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Should you put all your eggs in one basket?

The pros and cons of exclusive contract packaging service arrangements — for both buyers and sellers.

For example, a packaging service provider may obtain a contract to package a branded consumer product and later seek to obtain a contract to package a competing generic product. Since generic products are often in similar packages with slightly different labeling, the provider may be able to utilize similar packaging processes and machines or capitalize on contracts with vendors and suppliers to obtain lower prices for higher quantities.

The provider’s perspective

Service providers, therefore, are not typically enamored with the idea of an exclusive arrangement with a buyer in which the service provider may not provide services to competitors of the buyer. Not only would the service providers lose the opportunity to capitalize on economies of scale, but they may also subject themselves to potential avenues of liability.

Exclusive arrangements may include restrictions on certain types of packaging or on potential new customers for the provider. The more restrictions, the greater the possibility of liability. The additional potential liability coupled with the reduction of a potential client base deters service providers from exclusive arrangements.

On the other hand, an exclusive arrangement may lock-in larger quantities and long-term deals, and may also invoke more favorable pricing negotiations.

The buyer’s perspective

Likewise, a buyer can also agree to exclusively use a particular contract packaging service provider for a period of time. In a given situation, the benefit to a buyer can be better pricing which can accompany guaranteed minimum and exclusive arrangements, while the service provider can benefit from securing all of the packaging business for either a particular product or line of products.

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