Offset Price Rises In Your Packaging
A number of tips and tactics to help manage your packaging costs
The letter lands on your desk and you get that feeling of dread. It looks like it is from a supplier, but it’s not an invoice. You open it slowly and sigh…
Another price increase.
So now your margins are even more squeezed. How will you let your customers know that the inevitable passing on these costs will happen again? Is it going to impact your company’s profitability this year (and your bonus)?
Is it going to mean searching for a new supplier again?
If the above sounds familiar, you are not alone. Prices (and not only packaging) are rising across the board, and packaging costs are no exception.
However, there are in fact a number of ways you can beat the packaging price increases (without begging your supplier).
Quick Reference / Contents
Why are prices rising?
Packaging price increases are nearly always tied to the costs of raw materials. When these go up, so does the cost of your packaging.
Problem is, the cost of paper – the main material for a huge range of packaging products, including corrugated cardboard – has risen significantly.
If you listen to the paper merchants raising the prices, they cite a perfect storm of increasingly strong demand, their own raw material (or input) costs going up, and the weakness of the pound.
Put simply, the global production index is rising, alongside consumer spending. As more goods are produced, more products need to be packaged and transported around the world. Plus, with increased consumer demand rises, so too does the need for retail and delivery packaging.
Effectively, more goods and more demand means more corrugated packaging required – driving up prices.
When you add in other factors, such as high demand in the Far East (that sees paper merchants selling locally rather than incurring the expense of shipping to Europe), plus the uncertainties surrounding Brexit, it all adds up to create significant price pressures.
As a result, the average cost of packaging is rising.
Impact on businesses
If any of your suppliers increase their prices you effectively have 2 options.
Firstly, you can absorb the additional cost and take a hit on your profit margins. This, however, does not risk upsetting your customers.
The second option is to pass the costs (or a percentage of them) directly onto your customers.
With packaging potentially contributing up to 10 percent of the total cost of a product (depending on industry sector / market), price increases here will almost certainly have a knock-on effect for customers and consumers.
Even large household name retailers are not immune. Former Sainsbury’s boss, Justin King, has said previously…
“Retailers’ margins are already squeezed. So there is no room to absorb input price pressures and costs will need to be passed on.”
This, of course, follows the well-publicised falling out between Tesco and Unilever, John Lewis issuing profit warnings and companies such as Jaeger and Brantano suffering administration over the last 12 months.
It is not all doom and gloom, however…
02: Five Tips
5 tips to cope with packaging price rises
So even if you are concerned at how to cope with your latest price increases, there are a number of often overlooked ways that you can make your packaging work harder – in effect offsetting any unit price increases you may have seen.
Whilst not all of these tactics apply to every business and/or market sector, they are work exploring to see the impact they could make on your packaging costs.
So in summary, the 5 tips to beat packaging price increases are:
- Consider alternatives and lifetime costs
- Reduce amount of packaging you use
- Take advantage of economies of scale
- Minimise your storage overheads
- Conduct a full review of your packaging processes
Continue reading for further details on these tactics, and the impact they could make on your packaging.
03: Lifetime Costs
Consider alternative packaging and the lifetime costs
When was the last time you analysed the packaging your business uses? Is it protecting your items fully in transit. Is it using the optimum corrugated material. Is it allowing efficiency and lean production in your warehouse or factory?
Often, the hidden costs of your packaging are the ones you should focus on first.
For example, if you are seeing a high volume of returned products that have been damaged in transit, the costs of processing the returns, sending replacements and the “written off” stock will usually dwarf the cost of improving your packaging to prevent this.
Similarly, packaging boxes that are difficult to assemble waste valuable staff resources (and incur higher labour costs). Ready assembled or easy to assemble cartons (such as crash lock boxes) can make a huge difference to staff productivity, and allow for noticeable reduction in costs.
And of course, the material used in your packaging should not be overlooked either. By testing your packaging, it may be possible to use a lighter (and cheaper) board grade with no noticeable compromise in performance.
This final point also ties in with taking a long term look at your packaging.
Could you use returnable packaging in certain parts of your supply chain or production processes? Whilst a higher initial cost, switching to plastic from corrugated in certain scenarios can see vastly reduced lifetime costs (plus realise recycling and environmental benefits too).
