- Contract Packaging
- Leaders in Packaging
Article | December 31, 2001
Outsourced packaging: Let the experts do it!
Exclusive survey reveals that manufacturers increasingly turned to contract packagers in 2001, and the growth continues this year.
Although many in the packaging community are wringing their handsand their workforcesover slowing investment contract packagers (CPs) are busy shaking hands over new contracts with manufacturers. It appears that alliances between manufacturers and CPs remain relatively unaffected despite efforts to cut costs by many companies. Thats the conclusion of a research project by Packaging World last fall. PW surveyed the state of contract packaging via surveys of end users (see sidebar for details) contract packagers and the suppliers that sell to them. The surveys were conducted via PWs Web site Packworld.com. Of the 120 end users who participated more than 90% said their companies will be doing the same amount or more business with CPs in 2001 compared to the previous year (see Chart 1). In fact just 9% reported their companies will reduce the amount of work outsourced in 2001. This optimism is particularly striking because the survey was conducted largely in the aftermath of the Sept. 11 terrorism. While the overall economy has faltered business with CPs is bucking that trend. Its possible that survey participants represented companies that had been less affected by the economic downturn; slightly over half (53.3%) reported their companies sales increased in 2001 compared to 2000. The optimism continues for this year too. More than 86% of end-user participants said their companies business with contract packagers would stay the same or increase in 2002. Only 13.3% predicted a decline in business with CPs. There were some interesting differences depending on company size. Fewer than 12% of respondents with large companies predicted a decline in business with CPs but 22% of small companies felt their volumes with CPs would drop this year. Gareth Walters of bicycle maker Bellsports Santa Cruz CA said his companys sales were flat last year. However he reported that overall bike sales were off 12%. As a result the company consolidated two divisions and cut about 35% of its workforce. Still he said that the company will do more package design while doing less packaging. Until about three months ago I designed about three boxes in my entire life Walters tells PW. Thats changing as the company moves to design in-house the best possible packaging especially for our accessories. However the repetitive work of loading the packages and shipping will be contracted out. The company also operates a plant in Rantoul IL that focuses on custom packaging. For a new order for bike helmets with a major club store chain Walters said the helmets will be largely made in Asia then shipped to Rantoul for final assembly packaging and shipping. Most retailers are following the Target brand-name approach. They want to sell brand names but theyre demanding their own packaging Walters explains. So we plan to strengthen our brand and get away from commodity-type high-volume merchandising. Packaging will play a big role in that change.
Broadened product lines Although there are many reasons why companies outsource their packaging one prominent one is to broaden their product line. Nearly six of every 10 end users in the survey said their companies introduced new products that are packaged by CPs. However this also was dependent on company size. Almost 71% of respondents from large companies said their companies introduced outsourced new products whereas 55% of participants from small companies said their companies did not introduce new products packaged by CPs. A packaging R&D worker for a manufacturer of industrial products said that the use of CPs has allowed her company to add products to its line that it cant manufacture in-house. A marketing executive for a Midwest distiller said much the same. We can offer a larger variety of products and packages through the use of co-packers she said since were limited by our existing bottling equipment and space. A packaging buyer for a major consumer products maker said his company primarily uses CPs for promotional and lower-volume products. They provide an effective way to bring promotional items to the marketplace and allow us to respond quickly to marketing opportunities he said. Plus we use CPs for low-volume products that are constantly changing. A quality control executive at a major brewery said that his company uses CPs for the flexibility they offer to introduce new packaging. They permit us to more quickly respond to market opportunities for niche packages without affecting in-house high-volume packaging lines. In fact almost 75% of respondents agreed that CPs help a company bring a product to market faster than doing it in-house. Surprisingly the decision to outsource packaging isnt solely the province of management or production executives at manufacturing companies (see Chart 2). Virtually every department appears to be involved in the decision to shift packaging to outside firms.
