Contract Packing Versus Owning a Packaging Line

The decision is whether to pay an outside packer for each pack or to buy and run your own packaging line. A contract packer (also called a co-packer) packs your product for a per-unit fee, often with setup fees, minimum orders and either your materials or theirs. An owned line replaces those fees with equipment, fixed costs and your own variable cost per pack.

The short answer: outsourcing wins at low and uncertain volume, and ownership wins once volume is high and steady enough to carry the fixed cost. In the example below the crossover sits near 284,000 packs a year. The number depends entirely on the inputs, and several factors that decide real cases never appear in a cost formula.

Two options, one basis

Compare both options as one year of cost for the same number of good packs. Each side needs every cost that changes with the choice, including the ones that are easy to leave out.

Co-pack annual cost = (per-pack fee x packs)
                    + (setup fee x runs)
                    + freight to and from the packer
                    + extra inventory and handling
                    + quality oversight time

Own-line annual cost = allocated equipment cost
                     + fixed annual costs
                     + (variable cost per good pack x packs)

Allocated equipment cost is the installed cost divided by a stated life, a planning allocation and not accounting advice. Installed cost covers everything needed to get the line producing, as set out in the true installed cost of packaging automation. Variable cost per pack should count good packs only, per cost per good pack.

If the packer’s cost per pack is roughly flat (call it v_c, all per-pack items combined) and the owned line has fixed cost F_o and variable cost v_o per pack, the break-even volume is:

Break-even packs = (F_o - F_c) / (v_c - v_o)

F_c = fixed co-pack costs (oversight)
v_c = per-pack co-pack cost, including fee, setup per pack, freight, handling

Below that volume the co-packer costs less. Above it the owned line does, provided it has the capacity to run that volume.

Worked example

Illustrative numbers, not a quote, benchmark or customer result. This article makes no claim about what co-packers typically charge.

Assume a product packed in runs of 25,000 packs. The owned options are the semi-automatic and fully automatic lines from the manual, semi-automatic or fully automatic cost model: fixed cost of $7,500 and variable cost of $0.09 per pack for semi-automatic (about 800,000 packs a year on one shift), and $37,500 and $0.06 for fully automatic (about 3,000,000).

Co-pack input	Value
Per-pack fee	$0.14
Setup fee	$250 per run
Freight, both directions	$15 per 1,000 packs ($0.015 per pack)
Extra inventory and handling	$0.01 per pack
Quality oversight (staff time)	$4,800 per year

Per-pack co-pack cost: 0.14 + 0.015 + 0.01 = 0.165. Setup per pack: 250 / 25,000 = 0.01. Total v_c = 0.175 per pack, plus $4,800 fixed.

Annual packs	Runs	Co-pack	Semi-automatic	Fully automatic
150,000	6	$31,050 ($0.207/pack)	$21,000 ($0.140)	$46,500 ($0.310)
600,000	24	$109,800 ($0.183)	$61,500 ($0.103)	$73,500 ($0.123)
2,000,000	80	$354,800 ($0.177)	over capacity	$157,500 ($0.079)

Arithmetic, co-pack at 150,000: 0.165 x 150,000 = 24,750; setup 6 x 250 = 1,500; oversight 4,800; total 31,050. At 600,000: 99,000 + 24 x 250 (6,000) + 4,800 = 109,800. At 2,000,000: 330,000 + 80 x 250 (20,000) + 4,800 = 354,800.

Arithmetic, owned: semi-automatic at 150,000 is 7,500 + 0.09 x 150,000 (13,500) = 21,000; at 600,000 it is 7,500 + 54,000 = 61,500. Fully automatic at 150,000 is 37,500 + 9,000 = 46,500; at 600,000 it is 37,500 + 36,000 = 73,500; at 2,000,000 it is 37,500 + 120,000 = 157,500.

Break-even volumes

Versus fully automatic: (37,500 - 4,800) / (0.175 - 0.06)
                      = 32,700 / 0.115 = about 284,000 packs

Versus semi-automatic:  (7,500 - 4,800) / (0.175 - 0.09)
                      = 2,700 / 0.085 = about 31,800 packs

Check at 284,348 packs: co-pack 4,800 + 0.175 x 284,348 = 54,561; fully automatic 37,500 + 0.06 x 284,348 = 54,561. The two agree.

