In-house or through a co-packer? Weighing the cost

CPG companies in the market for highly customized, hand-assembly packaging services might be inclined initially to consider having the work done in-house, believing it could be performed more cost-effectively than using a contract packager.

Bill McNeil, president of Premier Packaging, advises CPG companies to carefully compare the costs before finalizing a make versus buy decision. He offers the following scenario:

Suppose a contract packager bids the work at 25 cents per unit. The product manufacturer—analyzing only labor costs, overlooks the associated costs of reallocating duties, warehouse incidentals, accounting costs, facility space, equipment, systems, and processes—counters that it can perform the work internally for 14.5 cents per unit. Once CPG companies factor in the true costs, the company’s estimate rises to about 22 cents per unit.

“And that’s based only on the assumption that your operation can get the job done as fast as you need to get it done,” McNeil adds. “And you’d better know how to manage hand-labor people in a packaging line, or the cost per unit will go up even higher, and quickly.

“If I quoted you 25 cents and it costs more in the end, all you pay is 25 cents, because that’s what I quoted. But if your true cost comes in higher than you expected to do the work in-house, you’re going to be paying that extra money, which is often more than I quoted.”

More in Contract Manufacturing and Packaging