Contract Packaging and Consumer Goods: A Balanced Perspective on Successful Growth

116 Spadina Ave, Suite 102 | Toronto, Ontario | M5V 2K6 | 416.598.4684 www.themezzaninegroup.com 1

Introduction
The contract packaging industry is changing. Supply chain managers in consumer packaged goods companies are not just looking to cut costs, they are looking for high performing co-packagers to become partners in their supply chain. Many are now asking their Co-Packers to be involved in early stage product planning and are asking for their insights and execution on everything from package design to promotion ideas. Driving more business through contract packagers is a healthy way for CPGs to cut costs or grow their businesses while focusing on core strengths such as product development, product marketing, or sales execution. Contract Packagers are thus in an industry poised for growth and those with the right balance of customer centricity and internal control will reap the greatest rewards.

Industry Trends
This whitepaper highlights the pressing issues identified through interviews with senior executives in the contract packaging industry, including managers and executives at consumer packaged goods companies, and provides recommendations to contract packagers on achieving successful partnerships.

A number of trends are impacting the contract packaging sector. On one hand, Co-Packers are trying to balance the need to diversify their customer base against the desire of some CPG companies to form deeper partnerships. Some contract packaging companies are forging ahead with new marketing techniques to attract high quality customers, proven management techniques to optimize project delivery and new technology platforms to automate information flows both inside the company and with customers of all sizes. Supply chain managers are reacting to current economic conditions by conducting strategic sourcing reviews. Based on the analysis, some are bringing all or a portion of their outsourced operations back in-house. They are also rationalizing their base of contractors with a fresh look at capabilities and changing marketing conditions. The stated objectives were to manage fewer, more capable and strategic contract packagers and manufacturers and use the downturn in the market as an opportunity to dissolve relationships with lower performing contractors. As a result of these reviews some co-manufacturers are seeing revenue pools dry up and are seeking new customers or developing new offerings to maintain stability. Some will not make it through this downturn. They will be acquired, dramatically downsized due to lost business, or fold altogether.

Insights
Participants shared with us their unique perspectives on the trends in the contract packaging industry. Over 360 years of collective experience was represented by our interviewees. Listed below are a few core insights:

CPGs are not looking for the lowest bottom line cost when sourcing contract packagers. They are looking for the highest return in terms of management savvy, project management skills, ability to bring forward innovative packaging concepts, and those with the flexibility to test concepts and launch NPIs at the lowest total cost. Forward-looking Co-Packers are embracing new technology and are ready to invest in solutions that simplify operations, strengthen their credibility, have a proven ROI, and position them for future growth. While they are less common, they do exist and are held in the highest regard by CPGs. Subsidiaries of public companies or significantly larger parents have the most difficulty in implementing new productivity software. Budgets for IT reside with corporate and the process for winning approval is lengthy. For this reason, CoPackers who are subsidiaries tend to go with what theyve got unless there is a major issue or a customer requirement. Having a project champion and / or executive sponsor will significantly improve the chances of having a new system installed that meets the needs of the subsidiarys business. Co-Packers are looking for ways to collaborate more with their CPG clients. However, Co-Packers are concerned that deeper partnerships will translate into off balancesheet financing as CPGs ask Co-Packers to procure raw materials, assemble products, and deliver to customers. This moves all related costs off the books of CPGs and onto the books of Co-Packers, who carry finished goods inventory until orders are received. More Co-Packers are leveraging the web both to find and attract new customers and to manage information flows with clients. In addition to social networking groups found on LinkedIn, supplier search portals such as Thomas Net, Kelly Search, and Vendor Seek are being used with success by Co-Packers who have cut back on trade show attendance.

Pain Points
Companies in the co-packaging industry face challenges and opportunities in this environment. Both CPGs and Co-Packers have pains in dealing with their partners.

