What is the actual value of using a contract packager? First, we need to total the dollar value of the resources that were distracted from Company A. These line items don’t always appear on a general ledger. It soon becomes obvious this number will vary wildly, depending on who does the calculations.
Regardless of the method used, the number will be huge. Do your own math based on your company’s experiences. Account the value of the involved resources discussed in Company A’s approach and calculate their worth based on a significant percentage of their worth being distracted and dedicated to a non-core event.
Next, we know there is a direct cost to both Company A and Company B. For Company A, the direct cost includes additional labor, materials, equipment, space, utilities, and overtime for core staff. For Company B, the cost is merely the charge for the contract packager. Our example assumes that both work-in-progress and component costs are the same for both companies.
Assume that the direct costs wash out. That means the per-package price to produce internally when accounting only for direct labor, space, equipment, and so on, is equal to the co-pack fee. A good co-packer should be competitive with direct costs on price.
The direct costs, then, are the same for both Company A and Company B. The difference in total delivered cost to these companies, to run the same event, is the value of the resources that were distracted in Company A. In other words, Company A lost competitive advantage and market share to Company B, and the difference is the Resource Distraction Value™.
In many cases, this value is greater than the direct costs themselves. When this happens, it could be argued that Company B outsourced for free. Two formulas can be used to express the differences between the two scenarios. (view image)
See the story that goes with this sidebar: What is this thing called Resource Distraction Value?
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