Packaging category managers of CPG companies are increasingly finding themselves in a conundrum. They are expected to not only cut packaging costs but also drive value in other ways. Unlike in the past, the lowest cost option may not be the best, considering today’s wider business objectives (such as ethical sourcing and brand value), so companies are increasingly looking at value-based sourcing which balances differing business imperatives. PepsiCo for instance, introduced the lightest half-litre bottled water in Eco-Fina, eliminating 75 million pounds of plastic annually.
In the face of immense cost pressures and ever-increasing competition, packaging has become a key competitive differentiator and a focus area for CPG companies. The Smart Cube has enhanced packaging sourcing for many clients, and based on our experience, we suggest the following three strategies to help address category managers’ sourcing dilemmas:
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Focus on the cost model; is TCO an option?
If you have the right strategy in place, you will have a flexible pricing model with your supplier that’s linked to raw material price movements. However, also be aware of the real cost of purchasing which will include indirect cost such as wastage, labour, logistics and SG&A. Suppliers shy away from sharing production overhead costs; this is where a ‘Should Cost Model’ can increase your bargaining power as a buyer during contract negotiations and renewals. It could be useful especially if your supplier adopts a new production method or relocates its operations to a new location.
For example, one of The Smart Cube’s client’s suppliers had moved its production base from the US to Mexico. After analysing the costs in Mexico, we discovered that the price charged by the supplier was much higher than the incremental cost incurred in the new location, to the extent that the prices of various labels was 10-70% higher. Our insight enabled the client to renegotiate with its supplier, delivering cost savings which improved the bottom-line.
Sometimes favourable technological and production economics may merit in-house provisioning, encouraging CPG companies to ask the question, “can we make/do this in-house?” For example, digital printing on labels is a trend that’s catching on, with CPG companies installing machines in their own factories, in turn, reducing their sourcing footprint in conversion. Gaining visibility on the actual cost of production in-house – including financing, brand value, ROI, etc – is essential: a Total Cost of Ownership (TCO) model can help understand whether in-sourcing is more cost effective than outsourcing.
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Collaborate with your suppliers
Packaging material is also witnessing a lot of technological changes: plastic resins which are lighter and more environment-friendly have been developed; the volume of material used in packaging products is being reduced; there is a transformation in labelling techniques to give a premium feel to products – to name but a few.
For companies looking to get creative with packaging and use it as a key product differentiator, treating a packaging supplier like a partner can help greatly. Suppliers can be knowledge partners for your business, informing you about cutting-edge innovations, and work with you to bring them to life. For instance, packaging supplier Smurfit Kappa, working with Nestlé on its cereal portfolio, was tasked with reducing costs and waste. In partnership, they changed packaging materials, streamlined logistics, and increased the efficiency of the goods report processing.
Click here to read more about supplier-led innovation and supplier patent monitoring.
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Identify the value drivers in your supply chain – Design to value
There are value drivers hidden at various levels of your supply chain from excess packaging (extra cost) to value-add elements that you may have missed. Bringing value to your stakeholders (customers and management) requires a step-back, to understand what drives the purchase of an SKU, collaborating with your suppliers, and R&D and Marketing teams. Packaging is the first point of contact for your product, and often, companies compromise on that first touch-point.
Conducting a Design to Value (DTV) project, especially for packaging spend, can help improve a company’s P&L, by helping to answer questions like:
- Are millennials more susceptible to a matt-finished packaging?
- Will an etched glass bottle generate more sales?
- Is that extra film required?
The Smart Cube has worked on many such initiatives with clients, using White-Space Analysis, competitive benchmarking and tailored intelligence, helping to drive innovation and embed evidence-based decision-making in organisations.
The business significance of packaging cannot be understated. CPG companies must now navigate an extremely complex and consolidating supplier landscape. These three strategies could help kick-start a much-needed evolution in your packaging category management.
To find out how The Smart Cube helps CPG businesses stay ahead, please read about our intelligence and analytics solutions or get in touch. We can help you understand and anticipate the forces and changes influencing your critical procurement categories today and beyond.