CPG Pain Points

CPG participants identified a number of pain points in their dealings with their supply chain partners. We were able to segment the issues into two broad categories strategic and operational. On a strategic level, the primary issues identified are common to business partnerships. However, Co-Packers may be surprised to learn that CPGs are looking for more than just the lowest per unit cost. They want to have confidence in the facility, materials, and management team. Some CPGs even reported performing technology audits while conducting sourcing reviews, and favored those Co-Packers that could demonstrate a high level of capability in this regard. Smaller CPGs expressed an interest in sourcing a contract packager that could offer a full range of services, from manufacturing to specialty packaging, warehousing and order fulfillment. Contract manufacturers with additional store space and sufficient industry software could capture more business by partnering with these smaller players. Larger CPGs commented on the innovation divide that blocks some contract packagers out of the bidding process. These CPGs were not willing to entertain bids from companies that were using dated equipment and insufficient technology to monitor and plan operations in real time and to provide traceability of products throughout the supply chain. On an operational level, CPGs were generally disappointed with the level of project management skill employed by Co-Packers at lower levels in the organization. Poor performance to KPIs are often traced to poor communication or execution to expectation. Those CPGs whose Co-Packers were using recognized management practices reported the highest level of satisfaction with their Co-Packers and were more likely to consider them business partners rather than suppliers.

Contract Packager Pain Points

Contract packagers reported pain points with their CPG clients along similar lines. In defense of their project management skill, they point to multiple contact points within a CPG that often have competing interests and lack their own project champion. Most contract packagers reported that their larger CPG clients require them to update an enterprise software system with relevant operational data such as delivery dates and inventory levels. One large Co-Packer reported using 10 unique systems for their customers and was yet to develop an internal solution to automate such information flows in order to minimize the training and labour hours involved in performing these routine daily tasks.

The Shared Pain

The single biggest challenge that was identified among both CPGs and Co-Packers was the difficulty and relative cost of sharing information. It is an issue for the related account teams that work together, and also represents a lost opportunity for management to capture data for measurement and analysis. The issue centers on getting the right information in real-time so that decisions can be made about production planning and final delivery. Companies have adopted different solutions to address the problem. We looked at technology platforms, software applications and other management techniques in order to assess their various levels of success.

Technology Platforms
When we looked at the technology used by participants, we found co-relations between the types of applications used and the challenges they identified in managing their businesses. Participants were categorized by type of platform Home Grown (system Type of MRP System Used by developed in house), Custom Software (system developed by Participants consultants), Industry Software (systems designed specifically for contract packaging), and Enterprise Software (traditional Enterprise / systems like SAP). Traditional
5% 21%
Home Grown

48%

26%

Industry Software Custom Software

We found that those using Home Grown or Custom Software were spending significant amounts of time and money in managing and maintaining these systems. They were often called into question by new customers performing technology audits, and were most likely to be forced to use the systems of their customers in conjunction with their internal systems.

Those using Home Grown systems tended to have an affinity towards the system due to a sense of pride in proprietary development, a perceived high and required degree of customization, and the sunk costs involved in developing it. Some remain unconvinced that industry specific software can deliver productivity gains or will be as cost efficient as advertised. Still others are simply unaware of the efficiency gains these platforms offer. Those using Enterprise Software, while generally larger in size and more mature businesses, were disappointed with the flexibility and cost of customizing the enterprise system. 12% reported using an Industry Software system in conjunction with an Enterprise Software system due to simplicity, capability, cost savings, and productivity gains. Those who were using a software designed specifically for contract manufacturing, or Industry Software reported shorter turn-around times on RFPs, better scheduling and labour planning capabilities, lower maintenance and IT costs and a general higher level of satisfaction with the system and its capabilities. Costs of acquiring such a system were considered relatively low when benchmarked against Enterprise systems, IT costs, and productivity savings. Ultimately, those who have achieved the greatest success in improving their productivity feel that success rests on two main factors; having the right project and information management systems in place, and having a disciplined management team to run them. Those who have overcome the challenges have trained their people in good project management principles and have implemented professional supply chain management software.

