Expectations are rising for suppliers 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 process to identify opportunities in a variety of areas. In our experience, best-in-class examples of this approach leverage in-depth cost modelling and understanding of cost structures. Here’s a summary of some of the key strategies you might use:
To prioritise savings opportunities, strategic organisations should examine them through the lens of benefits vs difficulty to implement:
With a correctly configured cost model, companies can separate spend into meaningful cost centres that can then be affected by specific material and sourcing strategies. Best results will be obtained with a focus the cost drivers in five discrete areas: raw materials; make-ready/setup costs; conversion costs; packaging and delivery; and supplier margin.
In developing a strategy for each major cost area, take the following considerations into account:
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 weight reduction or packaging footprint reduction.
Hosting supplier challenges is an efficient way to harness the accrued knowledge of your supply base to generate cost reduction and material and packaging format 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.
High setup cost is a common issue for complex and fragmented portfolios. Low run sizes are typically driven by market requirements, so increasing production quantities to drive efficiencies is rarely feasible. However there are alternatives:
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.
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 optimise packaging with transportation and logistics costs in mind.
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 cost modelling capabilities. This is a challenge for most internal organisations 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.
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 organisations. Mapping key stakeholders and decision makers greatly accelerates the process, helps promote buy-in and increases the likelihood you will be able to realise the savings opportunities you identify as part of this strategic process.