This article originally appeared in the September/October issue of PARCEL.
Most likely, packaging is not the first place to look for operational savings. Perhaps it should be, even if packaging is not your specific responsibility. Inefficient packaging design can add needless cost to both warehousing and transportation as well as make a company less green.
The process of designing or selecting shipping cases can be complex. One major difficulty is that so many functions need to be involved in the process. Marketing, manufacturing, quality, advertising, engineering, purchasing, and logistics all want input, as do some customers or suppliers. Producers of consumer products consider packaging a marketing function, while industrial firms usually assign the decisions to an engineer who may or may not have packaging expertise; one firm we assisted learned first-hand that an aeronautical engineer does not know how to design effective packaging. Some naïve companies simply turn the whole process over to their supplier of corrugated containers. Unfortunately, constructing a cardboard box does not make a company knowledgeable about logistics efficiency, which is at the heart of this issue.
A Multi-Functional Decision
Ideally, shipping carton selection should always be a supply chain responsibility because it is a multi-functional decision with conflicting goals advanced by groups with different interests. The process can generate contentious results, as seen in the following examples:
Marketing managers usually prefer big, colorful cartons that convey value through their size; the bigger, the better. Manufacturing specialists want boxes with extra internal space so production line speeds benefit from loose tolerances. Most quality experts like a box that is able to withstand any condition without damage, meaning that a metal container would be ideal. Logistics managers need cartons that minimize both warehousing and transportation expense. To the detriment of the enterprise, logisticians are rarely consulted during the box selection process, but their budgets absorb the full impact of ineffective decisions.
The Cost of Cheap Boxes
Many corporate decision-makers focus on reducing packaging expense while striving for sustainability benefit but overlook the impact on warehousing and transportation cost. As a result, they incur a higher cost for the business, not realizing that packaging is the smallest component in the supply chain, comprising less than 10% of each supply chain dollar. In contrast, warehousing consumes about 25% of the cost, while transportation accounts for as much as 60%. One truism that many executives have learned the hard way is that cutting packaging cost while ignoring warehousing and transportation is a fool’s errand.
One client contacted us for help in reducing shipping case damage because many of their boxes, especially those on the bottom layer of the pallet, were creasing and crushing. When we inquired why they thought there was so much damage, the company president joked that they must be using cheap boxes. As it turned out, all of their boxes were designed for one-pallet-high stacking, while all outbound trucks left with double-high stacks. The president then recalled that he had mandated the purchasing director to reduce the packaging expense. In response, the director reduced the strength of all boxes and collected a nice bonus for his efforts. Meanwhile, damage escalated, customer complaints increased, and freight cost shot up. Our solution was to replace all of the cheap boxes with ones that could withstand two-high stacking, which served to clear up the problems while cutting total cost. As supply chain practitioners prove daily, it is possible to increase performance while reducing total expenses.
The National Motor Freight Classification (NMFC) book is the Bible of the less-than-truckload (LTL) industry. Listed in the 700-page publication is the freight description and freight class for thousands of products, from abrasives to zippers. The LTL industry uses information in this book to establish a base for setting freight rates. What many shippers don’t realize is that the NMFC book also contains 150 pages of packaging rules that impact freight classes and related rates. Alas, we continually encounter companies that assigned shipping case selection to marketing or engineering, none of whom are aware that the NMFC book even exists. How can they possibly be expected to make effective decisions about shipping cartons?
Meanwhile, LTL carriers are quickly abandoning the 85-year-old freight class system and moving toward pricing based on density. As a result, many products such as paper, candles, hoses, and headlights have numerous freight classes based on density. Paper has one of the broadest pricing ranges, with 15 different rates from class 400 down to class 60 [the higher the freight class, the higher the shipping cost per pound]. While it is highly unlikely a packaging change can reduce freight class from 400 to 60, we do have one client that achieved a 40% reduction in freight expense by changing its packaging. This manufacturer of automobile lights was able to bring class 250 down to class 150 by cutting down air in its shipping cases.
The impact of density on shipping cost has clearly been felt by companies making shipments of small packages. Parcel carriers such as UPS and FedEx, which had used dimensional weight in air shipments for years, began to apply the same pricing methodology to ground shipments in 2008. Since that time, the impact of dimensional weight has escalated sharply, making everyone fully aware of its effect on shipping cost. Anyone shipping lots of air in the cartons has no doubt already felt the sting of higher costs as FedEx and UPS both punish inefficient shippers through pricing.
