Each purchasing category, whether indirect or direct, has a unique set of parameters that can be optimized to take full advantage the savings opportunities in the market. The packaging category is no exception, offering major opportunities for cost savings beyond the basic volume leverage approach.
Packaging, which may be considered either a direct or indirect product depending on the use and company, can be particularly complex to take to market. Many organizations strive to find a supply base that can support the company’s needs while generating value. Taking into consideration the upfront investment of time and resources (without a guaranteed ROI), running a competitive bid process can be an intimidating endeavor for many companies. However, with the proper expertise, packaging is an area of spend with major cost reduction and value added opportunities.
Interested in tackling your packaging spend but not sure where to start? Below are key considerations for achieving greater savings while boosting collaboration with your supplier base to drive continuous value.
Category Identification – Packaging breaks down into two categories, primary (custom), and secondary packaging. Primary packaging is comprised of first-level packaging products which contain the product being sold and/or have an element of customization specific to the organization such as a custom print. Secondary packaging is comprised of all corrugate, foam, tape, bags, fillers, and other packaging materials that can be purchased ‘off the shelf’ and are not used to directly encase a finished good. There are certainly suppliers that are able to service both needs, however it is important to ensure that the identification of your packaging market basket encompasses both the direct (primary) and indirect (secondary) packaging products to optimize volume leverage.
Specification Collection and Gap Analysis – Detailed specifications and drawings are key in properly sourcing custom packaging items. Even an item as simple as a corrugated box with a single print has critical metrics such as flute, edge crust test (ECT), and color that are needed to ensure accurate pricing. Additional information such as die cut size, print color, and pallet policies are also helpful in assisting suppliers quote confidently. Pricing is always improved if the supply base is not concerned about gaps in knowledge skewing other competitors’ quotations, and specification efforts show that a genuine opportunity is on the table.
Run Size Optimization - A run size is the quantity of materials produced in one production cycle. It is important that you understand your annual volumes and communicate these effectively to suppliers during a sourcing initiative. Additionally, suppliers should be given opportunity to price at tiers determined by their quotation team. Each supplier has a unique manufacturing run size that allows them to price packaging items at the lowest cost possible. Understanding this information and taking the optimal order quantity into consideration when awarding business and placing future orders will ensure that no savings are left on the table.
Inventory Capacity and Needs – Taking advantage of optimal run sizes is only possible if there is space to hold inventory that will not cause the organization to incur significant cost or risk. Suppliers can be leveraged to implement a vendor managed inventory (VMI) program for which they are willing to hold inventory tied to a purchase order (or - at times - in good faith) so that optimal manufacturing run sizes can be leveraged. The costs of these programs (if incurred) will need to be considered against the value of the volume savings. This is also a key area for negotiation prior to contracting.
Branding and Engineering Optimization – Lastly, the design of a product or level of customization required can severely impact unit price, and often basic changes can reduce overall costs of the packaging program. For example, a frequently purchased box may be designed to support 42lbs despite the fact that the contents will never amount to that weight. Giving suppliers context over the use of the boxes can assist them in suggesting redesign practices that will support the product and not waste additional materials. Custom prints are typically priced by number of unique colors used, and a logo in a solid color may have the same impact as a multi-color logo. Collaborating with marketing to analyze these needs will ensure that additional costs are not being incurred without sound logic behind the design requirements.
The above concentrations will ensure that the sourcing initiative is pulling maximum value from the opportunities portrayed in the market. Transparency with suppliers is key in allowing them to leverage their knowledge base and expertise to suggest additional areas for opportunity. While supply base consolidation will certainly begin the steps to an efficient supply chain, looking for areas outside of traditional methods will ensure value is captured for a long term supplier partnership.
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