Two readings follow. First, the semi-automatic line beats the co-packer almost from the start in this example, because its fixed cost is small. Second, the answer changes with the fee: at $0.10 instead of $0.14, v_c falls to 0.145 and the fully automatic break-even rises to 32,700 / 0.085, about 384,700 packs. The example also leaves out the owned line’s labor hiring, floor space and supervision beyond the stated fixed cost, which would push the break-even up.

Non-price factors

Price ranks the options only after these are settled. Treat the list as a checklist, and mark each item as favoring outsourcing, favoring ownership, or neutral for your case.

• Capital and cash flow. Outsourcing needs no equipment purchase. Ownership ties up cash before the first good pack ships.
• Speed to market. A packer with a suitable line can start sooner than an install, commissioning and training cycle.
• Demand uncertainty. Outsourcing turns fixed cost into variable cost. If the forecast range is wide, that flexibility has value the formula does not show.
• Control of quality and schedule. In-house lines answer to your priorities. A packer serves several customers.
• Capacity priority in peak season. Ask what happens to your slot when the packer’s other customers peak at the same time you do.
• Intellectual property and formulations. Sharing a recipe, a pack design or a customer list has a risk that a per-pack fee does not cover.
• Minimum order quantities. Minimums can force more inventory than you want.
• Lead times. Booking, packing and return transport add days or weeks to your order cycle.
• Transport risk. Product moving to and from a third site can be damaged, delayed or lost.
• Know-how. Running a line builds process knowledge that stays in the company. Outsourcing builds it at the packer.
• Staff and floor space. An owned line needs operators, maintenance skills and room for feed, discharge and storage.

Hybrid paths

Many cases are not either-or. One path is to start with a co-packer while a new product proves its demand, then bring packing in-house when volume stays above the break-even for several planning periods. The threshold should include a margin, since the owned line’s real fixed cost will probably exceed the first estimate.

A second path is to own a line sized for base demand and keep a co-packer for peaks or for low-volume SKUs. In the example, a SKU that sells 30,000 packs a year sits below both break-evens, so it stays outside even if the main product moves in-house. Line utilization then improves, which is covered in how equipment utilization changes automation payback.

What to ask a contract packer

Quotes arrive in different shapes. To compare them fairly, get these in writing:

1. Per-pack fee, and what it includes (materials, labor, cartons, labeling, palletizing).
2. Setup, changeover and cleaning fees per run, and the minimum run size.
3. Minimum annual volume and the penalty for missing it.
4. Who supplies and stores materials, and what happens to leftover stock.
5. Lead time from order to return shipment, and the capacity commitment in your peak months.
6. Reject and damage handling: who pays and how the count is reported.
7. Term, price-change rules and exit conditions.

Line these up with the same discipline you would apply when comparing packaging machinery quotes on a like-for-like basis. The model in this article ranks costs. It says nothing about any packer’s reliability, and this site does not recommend packers or suppliers.

When the conclusion changes

Ownership loses its advantage if volume is below break-even, if the forecast is wide enough that the line would sit idle, or if cash is better used elsewhere. Outsourcing loses its advantage if the fee is high relative to your variable cost, if peak-season capacity is not guaranteed, or if the product cannot be shared with a third party. Cross-border packing adds freight, duties and timing risks, and the Trade and Supply Chains hub covers related questions.

Keep reading

• Manual, Semi-Automatic or Fully Automatic Packaging? A Cost Model: shows where the owned-line inputs in this example come from.
• How Equipment Utilization Changes Automation Payback: explains why a part-idle owned line costs more per pack than the model suggests.
• Comparing Packaging Machinery Quotes on a Like-for-Like Basis: helps you line up the equipment side of the comparison.

Assumptions and limits

• Every input is invented for illustration, including the co-pack fee, setup fee, freight and oversight. Replace them with written quotes and measured costs.
• The model treats the per-pack co-pack cost as flat across volume, although real fees may change by tier, and it assumes the owned line has the capacity stated in the example.
• It ignores taxes, financing, the time value of money, ramp-up, learning curves and residual value.
• It prices no non-price factor. The checklist above ranks nothing and attaches no numbers.
• The model ranks costs, not supplier reliability, and does not recommend any packer or supplier.
• It supports comparison and does not replace financial, legal, safety or engineering review. Calculators are in preparation and will be published only after testing. See the editorial policy for how this site handles its analysis.