Flexibility Is Key
Managers concerned about packaging optimization once focused only on rearranging the contents inside the existing shipping cases; case counts and retail packaging were sacrosanct. That veil was pierced 10 years ago when Walmart directed all suppliers to reduce packaging costs by five percent; this minor adjustment delivered $10 billion in supply chain cost savings, with two-thirds of that benefiting Walmart’s suppliers and huge sustainability benefits. Even after that kind of phenomenal improvement — which generated all sorts of PR and industry attention — we have crossed paths with managers who have opined, “There may be something to this packaging optimization idea.” Do you think?
Historically, companies told us that rearranging retail units inside a shipping case is an easy change to absorb; count changes are a big issue, and revising retail units is out of the question. With the intense focus on cost reduction that is part of today’s business world, all options are now on the table at most companies, including changes to the sacred retail unit. Generally, the intent is to revise the shape or size of the retail package while retaining its original weight; for example, the dimensions of a bag of trinkets can be adjusted while its weight is held static. The reality is that the more flexible a company is to adopting change, the greater their cost reduction opportunity.
E-commerce and mail order businesses that ship a variety of mixed products face a unique challenge: a reasonably sized company will ship more than one million unique combinations of weight and cube each year. Since parcel shipments are priced on both weight and cube, figuring out the best number and sizes of shipping containers is a daunting task indeed. The easy solution is to select a universal box that can be used for all shipments. This then leads to a flash drive shipping in a carton the size of a breadbox, which is something all of us have experienced. The opposite extreme of hundreds of different boxes is certainly not a practical approach. Thus, most companies we have worked with on this problem settled on half a dozen shipping containers — a solution based on guesswork without any scientific analysis. However, when the shipping case selection is derived through packaging science, freight consideration, and advanced mathematics, results are tangible. This is an example of what we saw one company achieve:
· outbound cartons reduction: 167,000, or five percent of original total
· outbound weight reduction: 782,000 pounds, or five percent of original total
· dimensional weight reduction: 1.4 million pounds, or seven percent of original total
· outbound case cube utilization: improved by 28%
· corrugated material reduction: 21% of original total
· filler material reduction: 41% of original total
· freight cost reduction: five percent of original total
When working with some staff engineers at one logistics service provider as we assisted a mutual client, these engineers challenged the optimal solution, which increased shipping cases from 16 to 19. Like many companies, they were trying to use as few shipping containers as possible in the mistaken belief that fewer is always better. Usually, trading down to fewer shipping cases may deliver some unquantifiable reduction in complexity, while total costs increase substantially. Time and again, we hear this objective of reducing complexity but have yet to encounter a company that can assign a specific monetary benefit to it.
Luckily, the client requested a detailed analysis of the total cost effect of reducing shipping cases back to 16. Here is the impact of that seemingly small change that was being advocated:
· cube utilization reduced by eight percent
· cubic feet of freight shipped annually increased by 240,000
· dimensional weight of freight shipped annually increased by 863,000 pounds
· client total annual logistics cost increased by $250,000
The above results clearly serve to confirm that intuitive thinking does not suffice in packaging optimization. A thorough scientific analysis must be performed to get the best answer. Managers who shortcut the analytical process later wonder why their costs have inexplicably increased. Others do not even realize that packaging efficiency has a direct impact on freight expense. One company we went to visit warned us that their president was going to sit in on the meeting because he did not understand how packaging can impact freight cost. Furthermore, the connection between packaging and freight cost is often not recognized at all because packaging cost and shipping cost are managed by different departments.
When managers fully comprehend the opportunity that exists in packaging and approach the process scientifically, the cost reduction and performance improvement potential is immense. More than one client has concluded they must have provided us with inaccurate data because the cost reduction in packaging optimization could not possibly be as big as what we had projected.
So, what is possible? From 25 years of experience in packaging optimization, we have learned that the typical manufacturer can achieve 10% cost reduction from their total cost of packaging, warehousing, and transportation. While faced with much more complexity, pick-pack shippers have an even greater opportunity, with the average company cutting total costs by 15%. We are familiar with one large consumer product manufacturer that fully recognized the relationship of packaging and logistics at the highest level and then marshalled a major effort to support the process. They were able to reduce total cost by more than $100 million.
Jack Ampuja is President, Supply Chain Optimizers, the North American leader in packaging optimization, with more than 500 completed projects. Jack is also a recognized educator, having taught MBA classes at four universities including the top-ranked online program of University of Massachusetts. Since 2002, Jack has served as Executive in Residence at Niagara University. Join him at 9 am on September 20 for his PARCEL Forum session dealing with this topic of packaging optimization.