufacturers. However, there are also drawbacks. It will be necessary to lock into a contracted rate for production. Any improvements in efficiency that translate to manufacturing cost savings will not translate to the brand's bottom line. If the cosmetic brand doesn't own the formula, it is subject to the whims of the manufacturer. Additionally, there may be supply chain concerns. If the product is made abroad, there may be unexpected transportation or customs delays when the product is shipped.

Finally and most importantly, all contract manufacturers are not created equal. Due diligence is required before choosing a business partner. A clean beauty brand with strict raw material requirements may later find out its manufacturer ignored its requests and find itself in the midst of a PR nightmare. Small brands may get bumped from the production schedule if a major customer comes in with an urgent request. Customer service, reliability, and transparency can vary wildly among different companies.

Internal Manufacturing

Most large brands use a combination of internal and external manufacturing sites. But with a robust marketplace of contract manufacturers, why would anyone want to take on the cost of building manufacturing capability internally? Buying equipment, hiring personnel, keeping on-hand supplies of raw materials and packaging components, and implementing systems and controls sounds expensive and it is. There are a few reasons to go through the trouble of internal production:

1. Huge company can benefit from economies of scale - When I was taking a course in operations management, a student in my class would answer every question posed by the professor with "economies of scale!" He was right more often than you would expect. Well-managed factories are great at making large quantities of the same thing. There is nothing an operations manager would love more than making the same product in the same equipment with the same packaging ad nauseam. They can reduce inefficiencies and optimize everything in the process to minimize the cost per unit. If a company is huge and is running its plant 24/7 to make as much of a product as possible, the initial equipment investment may generate a return on investment quickly. There's also a benefit to cutting out the middleman in all transactions. If a company is large enough to get quantity discounts on packaging and raw materials on its own, it may be cheaper in the long run to make products internally.

2. Small company focused on personalized products - The opposite instance may also benefit from internal operations. For a brand focused on bespoke products, having the internal control to individually create and package each product may be necessary. These brands are generally selling at a higher price point and aren't trying to mass produce their products for giant retailers. A small operation that is local and completely within their control will allow for the close management of the customer experience.

3. Trade secrets - Most cosmetic formulations are not too secretive. Every product's label lists out all ingredients used in the formula. That said, there are instances where brands want to keep their product knowledge in house and avoid manufacturing with external partners. This is to protect information about the exact proportions of ingredients used and the details of the manufacturing process. In development, time and money has been spent to optimize the formula and manufacturing process to give the ideal aesthetics with the most efficient process and this information is therefore worth protecting.

Conclusion

In summary, the real question is not internal vs. external production because for many companies, the ideal answer is both. Making large quantities of the same product in-house may be economical with a large internal manufacturing facility and making small quantities of bespoke products may be ideal with a small internal lab. Using outside technical expertise to keep the internal team small may also be best for some brands. How companies choose what production configuration works best for them is based on many factors including costs, product portfolio, sales, and the company's mission and future plans. The production plan will also likely change over time as a brand matures and decides to expand its product offering or dig deeper into a core competency.

I hope you found today's post informative about different production options! In the future, if you try similar products from different brands and find them to be nearly identical formulas and packaging, you now know that they may actually be the same stock formula from a contract manufacturer, sold to different brands. If you have any questions, let me know in the comments section below!