The Dawn of Dynamic Contract Packaging Relationships

For many industry segments suppliers continue to consolidate customers continue to gain market share through acquisition or internal growth and traditional business processes are being forced to change.

A manufacturer will live or die based on the strength of his supply chain. Ask Napoleon. What is not clear to many manufacturers however is that supply chain dynamics follow the classic “S” curve and are driven by the market forces affecting all parties in the chain from raw material suppliers through end customers. Supplier relationships mature becomes less efficient and then react to free market forces to become efficient again.

In a simplistic example the supply chain for manufactured products begins with raw materials moves to manufacturing and then to packaging.

From packaging the product continues to flow through its respective distribution channels to the end customer. This flow is true for every industry although different terms may be used to describe it. For instance the raw materials are “processed” in the food industry but “manufactured” in the consumer products industry.

Over the past 20 years the steps in the supply chain have changed from being somewhat discrete to being seamlessly interconnected as driven by information technology the pressure to turn inventory faster and the demands of increasingly larger end customers. Additionally over the past 10 years broad-based industry consolidation has occurred within the layers and now within the past two years a new inter-layer trend in which a company in one layer of the channel acquires a company in another layer has begun. The chart on this page presents a conceptual view of the relationships among the layers in a supply chain and highlights the two different acquisition trends.

Impact of trends

Industry consolidations and advances in information technology have created the dawn of dynamic contract packaging relationships. As branded food companies consolidate their smaller product lines become less critical to the overall success and growth of the parent company.

Although these products are important in terms of overall offering they are not considered strategic and are unlikely to receive the financial support of the larger product lines. These profitable but smaller product lines can be outsourced without compromising a brand’s market position. Often a contract packager can deliver a more cost-effective solution given lower overhead and labor rates.

Over the past 10 years the cost of effective information systems consistently has dropped. Today even smaller contract packagers can produce robust data in formats tailored to the specific needs of consumer product goods companies. Continuous replenishment real-time information on WIP and lead times and the ability to react rapidly to changing market demands are all possible for contract packagers.

The range of available outsourced services has increased dramatically and the willingness of suppliers to accept more financial risk is driving growth in the contract packaging industry. Contract packagers’ willingness to invest heavily and accept more working capital risk is being driven by the increasing larger revenue opportunities available from the consolidating brands.

These in turn are being driven by the consolidation of their customers-the retailers. For example even some publicly traded companies outsource all of their manufacturing and package production to “virtual” plants owned by contract packagers.

The changing market offers more latitude to packagers with respect to how much financial risk they are prepared to take on behalf on their customers and it offers manufacturers the opportunity to structure contract packaging relationships in a way to further multiple strategic goals. The accompanying list compares the supply relationship changes that have occurred over the past 10 years.

Consumer company perspective

The relationship with a contract packager can be dynamic with the supplier providing a full range of services including acting as a complete virtual plant with full responsibility from raw material purchases through delivery to the customer. Based on a consumer goods company’s individual growth plans financial strategies and access to capital its relationship with its contract packager can be structured as a win-win and can have a substantial positive effect on working capital capital spending information systems and internal business processes.

• The co-packer can be a financial partner as well as a supplier by entering into agreements that shift financial risks to the supplier in exchange for a share of the upside economics.

• Consumer goods companies can enter into agreements that provide cost-reduction incentives to each party. These combine the co-packer’s ability to improve with the consumer goods companies.

• Contract packagers are more inclined to take significant financial risk for projects that would shift the manufacturing process from labor-intensive to capital-intensive.

Contract packager’s perspective

To be competitive contract packagers have to adapt to a supply channel that is consolidating at virtually every level. Long-term viability will be a function of:

• The commitment to invest an increasing amount of capital to finance a customer’s working capital and to make specific capital expenditures on a customer’s behalf.

• The commitment to invest in information technology systems and people

• Developing a clear industry strategy.

• Doing what it takes to supply large customers.

• The ability to serve multiple customers.

Services offered by the classic co-packer:

1. The basic financial relationship is one-dimensional - fixed price per unit with the customer buying materials and packaging

2. Rent machine time

3. Take no working capital risk

4. Typical products are short runs seasonal in/outs; automated straight pallets or hand packed variety packs; regional packaging requirements and samples

Services offered by today’s dynamic CP partner:

1. The financial relationship is multi-dimensional.

2. Source and purchase raw materials and packaging

3. Assist in packaging design

4. Jointly develop new product formulas and prototypes

5. Package retail displays and mixed pallets

6. Financing and warehousing a customer’s inventories

7. Open information systems for real-time reporting on production status

8. Commit to significant capital spending for specific customers

9. Arrange transportation/logistics

10. Full-service partner offering a “virtual” plant or a plant-in-a-plant