2009 Secondary Packaging Outsourcing Report

Transcription

1 Whitepaper Series 2009 Secondary Packaging Outsourcing Report This industry-wide report identifies common practices, challenges, and emerging trends related to the outsourcing of secondary packaging.

2 Table of Contents Overview... 3 Outsourcing profile... 4 The value proposition... 5 Trends... 7 Challenges... 9 Value of 3PLs Moving forward

3 Overview Secondary packaging plays an integral role in the supply chain. It allows manufacturers to customize products to meet customer demands, protect products during shipping, promote product features, advertise discounts and cross-promotional offers, display products at the point of purchase, and more. Recognizing its critical role, many manufacturers choose to outsource their secondary packaging to a partner with the resources and expertise necessary to speed their products to market as efficiently and cost-effectively as possible. Interest in secondary packaging outsourcing is undoubtedly contributing to the dynamic growth of the contract packaging industry; however, there has been little research to date pertaining to secondary packaging usage or trends. To better understand the needs and challenges posed by this growth industry, Saddle Creek Corporation commissioned Contract Packaging magazine, the official publication for the Contract Packaging Association, to survey users of contract packaging services. A total of 494 surveys were completed in May 2009, making this research statistically valid. Of these respondents, 41.1 percent currently outsource some or all of their secondary packaging services while 5.7 percent plan to outsource secondary packaging services in the next 12 to 18 months. This whitepaper includes results analysis for the 203 respondents who are currently outsourcing. The following report presents a close look at the practice of outsourcing secondary packaging, the value proposition, key challenges, and industry trends. Here are just a few of the questions answered in this report: Who is outsourcing secondary packaging services? How is the practice being implemented? What are the greatest benefits of outsourcing? What challenges are manufacturers facing? What changes can be expected in the near future? 3

4 Outsourcing profile For the purposes of this research, secondary packaging is defined as the process of modifying, consolidating or protecting product(s) in primary packaging for distribution and sale. Examples of secondary packaging services include assembly, kitting, fulfillment, cartoning, repacking, point-of-purchase displays, wrapping, bundling, etc. Survey respondents who currently outsource secondary packaging services are most likely to use assembly/kitting/fulfillment (58.6 percent) or repacking services (40.9 percent). Point-of-purchase displays (35 percent), cartoning (31.5 percent), and wrapping/bundling (23.2 percent) services are also used. Practitioners Which industries use secondary packaging providers the most? Companies producing food and beverage (25.6 percent), health and personal care (24.1 percent), and medical/pharmaceutical (21.7 percent) products top the list. Within those organizations, individuals charged with selecting secondary packaging providers are most likely to have job functions such as purchasing/procurement/supply management (51.2 percent). However, a large percentage of respondents (42.8%) said that either brand or executive management was involved in selecting the provider. This suggests that these organizations see secondary packaging as more strategic in nature. Products Requiring Secondary Packaging Apparel/Textiles 3.4% Automotive 5.9% Chemical/Paints/Household Cleaner 12.8% Computers/Electronics 5.9% Food & Beverage 25.6% Games/Sporting Goods/Toys 3.9% Health & Personal Care 24.1% Medical/Pharmaceutical 21.7% Paper/Printing 11.3% Pet Supplies 4.4% Plastic/Metal/Glass/Wood Products 13.8% Retail 11.3% Outsourcing practices Those who currently outsource are typically supplementing in-house capabilities. When asked about their mix of in-house and outsourced secondary packaging services, the majority of respondents (56.9 percent) said they are likely to retain the bulk of their packaging services in-house. However, a significant number of companies (34.6 percent) outsource 75 to 100 percent of their secondary packaging services. Companies tend to limit their outsourcing partners, perhaps in an effort to streamline their supply chain. Respondents most often confine their outsourcing activity to one or two providers (38.6 percent). Another 40.6 percent use between three and five providers. 4