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Technology a major driver Survey respondents say that technology or capacity unavailable in-house is the primary reason (35.9%) their companies outsource packaging to CPs (see Chart 3). However nearly a third point to minimizing upfront investment and about 12% outsource because their companies dont have in-house the appropriate worker skills. Tom Tompkins a parts packaging executive for American Honda Motors Marysville OH said the skills issue is crucial at his company. Our primary reason for using contract packagers isnt so much technology. Were not a packaging company so contract packagers provide a skill we dont need to have in-house he said. Technology is definitely important for Welch Foods purchasing executive Bill Hendricks. A lot of our work with contract packagers takes advantage of that companys capability that we simply dont have. Often its equipment that we dont employ in our plants Hendricks said from Welchs Concord MA headquarters. Sometimes we outsource to determine whether that technology is a direction we need to look at. So often these arrangements are really kind of tests to gauge the market Hendricks added. Much the same is true for the Mexican subsidiary of a major U.S. food manufacturer. The companys marketing executive said his company has been able to enter new markets that require technologies that we dont have in-house. Two executives at major corporations see a combination of factors in outsourcing of packaging. Contract packagers provide flexibility speed to market and reduced capital investment when we launch a new product said a packaging R&D worker for a major household chemical maker. Nearly the same words were used by a packaging executive for a national personal care maker. One surprise here: More large companies (39.2%) said they used CPs primarily to minimize upfront investments than did small companies (33%). Economics not always favorable Not all the survey participants are positive about using contract packagers. A packaging executive for a large Southwest poultry company said contract packagers are sometimes a necessary evil. A purchasing official for a Southeast pharmaceutical company said that the use of CPs is more costly and added that his company is stuck with them. The issue of economics was also on the mind of a buyer for a Midwest beverage producer. He conceded that CPs offer flexibility to ramp up quickly allowing your own plants to catch up. But he said the cost always turns out higher than what we could do internally. Welchs Hendricks doesnt agree. We think that contract packagers are often more aggressive about costs. Theres certainly a motivation from outside companies to retain your packaging volume he said. A purchasing executive for a Midwest nutritional products maker is ambivalent. The use of CPs cuts total dollar outlay and we dont have to hire additional employees or buy more equipment he said. However he growled CPs rarely deliver on time and we always seem to have inventory issues with them. A packaging executive for an industrial products maker experienced similar problems. The use of CPs reduced our ability to respond to surges in demand because we eliminated in-house packaging personnel he reported. Contract response times are too slow to respond to market opportunities.
Close relationships Despite those companies that had experienced problems with CPs most survey respondents see contract packagers as extensions of their companies. Slightly more than half of all respondents say their companies have established partnership arrangements with CPs and more plan to do so in the future (see Chart 4). Tompkins of American Honda said his company works at many levels with the CPs. We especially work closely with their engineering design people. Our engineers work closely with their engineers in developing optimal packages. We have many difficult parts to package and we have high expectations. Thats why partnerships are so critical. His company has found that problems can often be traced to subtle changes in part design rather than package failures. Weve found that a slight change in the part specification can create damage. Too often the contract packager doesnt know the part well enough to question small changes. Bill Hendricks of Welchs also sees CPs as part of the team. We definitely establish partnerships with our contract packagers most of the time he said. We maintain close coordination with these companies on several levels. Partnering is definitely more popular among the larger companies. Some 56% of them have established partnerships with CPs; only 22% of smaller companies say the same.
International role too Some respondents like Hendricks say their companies work with CPs around the world not just domestically. In fact only 47% of respondents report working with CPs exclusively in the United States. Although Canada and Mexico are popular locations for CPs Europe and Asia are other locations that were frequently identified. A purchasing official with an international chemical company supported the use of CPs overseas. Globally the use of CPs permit a more rapid market entry for new products before internal resources are capable of being brought onstream he noted. The shift of manufacturing from the United States to the Far East is also a factor. One household product manufacturer recently shifted from receiving goods in bulk to having the products prepackaged overseas. After a few months of receiving products from the Far East unacceptably packaged the company now has a critical project to improve the packaging performance. Fortunately that hasnt been a problem for bicycle maker Bellsports. Weve transitioned a good deal of our packaging to Asia where many of the parts are actually manufactured said Bellsports Walters. Were dealing with manufacturers that provide a turnkey service sending us prepackaged parts that theyve manufactured. Whether done here or overseas contract packaging appears to have become another very adjustable wrench in the toolboxes of production purchasing and marketing executives of U.S. manufacturers.
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