Packaging is typically the first attribute noticed by a consumer making an in-store purchase, acting as an ambassador to the finished good inside. The quality of packaging materials is important to protect the product and prevent loss from damage in transit. The branding and design is equally as important for marketing and product differentiation. These essential characteristics come at a cost, and are typically considered a direct material, one that is wrapped up into the cost of goods sold (COGS).
Procuring direct items is a challenging endeavor, as the materials directly impact the customer’s perception of the finished good. Quality and costs must reach a fragile balance to match the perceived value of the item and drive consumption. To add to this, direct materials are often commodity items, meaning pricing may be volatile. Packaging materials are not an exception to this rule, and there are certainly tactics that can be placed to reduce the level of risk associated with fluctuating raw material pricing. While important in maintaining competitive pricing, hedging commodity indices is not the only opportunity for cost optimization in the packaging category. Advanced purchasing strategies can reduce pricing margins beyond the raw material cost, and lead to more efficient sourcing.
The first area of impact for cost reduction is in analyzing optimal run sizes. A run size is the quantity of materials produced in one production cycle. Purchasing strategy should take these quantities into consideration to fully optimize costs. Ordering in quantities outside of the manufacturer’s optimal run size exposes the supplier to risk in holding overage inventory or having to short-run their production, both of which will come at an increased cost.
Placing blanket purchase orders is a way to take advantage of pricing associated with these favorable volumes without taking on more inventory than is required. Under a blanket PO, an order can be placed to cover the full run size with periodic releases of inventory from the manufacturer. This also further reduces overhead costs associated with processing frequent purchase orders. Once all releases have been fulfilled, the blanket purchase order is complete. Inventory cost and risk can be reduced further through the implementation of a Vendor Managed Inventory (VMI) program. This allows the manufacturer to control inventory replenishment and have direct visibility into the quantities to prioritize and optimize their production schedule.
Finding the ideal product mix is an additional way to leverage volumes for better pricing without necessarily having to take on additional inventory risk. A high volume, low mix market basket is the ideal scenario for taking advantage of these benefits. Periodically, packaging material specifications should be reviewed and rationalized, seeking areas of overlap to reduce the amount of differing items. For example if item A utilizes a corrugated box with dimensions 8” x 16” x 4” with a custom foam insert and item B requires a slightly larger corrugated box with dimensions 8” x 18” x 4” also with a custom foam insert, there is opportunity for review and consolidation. It may be more cost effective to use the larger box across both products, as the volume leverage reduces cost drastically enough to justify the extra material. Alternately, the foam insert for item B may be able to be reduced in size to fit item A box specifications. As a result, material costs well be reduced while negotiation leverage simultaneously increases.
Furthering specification rationalization is branding rationalization. Procurement and marketing must work together to find the ideal balance of promotional package branding and cost optimization. Custom prints using multiple colors while pleasing to look at, can be costly to produce. Frequent design changes can require additional upfront investment in reengineering fees. The level of detail in a design should strike a balance of consumer friendly and conscious of small details that may be better off omitted due to the risk of frequent change requirements.
Frequently evaluating purchasing tactics and coordinating optimization strategies with internal departments and suppliers is an excellent step in becoming a procurement center of excellence. It is important to exhaust every angle when seeking areas of opportunity, and to never assume an item’s cost is not impactable due to commodity material pricing.
Source One Management Services has developed expertise in sourcing direct material across many sourcing categories, including packaging. Contact our strategic sourcing experts today, to learn more about optimizing your packaging spend.