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Increases in raw material costs pound packagers

John Kalkowski, Editorial Director -- Packaging Digest, 7/1/2008 2:00:00 AM

In the last month, I've seen a growing stream of price increase announcements from both suppliers and packagers. This is not new. As raw material and transportation costs have edged up over the last several years, the industry has been trying to increase its prices to keep up with the accelerating costs of production. However, rising costs have easily outpaced price hikes, and margins have been squeezed as though they are in a vise grip.



What's new is that the industry now is seeing substantial price hikes of up to 25 percent in a single leap for some materials —especially those based on petroleum—that are essential to packaging. In the past, many companies were happy if they could get a 2- or 3-percent increase every couple of years. In times of plenty, their customers had come to expect that they could even force price reductions, just as the end users were demanding more quality and quantity at lower cost. No one in the packaging supply chain seemed to have any pricing power.

For years, packagers have been tightening their belts to drive any unnecessary costs out of their manufacturing and sales processes. Lean manufacturing is more in vogue than ever. Staff sizes have been reduced. Purchasing departments hold enormous sway in buying decisions. But you have to ask, “How much more can be cut?”

What we see now is classic cost-push inflation in which the cost of making packaging spirals upward and eventually trickles all the way through the chain to consumers. It's a little easier to accept these price increases when you can see that the costs of petroleum products have essentially doubled in the last year. At some point, though, consumers will say, “Enough is enough.” Then they will slow their purchases.

These are times that can inspire structural changes in an industry. An obvious action would be to recycle and reuse more packaging materials. Improved management of scrap and waste will help, as will downgauging where applicable. Even though it's easier said than done, find alternative materials that don't require costly components with limited availability. In one industry survey this year, 89 percent of the respondents have recommended lower cost equivalent materials to customers, but the recommendations were accepted less than 50 percent of the time.

Packagers need to map new strategies for buying raw materials; it's likely they're doomed if they wait for costs “to return to normal.” The current pricing situation holds as many opportunities as challenges.

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