Peeling the (packaging) onion to reveal layers of savings
posted by Kari Embree, Senior Digital Content Editor -- Packaging Digest, 11/1/2013 4:13:00 PM
Expectations are rising for Procurement to drive continuous cost reductions in packaging. As a result, the ability to identify and prioritize multiple layers of potential cost-savings opportunity, while at the same time supporting innovation and sustainability goals, is more necessary than ever.
How do leading companies tackle this challenge? By peeling back the complex layers of the packaging onion to identify opportunities in a variety of areas. In our experience, best-in-class examples of this approach leverage in-depth cost modeling and understanding of supplier cost structures. Here's a window into some of the key strategies we help clients use:
Prioritize opportunities using key criteria. To prioritize savings opportunities, strategic organizations should examine them through the lens of benefits vs difficulty to implement:
• What is the cost reduction potential? (such as, how much cost savings could a 10 percent reduction in material usage generate?)
• Which low hanging fruit has already been harvested?
• How difficult would it be to realize these potential savings? Consider potential barriers like portfolio
fragmentation, customer change requirements and resource constraints.
• What are the implementation costs?
Break packaging spend into discrete categories. With a robust cost model, companies can separate spend into meaningful cost buckets that can then be impacted by specific material and sourcing strategies. At a minimum, focus on understanding the cost drivers in these five discrete areas: raw materials; make-ready/setup costs; conversion costs; packaging and delivery; and supplier margin.
Develop a customized approach tailored to each cost category. In developing a strategy for each major cost area, be aware of these key considerations:
1. Raw materials: Strategies vary based on the level of raw materials in a specific packaging component. For example, high raw material items, such as commodity corrugate boxes or clear films, benefit most from usage reduction efforts like light-weighting or packaging footprint reduction.
Hosting supplier challenges is one efficient way to harness the accrued knowledge of your supply base to generate cost reduction and material and packaging format innovation ideas. Larger buyers may explore Tier II sourcing for certain supplier raw materials as their buying leverage may exceed that of Tier I suppliers, particularly for customer-specific products.
2. Make-ready and setup costs: High setup cost is a common issue for complex and fragmented portfolios. Low run sizes are typically driven by market requirements, so simply increasing production quantities to drive efficiencies is rarely feasible. Consider strategic alternatives:
• Seek alternate ways to purchase your products: such as, explore options to increase supplier
efficiencies through Vendor Managed Inventory (VMI) or combination run programs.
• Explore alternate make-ready friendly technologies such as digital vs flexographic printing, on-demand corrugate production, labeling vs pre-printing.
• Seek internal opportunities to standardize design like common packaging footprints and standardization of artwork.
3. Conversion costs: Conversion costs are typically supplier-driven, so it's important to ensure that your suppliers are keeping up with industry equipment and technology innovations. You should also examine whether the special requirements you impose on suppliers are increasing complexity of production, supplier production waste or slowing down supplier production equipment.
4. Packaging and delivery: Beyond protecting product from damage in transit, packaging and delivery creates little end-user value. This is a great area for collaboration with suppliers to optimize packaging with transportation and logistics costs in mind.
5. Supplier margin: Efficient cost models should also account for supplier margin. Benchmarking against peers and industry averages should provide insight into whether the prices you are paying suppliers are competitive. This requires both supply market intelligence, but also should-cost modeling capabilities. This is a challenge for most internal organizations to obtain, but tapping the right expertise can inform and strengthen packaging sourcing and negotiation strategies-and help buyers maintain competitive costs over time.
Engaging in a "what is your target ROI/ROA/gross margin?" dialogue requires both a strategic approach and a high level of trust between parties. When executed correctly, this dialogue provides a common platform for you and your strategic suppliers to develop and enhance the business relationship, explore innovation opportunities and collaboratively drive cost-out initiatives.
Last Step. Execute! After applying this strategic framework, it's time to execute against the highest-potential opportunities. Most cost improvement strategies require cross-functional collaboration between key stakeholders within the buyer, seller and sometimes end-customer organizations. Mapping key stakeholders and decision makers greatly accelerates the process, helps promote buy-in and increases the likelihood you will be able to realize the savings opportunities you identify as part of this strategic process.
Author Vladimir Ryabovol is the flexible packaging sourcing lead at Procurian (www.procurian.com), the leading specialist in comprehensive procurement solutions. The company's built-out Specialized Procurement Infrastructure integrates with businesses to optimize spending and deliver real savings that equal a margin point or more.