Recommendations for Contract Packagers

1. Evaluate the management techniques being used by your company Drive out inefficiencies in operations such as manual scheduling, excess labour, excessive time / effort in gathering and sharing information. High performing Co-Packers reported that a new manager or owner was responsible for implementing a QMS (quality management system) and that the entire organization was trained on it, from the shop floor on up. Those who reported use of a QMS in their operations were more likely to have large or very large CPG customers who were won because of demonstrated quality control, process management, and value added services such as product development specialists and designers on staff. These same companies were more likely to be further integrated into the supply chains of their clients and reported the highest year on year revenue growth. 2. Evaluate the state of your IT system. Industry software exists at increasingly lower prices that can reduce or eliminate the need for costly IT consultants to maintain, upgrade, or refine the existing in-house solution. Evaluate your definition of collaboration and ensure it aligns with your customers. Account managers and senior executives are involved in landing big deals and are readily available throughout the bidding and negotiations process. However, CPGs note that once the business is won and moved into production, the account and operations teams often do not receive the same level of service.

As a Contract Packager, Youre in Trouble If: You think the move to sustainable packaging is a fad You think your home-grown MRP system and outsourced IT department is adding value and instilling confidence in your customers Your investments in marketing, training, and equipment have lapsed significantly as a way to save short term costs. New customers will overlook you, and returning customers will question your value. Youre still flying by the seat of your pants and riding the coat-tails of a few large customers. Youre Most Likely To Succeed If: You can turn around an RFP in 3-5 days You are the best customer your suppliers have Youre on the path towards or have already implemented recognized quality management techniques, such as Lean Manufacturing and Six Sigma. Your account teams include trained project managers Youre using an MRP system that is simple to use, drives cost out of your system, enables better project management, and instills confidence in your customers that you dont need to use their system. Your management sees and uses it as a strategic advantage, and not simply a warehouse system. Youre autonomous in running your operations and dont require hand holding by your clients. You demonstrate a sound understanding of the markets and customers that your clients serve. 8

3.

Collaboration extends beyond working together to accomplish routine or expected tasks. It involves the exchange of ideas and insights that can lead to improved processes, lower costs, and new product developments. Employees who are empowered to recommend changes and improvements internally will bring forward ideas that benefit the company and its clients. Similarly, client facing employees have a significant influence on the perception clients have of your firm. If clients dont feel like your account teams are an extension of their supply chain, they will be less likely to entertain talks about forming deeper partnerships. Invest in building the account level relationships and clients will be more willing to grow their business with you.

Conclusion

Once characterized as an industry with many mom and pop providers, the contract packaging industry is maturing and attracting savvy managers and demanding investors. Private equity firms and large public companies are acquiring contract packagers and running them as subsidiaries, and mid-size packagers are acquiring smaller businesses in strategic locations to help expand operations. As the industry continues to grow, smaller and weaker players will succumb to industry pressure and will lose long standing customers to those who are driving efficiency and innovation.

Background

Mezzanine Consulting conducted interviews with 18 senior executives in the North American contract packaging industry to examine the dynamics at play in the industry, with a specific focus on the integration of contract packagers, contract manufacturers, and other 3PL providers into the supply chains of consumer packaged goods companies. Interviews were conducted from July to September 2009. The author would like to thank all of the individuals who participated in this study. For more information on this report, please contact us at info@themezzaninegroup.com.

ABOUT THE MEZZANINE GROUP Have you ever had theater tickets on the mezzanine level? Its a great view far enough back to see the stage completely, and close enough to see all the details. Thats why were called the Mezzanine Group. We are a growth services firm that provides market intelligence, marketing planning and outsourced marketing management to help companies gain a clear view of their opportunities and pursue them effectively. Over the last 10 years, we have helped some of the most exciting growth companies in the world (like RIM, Capital One, Philips as well as early stage and mid-sized firms) assess their opportunities, plan their marketing, and implement effectively. We understand growth because weve lived it Mezzanine was named one of the fastest growing companies by PROFIT Magazine 2005 - 2008. For more information, visit www.themezzaninegroup.com or call 1.888.413.3911 (in the GTA, 416 598 4684).

intelligence +
116 Spadina Ave, Suite 102 Toronto, Ontario M5V 2K6 I 416.598.4684 I www.themezzaninegroup.com

10