04: Packaging Reduction
Reduce the amount of packaging you use
If you can’t reduce the cost of your packaging, then an obvious alternative is to use less of it.
Whilst this sounds obvious, it is often overlooked that your business may be using excessive packaging – and in particular what is often classed as “secondary” packaging.
An example of this could be as simple as switching from standard taped boxes to cartons with self-locking bases. These not only assemble more quickly, but also halve the amount (and therefore the cost) of the tape that you use to seal them.
If you are using specialist bags or papers, such as VCI corrosion inhibitors or anti-static protection, then could these properties be incorporated into the outer container (again eliminating the need for additional items and the process for adding these when packing)?
You could even consider changing the sizes of your boxes. Custom packaging, which would usually be smaller than the nearest stock option, would reduce the amount of void fill required, and the costs of purchasing, storing and adding it.
As a side note, this would also reduce volumetric shipping costs and allow you to get more items per pallet – another potential cost saving.
The bottom line is to consider if your products are over-packed, whether you can eliminate or combine certain elements, and how they are handled.
Just remember – any changes mustn’t impact the protection levels provided by your packaging and contribute to increased product returns (and the associated costs).
05: Economies of Scale
Leverage packaging economies of scale
If you have a diverse and / or large packaging inventory made up of many slightly different products, you may find that you order certain lines far more frequently than others (the old 80/20 rule).
However, what this means in practice is that you get a much better unit cost on the high volume orders that you do on the corrugated boxes you only order sporadically or infrequently. So when you do need to order these items, the costs seem excessive.
One way to resolve this issue is to look at rationalising your packaging.
This is a process whereby all of your boxes and cartons are analysed and consolidated. This may mean using only 2 or 3 outer cartons for example (instead of 20), and using integral or separate fittings to adapt them to the differing requirements of your products.
This, in turn, means you can sensibly order much higher volumes of the consolidated 3 lines and therefore take advantage of the lower unit costs seen from the resulting economies of scale.
This can also benefit you by simplifying the admin of ordering, storage and retrieval and overall stock management.
Minimise the storage overheads of your packaging
Whilst the knock on effect of rationalising your packaging is an inventory that is easier to manage, it is possible to vastly reduce the cost associated with storage of your packaging.
Warehouse space isn’t cheap.
After you consider the rent / mortgage charges, lighting, potentially heating (or cooling), plus health and safety requirements and general management costs, it can seem like a very large (but necessary) overhead.
But what if your packaging could be supplied on a Just in Time basis?
This would allow you to order in large volumes (maintaining price points), but have the stock manufactured, held and delivered so you do not need to store excessive amounts.
You could then use the warehouse space for additional products or materials, or use it as an opportunity to eliminate the costs of that used to be required to store your packaging inventory.
Remarkably, there are secondary benefits to this as well.
For example, if your packaging supplier is managing your stock, they will be able to forecast peaks and troughs in demand and adjust manufacturing schedules as required. This means you will not face stock shortages of your packaging that could slow down production or delay orders being sent out.
Review all your packaging processes
Whilst the above tactics work well in reducing your packaging costs, the most effective way to drive down costs is to take a holistic view of your packaging.
Often, implementing one change can have a knock impact elsewhere which, if not fixed, will simply move a problem elsewhere. And many times combining a couple of changes can multiply the success of your packaging cost reduction strategies.
Don’t know where to start though?
Many packaging companies will offer a full audit of your packaging supply and processes (most of the good ones will anyway). It should cover everything from storage, number of suppliers, secondary packaging, inventory size, ordering and replenishment processes, packing times and overall efficiency, performance in your supply chain and even end-user satisfaction
Even better – many will do this for free.
This may just highlight the small number of changes that, when implemented together, can mitigate any historic (or future) packaging price increases.
How to beat those price increases...
A number of the tips and tactics detailed above can be applied to your other suppliers as well.
Just remember to take a step back, consider how and why the products are being used, can any aspect of the supply or use be done more efficiently, and don’t be afraid to approach your suppliers to discuss how they can help.
So if you get packaging price increases in the future do not despair – it is possible for you to beat the price hikes.
About the Author
Business Development Director | GWP Group
Ian is one of the founding Directors of GWP, using his broad knowledge acquired over more than 30 years to oversee new business strategy [Read full bio…]