Offset price rises in your packaging
Several 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 of these costs will happen again? Will it 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 (across a wide range of products, services and materials) are rising across the board, and packaging costs are no exception.
However, there are, in fact, several ways you can beat the packaging price increases (without begging your supplier).
Why are packaging prices increasing?
Packaging price increases have become commonplace over the past 18 months. Increased demand for boxes caused by the growth in eCommerce deliveries, plus raw material shortages and broader inflationary pressures, has driven up most packaging prices. Rising packaging costs (and other services/commodities) can negatively impact your business’s margins and profitability.
Packaging price increases are nearly always tied to the costs of raw materials. When these go up, so does the cost of your packaging.
The problem is the cost of paper – the primary material for a vast 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 factors. Increasingly strong demand, their raw material (or input) costs going up, widely reported inflationary pressures (manufacturing paper is very energy intensive), and the pound’s weakness is all playing a part.
Put simply, the global production index is rising against the backdrop of strong consumer spending and inflation. The proliferation of eCommerce has also led to more products being packaged and transported worldwide.
Effectively, more goods and more demand equals 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 remaining difficulties surrounding Brexit, it all adds up to create significant price pressures.
As a result, the average cost of packaging is rising.
There are several strategies to mitigate these increases, however.
Impact on businesses
If your suppliers increase their prices, you have two options.
Firstly, you can absorb the additional cost and take a hit on your profit margins. Doing so, 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 per cent 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.”
These comments pre-date the well-publicised falling out between Tesco and Heinz, John Lewis again issuing profit warnings, and companies such as TM Lewin and Studio suffering administration over the last 12 months.
It is not all doom and gloom, however.
Strategies to mitigate price rises
Five tips for coping with packaging price rises
So even if you are concerned about how to cope with your latest price increases, there are many ways (often overlooked) to make your packaging work harder – offsetting any unit price increases you may have seen.
Whilst not all of these tactics apply to every business or market sector, they are worth exploring to see the impact they could make on your packaging costs.
So, in summary, the five tips to beat packaging price increases are:
- Consider alternatives and lifetime costs.
- Reduce the 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.
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, suppose you are seeing a high volume of products damaged in transit, leading to excessive returns. In that case, 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 a noticeable cost reduction.
And, of course, it is vital not to overlook the material used in your packaging either. Testing your packaging may show it is 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 specific scenarios can see vastly reduced lifetime costs (plus realise recycling and environmental benefits too).
Reduce the amount of packaging you use
If you can’t reduce the cost of your packaging, then a potential alternative is to use less of it.
Whilst this sounds obvious, many businesses overlook the fact they may be using excessive packaging – particularly “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 you use to seal them.
Suppose you use specialist bags or papers, such as VCI corrosion inhibitors or anti-static protection. Could these properties be incorporated into the outer container (eliminating the need for additional items and the process of adding these when packing)?
You could even consider changing the sizes of your boxes. Custom packaging, almost always 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 you handle them.
Just remember – any changes mustn’t impact the protection levels provided by your packaging and contribute to increased product returns (and the associated costs).
Economies of scale
Leverage packaging economies of scale
If you have a diverse or large packaging inventory of many slightly different products, you may find that you order certain lines far more frequently than others (the old 80/20 rule).
However, in practice, this means 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.
Rationalisation involves all your boxes and cartons being analysed and consolidated. Doing so may mean using only two or three outer cartons, for example (instead of 20), and using integral or separate fittings to adapt them to the different requirements of your products.
A leaner inventory, in turn, means you can sensibly order much higher volumes of your newly consolidated packaging. You can therefore take advantage of the lower unit costs seen from the resulting economies of scale.
Other benefits include simplifying the admin of ordering, reduced storage requirements, easier retrieval and improved 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 also possible to vastly reduce the cost associated with storing your packaging.
Warehouse space isn’t cheap.
After you consider the rent or mortgage charges, lighting, heating (or cooling), health and safety requirements, and general management costs, it can seem like a considerable (but necessary) overhead.
But what if your packaging supplier could deliver your boxes on a Just in Time basis?
Just-in-time deliveries would allow you to order large volumes (maintaining price points) but have the stock manufactured, held and delivered so that you do not need to store excessive amounts.
You could then use the warehouse space for additional products or materials. Alternatively, you could use it as an opportunity to eliminate the costs that were associated with storing your packaging inventory.
Remarkably, there are secondary benefits to this as well.
For example, if your packaging supplier manages your stock, they can forecast peaks and troughs in demand and adjust manufacturing schedules as required. A managed service means you will not face stock shortages of your packaging that could slow down production or delay sending orders.
Review all your packaging processes
Whilst the above tactics reduce 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 move a problem elsewhere. And often, 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 offer a full audit of your packaging supply and processes (most of the good ones do anyway). It should cover everything from storage, the 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.
A packaging audit may highlight even a small number of changes that, when implemented together, can mitigate any historical (or future) packaging price increases.
How to beat those price increases
Your business can also apply a number of the tips and tactics detailed above to your other suppliers.
Just remember to take a step back, consider how and why you are using the packaging (or products), and whether any aspect of the supply or use can be more efficient. 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 – you can beat the price hikes.