Are you paying for the air in your packaging?
Interview with Tom Debney, Principal Consultant with Expense Reduction Analysts.
Tom has extensive experience in managing organisations in Australia and Asia and has spent more than 2 years as a Managing Director in the UK. He has extensive experience in the food, food ingredients, chemicals and packaging industries.
Tom - What does packaging encompass?
Every product has some form of packaging, whether it’s an envelope, a plastic bag, or a cardboard box. Packaging is a broad term which also encompasses items such as glass, sausage casings and the wax on fruit like an apple.
Packaging can be very simple, like a plain paper bag, or very complex, like a multilayer film with specific gas permeability. For example, with a cardboard box, the complexity encompasses issues such as:
- The type of board – is it fluted or flat?
- Does it need to be made from recyclable material?
- What does the structural integrity need to be?
- Will it be printed? It can use anything from 1-8 colours.
Is there a competitive market?
There are a number of major players in the packaging market like AMCOR and VISY, and some very highly specialised suppliers – like the sausage casing manufacturers! Companies such as Aurora and Visy make cartons and OI make glass.
There is fierce competition within many segments of the market at present because most manufacturers are attempting to reduce the weight of their packaged products. This is for two reasons. Firstly, weight impacts on freight costs – the heavier the carton or pallet, the higher the cost and, with fuel charges on the increase, companies are very conscious of reducing their freight costs. Secondly, there is a major drive towards reducing the environmental impact of packaging and making it more economical.
We are now seeing smaller players, such as printing companies which have lost many large print orders as their market shrinks produce packaging, which is impacting the cardboard industry. Printers are producing packaging as they have the high-cost printing machines and the formes and folding can be added relatively easily. These companies can be quite price-aggressive but may lack technical support in optimising pallets, selecting board sizes or having stock for a specific application.
What are the risks attached to our understanding of the pricing of packaging materials?
It is important to understand exactly what the product specification needs to be. Does a plastic bag need to be branded? Do the handles need to be strengthened? Are companies falling into the trap of using excess packaging? What strength is needed in the box?
With cardboard boxes, we often see companies using 4-colour print on the outside of the cartons which can be very costly. The consumer doesn’t see the cartons as it never gets to a shelf (a shelf-ready pack may be different), so is it necessary to have 4-colour printing? Would a label on the outside of a standard size carton be sufficient? (Therefore reducing the number of different boxes held and increasing a standard volume making pricing more attractive).
Packaging is often designed by the marketing division in an organisation, and they are not generally focused on cost minimisation and often want a specific look. Care needs to be taken to make sure it is a customer or consumer focus. Packaging technologists at the main suppliers can put together mockups to show how a product pack looks, what it will look like on shelf and in a display. This also allows for a better understanding of the pallet design and the through-chain decisions which are important in controlling costs.
Where are the opportunities for saving or optimising purchase of packaging?
Where possible, use a lighter weight packaging product that will do the job to generate savings. It is important, however, to understand what the product is being used for, because sometimes a lighter or finer product may increase the price.
We have recent experience with clients with 4-colour print on outer cartons that never left their warehouses. By moving to a company logo and not having specifically printed cartons for each product that were all the same size, they reduced the number of SKUs they held, improved pricing, and by using inkjet printers and labels, they moved to massively improve the logistics handling. On SMEs with small runs, this can be really effective.
Everything these days is geared towards lighter weights and fewer freight costs. For example, wine is often shipped in bulk containers and then bottled nearer to the point of sale. In this case, the saving is on a lighter bottle and carton which does not have to survive extended freight and also allows for better utilisation of space, as the round shape of a bottle is not an optimum pack.
Cost reduction and innovation is very often consumer driven today, with so many people concerned with the impact of packaging on the environment. Many large companies are no longer supplying plastic bags and are replacing them with biodegradable bags or are selling them so that there will be more recycling of bags. There are, however, always consequences to this kind of change. For example, biodegradable products may be more expensive, and multi-use plastic bags may harbour germs if not cleaned between uses.
Is there a benefit to purchasing packaging materials from overseas? What would the negative aspects be of overseas purchasing?
There are pros and cons to buying overseas. Sometimes it is necessary to purchase overseas because the item is a speciality product and not produced locally, or it may be cheaper to buy from an overseas supplier because the freight is cheaper! For example, for producers in WA, the freight may be more expensive from the Eastern States than it would be from Indonesia or China.
There are also some challenges in buying from overseas such as:
- Lead times, which may be long.
- May need to buy in bulk or FCL minimum order size.
- Printing on packaging may change and packaging may become obsolete (for food manufacturers, think of Country of Origin labels).
- Who owns the artwork and designs is important if you need to change a supplier.
- Knowing who the actual supplier is, and not the middleman.
What do companies need Expense Reduction Analysts’ expertise for?
All prices are driven by core material supply, but having an external consultant review the packaging costs is a good strategy, because many companies do what they are doing because they have always done it that way! One of our clients was sending goods by the container to Malaysia in very heavy, bulky packaging. Basically, they were paying to send a lot of air! We were able to review the strength of the packaging and reduce their costs significantly by using a lighter board, which was reinforced.
It is a good idea to run a tender every two-to-three years to review packaging materials and costs, and to see what new innovations may be available which may reduce the cost of the packaging.