Contract Packaging Cost: How Much Will Outsourcing Cost?
So, you are beginning the journey of seeking out a contract packaging company because you’re considering outsourcing your supply chain needs. In this situation, it is normal to have a lot of questions about the process. But, for most people, the number one question is, how much does it cost?
This is a very good question. However, most businesses are hoping to get a universal ballpark figure right off the bat. That’s totally understandable - you want to have this information to figure out if this is something you can afford. You want to know if the cost justifies the investment.
Many buyers go to the internet and punch in some variant of that question. They hope that the information will be front and center. After clicking through a host of articles on Google, many buyers get frustrated.
Most of the articles and other content you’ll find does not usually have this information. The reason for this is because the answer is extremely case sensitive. The cost for contract packaging is going to be very different from one company to the next.
The reason for this is because your costs relate to your labor force, packaging machinery, packaging materials, warehousing space, logistics, and the other variables that change from one company to the next.
The total cost for a contract packaging agreement for you, is not going to look anything like the one that is appropriate for your competitors. Unless of course, all the variables above are nearly identical for each company, of which, they rarely are.
With all of that in mind, it is important to understand one thing. There is an answer to your question and it can be provided by a contract packaging company. But, they will need to analyze your unique requirements to produce a close approximation of the total cost.
Industrial Packaging has done this kind of analytical research for countless companies. We can do this for your company as well if contract packaging ends up becoming the best option for your company.
In this article, we will explain the elements that go into calculating an estimate for contract packaging. We will explore the different elements we need to analyze before we can answer the question, how much does it cost?
How Much Does Contract Packaging Cost?
This is the million-dollar question, luckily not literally!
If you are looking to outsource your packaging needs, you want to understand what the cost or investment will be. As mentioned earlier, it is important to understand that every product and project is very different.
One process or product flow for one item may have a significantly different need than another. Also, when we discuss what “it” costs, we are talking about a total cost to outsource your packaging needs.
This means you are paying a fixed cost and allowing a third party to receive your goods and materials. The co-packer will then package them into a finished ready-to-sell unit. They’ll also ship them out to the distribution centers or customers you outline.
There are a handful of factors that will determine what the total cost will be. We’ll dive into each of them next.
What are your quality standards? The higher the quality standards you have, the slower the process can be. It should also be noted that the higher your quality standards are, the higher your cost will likely be.
If those quality standards can be built into the system through automation such as check weighers, X-Ray machines, or metal detectors, it will have less of an impact.
If the amount of sampling (or quality inspections of the finished product during the run) you require is more than normal, this too will add to the overall cost.
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As is the case in any manufacturing environment, we want long runs of one product. This allows the factory to gain efficiency as the job runs. Every run, no matter how much you have mastered it, loses efficiency at the start up and shut down phases.
The equipment will have to be retimed at startup. Scales will need to be recalibrated. Even if you run the same product the day before, you would want to test your systems before you run the line.
At the end of the shift, you don’t want to leave pallets incomplete. You will also need time to clean the machine and work area each day to maintain high standards for third-party audits.
To maximize the cost, you will want to understand how long of a run you are willing to commit to. This translates into order size. The more you order, the longer the runs can be, and the more efficiency the factory will see.
You can use this information in your favor as well. This can be a negotiating factor that you bring up if you can commit to those runs.
Oftentimes, people are concerned with longer runs as this requires more storage of the finished goods. If you are OK with the longer runs, but concerned about the storage of the finished goods, work with your supply chain partner. You will find that many of them will take longer runs AND store the finished goods for you until you are ready to receive them.
Do you have a very detailed project that requires intricate assembly of many parts? If so, expect a larger price tag. If you have a straightforward project that requires labor and some equipment, but is easy to assemble, you will see a lower fixed cost.
It’s worth mentioning that every supply chain partner will want to create as many finished goods, as quickly as possible, with the fewest amount of people. This is how they keep costs down for you, while keeping their margins intact.
A simple way to determine how complex your project is, is to complete a time study. Assemble your unit at your desk and time yourself. While a supply chain expert will be able to do it faster as they have access to labor and equipment you don’t, this will give you a baseline for how complex your item is.
If it takes 25 seconds or less to assemble, you can assume it is an easy to assemble item. If it is over a minute, this is a complex item.
An example of an easy job is shrink wrapping calendars. You can fit a lot of calendars on a pallet, and the product is very consistent in size and weight. There are very few variables that make this a complex project.
An example of a complex project is a full pallet-sized display that has 6 shelves, over 150 items, and 10 different types of products. This takes up much more space and we are unable to automate this process.
This is separate from run size. The overall volume of the project on an annual basis is a large factor for your supply chain partner. It’s easiest to show this by comparing 2 hypothetical companies.
Company 1 has their product run for 5 days every other month.
Company 2 has their product run for 10 days every month.
If the products are the same, Company 2 will get better pricing. That’s because the manufacturer will have a more constant workforce on that item. This means that they will be able to set up a line and leave it set up.
With infrequent runs, you will have to set up and dismantle lines to use the space for other projects. If the volume is substantial enough, you can leave the line set up and run it on an as-needed basis. There is no learning curve when you run it frequently. Starting up and shutting down become easier with fewer interruptions each time.
So, How Much Do Contract Packaging Services Cost?
This is the reason most of you are here, so let’s not wait any longer! As outlined above, each project you are looking to do is different. Generally speaking, if you can leverage a high-speed filling line that requires only a few touch-points, you are in the $.05-$.15 per unit mark.
If you have a very manual, bulky, complex point of purchase display, your cost could be over $100 per unit. If you are somewhere in the middle, the good news here is you will be closer to the lower end than the higher.
When you begin your journey to determine the cost of contract packaging services, you will want to understand what is critical to the success of the project. If cost is one of those factors, these points will allow you to be able to understand what actions you can take in order to reduce the overall cost of your project.
Additional Items Of Consideration For Contract Packaging
Of course, cost is just one variable of the contract packaging equation. You also need to consider the location of your contract packaging vendor and a host of other elements when thinking about entering into a business relationship like this.
If you would like to continue researching the various elements that go into the contract packaging process and the related packaging operations, you will want to consider reading this article. There you will find more information about the process of outsourcing your supply chain and packaging line.
About Jarrod Dizazzo, Vice President
Vice President at Industrial Packaging I believe that the strength of one is shown by looking at those around them. We've got a wonderful team in SCS and coming to work for IP is a joy every day. When not in the plant, you can find me fishing, hiking, or being goofy around the house with my 2 daughters and my wife.