The Benefits & Challenges of Contract Packaging
Consumer Brands Look to “Contract Packaging” to Stay Competitive
The terms “contract packaging” and “contract manufacturing” are often used interchangeably. In practice, contract packaging deals with the packaging of an already manufactured item, whereas contract manufacturing deals with the production of the packaging and its contents. In both cases, if done right, outsourcing part of the production process of consumer goods can increase competitiveness in today’s fast-changing market.
IN talked with Vicky Smitley, Vice President of Sales and Marketing at food solutions company, Hearthside, and President of the Contract Packaging Association (CPA), to find out more.
In your opinion, what are the top three benefits of contract packaging?
Benefits vary as much as customer needs. For large global brands, fundamental benefits include speed to market, innovation, and cost. Start-ups and smaller companies would benefit differently; perhaps in terms of capacity, expertise, increased access to resources, and of course cost reduction. For all customers, the “cost” benefit is more than the simple cost of the service, but all of the additional internal savings. This includes capital expenditures, plant and equipment, staffing, and other costs, which can be removed with a properly implemented contract packaging strategy.
What are the top three challenges for a company looking to bring co-packaging into their production/ supply chain?
The first challenge will always be linked to company philosophy. Those that believe that all aspects of their production are core competencies and must be done in-house will typically find reasons not to outsource. However, this is rapidly becoming a minority view. Leading firms now view contract packaging and contract manufacturing, for at least part of their portfolio, as a strategic imperative.
The second big challenge is misunderstanding around the true internal costs. To compare relative value, a company must know its true cost of production. The number of companies that do not have a solid handle on this is surprising. Typically they believe their costs are much lower than they actually are, due to improper allocations. When these firms realize their true cost of production, it opens up an opportunity to consider contract packaging and contract manufacturing.
What are some of the dominant supply chain trends driving co- packaging?
The most significant megatrend shaping the industry is contract packaging moving from a tactical role (regarded as a quick-fix or regional/seasonal accommodation) to a strategic imperative for companies. Trends that reduce inventory levels, such as postponement and product completion, are growing. And as marketers grapple with “last mile” challenges, these trends will only continue to grow. Omni-channel – a multichannel approach to sales that looks to seamlessly integrate the customer experience both online and instore – is also forcing brands to rethink many long-held conventions.
In which markets is co-packaging most prevalent?
By far the largest sector is consumer packaged goods (CPG in the US, or FMCG in Europe). This includes both food and non-food products that are continually consumed and repurchased.
In which regions or countries do you expect to see the most growth globally?
Since growth follows growth, all eyes are on Asia for CPG categories. In the US the contract packaging sector is growing at about three times the rate of the underlying industries it serves. As more companies outsource, we expect this growth rate to continue.
What is driving co-packaging in newer markets worldwide?
The fundamentals are largely the same, though the specifics vary: market access; market penetration; greater control of the brand; lower costs; access to expertise; local knowledge; local relationships; and, other factors. Companies that know they must think globally but execute locally see outsourcing services, such as contract packaging, as essential. This enables them to quickly build their brands in new world markets.
What impact will the rise of automation in plastics/packaging have on contract packaging?
Automated solutions, whether they be in plastic packaging or other formats, will only be practical in contract packaging if they are flexible. A multi-million dollar line set up to run one item 24/7 for 10 years would never work in a contract packaging environment. You may be running product “A” on one shift and product “B” on the next. So impact will only follow flexibility.
Can you share any recent global success stories – either through CPA or Hearthside?
If I put my Hearthside hat on, I am pleased to say we now have a European operation. Bars (energy bars, snack bars, nutrition bars, etc.) are one of the fastest-growing categories in food, and Hearthside is already the largest contract manufacturer of these products in the US. A company named VSI – an amazing group of people, and the largest contract manufacturer of functional bars in Europe – recently became part of the Hearthside family. We are excited about this as it gives us a European presence, as well as access to VSI’s extensive R&D and formulation capabilities.
The speed of change in consumer goods markets around the world may be quickening, but the trend of strategically outsourcing specific parts of production to contract manufacturers and contract packagers is moving just as fast. This is the market’s response to new challenges and global megatrends, and for the entire value chain it is proving to be a rather smart solution.
President of Contract Packaging Association
The Contract Packaging Association is a North America not-for-profit trade organization for the contract packaging industry. In this interview, Smitley gives an overview of what it means for a company to outsource its packaging to a contractor, discussing the advantages and potential challenges.