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Three-Tier Deals: How to keep your balance during multi-party machinery installations

When a new machine is needed for a co-packing plant, the machinery supplier, co-packer and brand owner must balance their roles and responsibilities for the project to succeed, according to experts on the supply side...

Brand owners may recommend equipment, but when the co-packer pays, the co-packer decides. Aaron Thomas Inc., recently installed this new RF Sealer in Memphis.
Brand owners may recommend equipment, but when the co-packer pays, the co-packer decides. Aaron Thomas Inc., recently installed this new RF Sealer in Memphis.

“The more the merrier” is an idiom that often describes a good-hearted attempt to add yet one more person to an already crowded venue. Business arrangements among several parties might seem a fitting situation in which to use the old saw. But are they really?

It depends. In the case of three-tier sales agreements, where an equipment supplier provides a machine to a contract packager “through” the co-packer’s customer (a manufacturer or brand-owner), all three parties can indeed come up feeling somewhat merry…or at least smiling.

The key to success, it appears, is knowing who is responsible for what and when, and then trusting each other explicitly to do the best job possible.

“Brand owners tend to sit at the head of the table on most all projects, regardless of whether production will take place internally or at a third- party location,” says Neil Kozarsky, president of Marlton, NJ-based T.H.E.M. (Technical Help in Engineering and Marketing), a contract packager and also sole U.S. supplier and seller of Sanko stick-pack packaging machinery.

“Once the project deliverables are defined,” says Kozarsky, “all parties have to work diligently to align machinery capabilities with requirements and metrics. The economics can be challenging, as CPGs often lean on contract packagers when they are not prepared to fully absorb capital expenses tied to new products. Still, the customer is king or queen and tends to drive the project and make final decisions. It often comes down to the willingness of the contract packager to take on measured risk when new programs are being advanced.”

When a packaging equipment supplier is working a deal which includes both a contract packager and a consumer packaged goods (CPG) company, it is never a black-and-white situation, according to Mike Wilcox, vice president of sales, marketing and aftermarket services at end-of-line machinery supplier Delkor Systems, Arden Hills, MN. Both groups are usually involved in the design and planning, he says, although the contract packagers tend to have final say on how the packaging line is chosen and laid out since they must operate the system once it is installed.

Tom Bacon, president and founder of contract packaging firm Aaron Thomas Inc., says that in his 40 years in business, the CPG or brand owner generally wants to avoid assuming the financial responsibility for investing in equipment. “The CPG is responsible for the design of finished goods only. Sometimes they will recommend equipment, but most often, we choose,” he relates. “We’re taking on the financial responsibility, and they respect that position.”

Enlightened development
Occasionally, three heads are better than one, as Kozarsky explains: “Yes, all three parties have to be fully immersed in the design and development phases, as the success of the project really depends on anticipating most of the challenging elements prior to entering execution mode. There is usually a good deal of establishing what is really the “need” as opposed to the “want” relative to production speeds and timing. Too much optimism or pessimism can be costly, and effective projects require all three parties to be in alignment on critical acceptance requirements.

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