The direct cost of packaging is a very small % of your total logistics spend, but it impacts every part of your business, so choosing packaging purely based on its direct cost is a surefire way to either cost your business money or to leave savings on the table. In the upcoming weeks, I’ll explore the cost drivers of packaging, including:

o   Product Protection
o   Warehousing
o   Handling 

There are other, softer impacts as well, but these are more difficult to dollarize:

o   Branding
o   Administration
o   Environmental

This week we’ll be look into the impact packaging has on product protection . Protecting parts from damage is critical both from a cost of damages perspective and  from a reputational perspective. There is a balance between packaging cost and product protection.  Typically the more protective your packaging, the more expensive it is, therefore it’s important to optimize and hit the “sweet spot” between cost and product protection when designing packaging. 

Example 1

Company X is an Aerospace Company making Custom Engine Components that cost $50K each.  They make 1000 per year.  They currently buy each set of packaging as a custom package that fits the product perfectly.  They spend $600 EA on packaging currently.  Their buyer has been tasked with reducing direct packaging costs and has found a solution for $500 EA to consolidate their packaging.  This packaging, however, is not customized to fit the product perfectly and will therefore increase the damage rate a bit due to increased product movement.  The new product will have an increased damage rate of .5%.  These are highly sensitive products so any product damage will require scrapping the component and building a replacement.  For simplicity’s sake, let’s say that the damage rate is going up from .5% to 1%

$600 Option
$500 Option
Total Packaging Cost
 $    600,000.00
 $    500,000.00
Total Expected Damage Cost
 $    250,000.00
 $    500,000.00
Total Annual Cost
 $    850,000.00
 $ 1,000,000.00

As you can see above, even though you’ve reduced your Packaging Cost by $100K, you’ve actually increased the total cost by $150,000.  This is the problem with evaluating packaging only by direct cost.  Not only have you increased your total cost, but you’ve also increased the likelihood of damage from 5 times per year to 10 times per year, which will have a negative effect on your company’s reputation.

In many instances, however, where the opposite of the above is true and packaging is over-designed and not cost effective.  It’s important to work with smart designers that can optimize packaging design and hit that product protection sweet spot.  Here’s an example of that situation:

Example 2

Company X works in the Energy sector.  They provide goods to the mining industry.  They have a product that costs $200 and is not particularly sensitive, but requires some cushioning.  The product ships LTL mostly.  The existing packaging is a Corrugated RSC with a fully encompassing PE Foam cutout.  It costs $50.  They sell about 10,000 of this product per year.  Their Supply Chain Manager was worried about packaging spend so they called a packaging company to evaluate their approach to the category.  The packaging company came in, redesigned the solution, and reduced material significantly as the product didn’t need to be fully encompassed in the foam.  Without getting too in-depth on cushioning curves (the standard way to measure foam cushioning), there is a sweet spot where either more or less foam touch points would actually reduce the amount of cushioning.  So, even though there was more foam before, it actually cushioned the product less.  They were able to reduce the price to $35 EA, while improving the packaging.  However for arguments sake, let’s say that the damage increased at the same level as the Aerospace example (.5 to 1%). 

Current Option
Redesigned Option
Total Packaging Cost
 $    500,000.00
 $    350,000.00
Total Expected Damage Cost
 $      10,000.00
 $      20,000.00
Total Annual Cost
 $    510,000.00
 $    370,000.00

Even when damages are doubled, the direct cost of this optimized solution is still much lower than that of the alternative. Of course, doubling product damage will present new reputational costs. As such, I would recommend ISTA testing whenever you change packaging solutions to ensure it will effectively protect your products.

You can see from this example that over-design is often a serious problem.  Another big mistake companies make when benchmarking their existing packaging is forcing like-for-like pricing.  Companies typically do this either because changing designs internally is a long and difficult process or because they fear new packaging won’t offer adequate protection.  The example above shows you how much this can cost.  Special care is also necessary because packaging companies will use tricks like putting in materials that are difficult for competitors to source even if they provide minor (if any) structural difference over a substituted material (i.e. Engineered Lumber vs. Regular Lumber).

Hopefully this blog helped you understand the role that packaging plays in Product Protection.  In the next part of this series I will show how packaging impacts Warehousing Costs.
Share To:

Matt Veksler

Post A Comment:

0 comments so far,add yours