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Stretch your CapEx budget by managing risk

Through tight partnerships and careful planning, contract service partners can minimize risk and make the most of their budgets by considering the many options for financing capital equipment.

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A business needs money in order to grow—that’s a given. But how companies get that money and how they allocate the capital expenditures can vary widely. There are no one-size-fits-all solutions in financial planning.


“Our company does have a systematic plan for capital expenditures in facility, equipment, and communications,” says Chris Nutley, president of MSW Packaging (www.mswpackaging.com), a contract packager in Lawrenceburg, IN. “As you can imagine, capital expenditures have taken a bit of a back seat during the struggling economy. As a result, communications expenses, such as computer hardware and software, have all experienced delayed replacement by 18 to 24 months.


“Facility CapEx has remained on schedule, however, partly because the real estate market has been so favorable to tenants. Many contract packagers have been able to improve their space, or reduce the cost of their current space, and utilize the savings for physical upgrades,” he explains.


“We systematically reinvest in the main staples of packaging equipment, such as shrink wrappers, printers, labelers, glue systems, taping systems, and more. These items are not product-specific. But routine purchases of such staples have suffered from the economic conditions by being delayed by 12 to 18 months in replacement,” Nutley admits.


Sometimes a shared approach between supplier and customer to equipment investment is an option, but MSW does not have packaging equipment on-site which is customer-owned. “MSW owns all of its equipment,” Nutley explains. “For projects that are package form-specific, MSW will typically share in the initial investment with one CPG company, and create a ‘buy-back’ scenario, in which MSW owns the equipment wholly after an agreeable volume level has been reached by the participating brand owner.


“If the required equipment is product-specific, custom-built, and fully relies on the success of that particular brand, most CPG companies understand that the contract packager cannot expose their business to a large portion of the capital expenditure,” Nutley says.


With any capital expenditure, Nutley advises that the company first do an honest and diligent assessment of how much risk the business can withstand. Next, the contract packager must predict whether the product/package will actually succeed in the market. “The contract packager must do this. Of course, the brand owner always thinks the product will be a success,” he ruefully admits.


MSW is gradually moving to a CapEx model that encourages mutual risk shared by the contract packager and its customers. One method would be to pay back the CPG over time and capacity utilization until the equipment is fully owned by MSW. But any such contractual arrangement has to be evaluated on a customer-by-customer basis, Nutley believes.


One way that MSW has been able to postpone many capital expenditures in machinery is by building a state-of-the-art in-house machine shop which can handle maintenance but also can retool existing machinery for new products or uses. Recycling, so to speak, and reusing has kept MSW nimble without extensive major investments, Nutley says.

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