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The industry trend toward 'turnkey,' and how to benefit from it

The contract packaging industry is experiencing a push/pull relative to who within the value chain is responsible for buying raw materials/components (and/or selecting suppliers who provide raw materials/components).

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For many years, the trend among consumer packaged goods (CPG) companies has been toward turnkey (definition: a services supplier such as the contract packager is responsible for procuring materials need to produce a finished good) services. Many factors influenced this trend. Brand owners generally find value in delegating these responsibilities to suppliers such as contract packagers because it reduces their internal headcount required to manage the process.

There also is a cash flow benefit. On the supplier side, a turnkey services capability enables more control over the process, thereby eliminating last-minute schedule changes because of a lack of materials. Needless to say, such changes can disrupt operations and also are costly.

As an β€œinterim” measure, some companies have moved to a β€œdirected” buy, whereby a CPG company authorizes its contract packagers to purchase materials from vendors on the CPG company’s designated supplier list. Though contract packagers do not have the ability to aggregate purchases through their own suppliers of choice, they are able to realize the benefits of β€œcontrolling their own destiny” in the sense of procuring what they need, when they need it.

As a general overview, the accompanying chart outlines the implications of a move to turnkey operation.

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