5 There is no shortage of service providers available for outsourcing. Survey respondents are most likely to outsource to a contract packaging provider (71.9 percent). Other types of providers include display suppliers or builders (28.1 percent), distribution services or warehousing providers (22.2 percent), and integrated third-party logistics companies (10.3 percent). While it may seem natural for a company to use their primary contract packager to also provide secondary packaging services, only 25.7 percent of respondents say that they do use the same provider for both services, while 31.3 percent say they do sometimes, and 42.4 percent say they do not. The value proposition The percentage of companies opting to outsource secondary packaging services indicates that the practice offers significant value. How is that value most often defined? Respondents who currently outsource say that the top two benefits of outsourcing include increased flexibility (64.5 percent) and reduced costs (62.1 percent). Outsourcing Benefits (select up to three) Reduced costs Increased flexibility 62.1% 64.5% Reduced number of links in supply chain 11.8% Benefit from new ideas/best practices/expertise 31.5% Help in meeting increasing customer demands 47.8% Other 2% Those benefits seem to be a catalyst for expanding the outsourcing of secondary packaging. Those who indicated they planned to increase their outsourcing somewhat or substantially, saw increased flexibility as a benefit 75.5 percent of the time while 69.4 percent saw reduced costs as a benefit. 5

6 Increased flexibility Finding a partner with the flexibility to accommodate fluctuations can relieve much of the burden of reacting quickly to changing business needs. Often, secondary packaging requirements are seasonal, such as preparing for the holidays or a back-to-school promotion. For one cosmetic customer, Saddle Creek assembles holiday gift sets every year, ramping up quickly and completing the process in an intense peak period between June and September. A packaging partner can also enable a manufacturer to delay product configuration until the last possible minute to meet current demand while controlling the cost of carrying and managing inventory. Assembling a back-to-school P.O.P. promotion, adding a colored face plate to a cell phone, shrink wrapping a rainbow pack of sports drinks, or making a last-minute wheel change on a piece of construction equipment are all examples of the flexibility outsourcing can offer. Reduced costs Respondents focus on managing costs is not surprising in today s economy. Companies are looking for ways to offset or counterbalance rate increases in transportation as well as rising labor and energy costs. Working together with a packaging provider can achieve cost savings in all of these areas. Labor. By reviewing supply chain processes, a packaging partner can help to identify and eliminate downtime and reduce the number of touches required in the packaging process, explains Robert Pericht, senior vice president of warehouse operations at Saddle Creek. Forecasting, the order mix, the way materials are brought in... all of these variables can cause challenges downstream, he points out. If there are 10 lines running, streamlining processes can have a significant impact on the total cost of the operation. Automation also offers opportunities for significant cost reduction by reducing the number of touches and increasing capacity, Pericht says. Instead of handling half a million units each week, for example, new equipment might increase throughput to 700,000 cases a week. More and more companies are looking for automation capabilities from their packaging providers as they seek ways to increase capacity and reduce costs. Robotics, laser tags, and other automated services can be cost effective to implement and offer an immediate return on investment. Transportation. This area is top-of-mind as a result of today s rising fuel costs and other transportation-related expenses. Location is a key concern. The closer the packaging facilities are to manufacturing operations, distribution centers or end destinations, the more cost effectively products can be transported. 6

7 Asking packaging partners to fulfill more service requirements also can increase efficiency. For example, having a packaging partner manufacture vacuum trays onsite helps to save on transportation costs since they don t need to be shipped from another location, Pericht says. It also streamlines management of the production cycle. If there will be five million units to pack next week, the packaging partner can produce the trays this week. In a recent secondary packaging study by the Packaging Machinery Manufacturers Institute (PMMI), respondents identified weight and size reduction as top changes that they are striving for in their secondary packaging. Modifying stacking patterns was also identified as a way to maximize truck space to reduce shipping costs. Trends Survey responses point to two key trends: an increased use of outsourcing by companies that are already using the practice and expansion of the role that packaging providers play in the supply chain. Increased outsourcing While only a small percentage of respondents (5.7 percent) say that they will begin outsourcing in the next 12 to 18 months, companies that are already outsourcing appear to offer significant growth potential. A quarter of these respondents (24.4 percent) expect to increase their outsourcing of secondary packaging somewhat or substantially in the next 12 to 18 months. Roughly half (53.7 percent) expect their level of outsourcing to stay the same. Given the challenging economic conditions at the time the survey was completed, the interest in increased outsourcing suggests that it is perceived as a way of controlling costs particularly given that a larger percentage of this group saw outsourcing as a way to reduce costs. Increase substantially Increase somewhat Stay about the same Decrease somewhat Decrease substantially Don t know Expected Change in Outsourcing (within 12 to 18 months) 7% 5% 4.5% 12.4% 17.4% 53.7% Currently Outsourcing 7

8 It is interesting to note that those respondents who expect to increase their outsourcing of secondary packaging somewhat or substantially are already more likely to outsource a larger percentage of their secondary packaging 51 percent say they already outsource at least half, compared to 43 percent overall. This suggests that they find value in the outsourcing arrangement and would like to do more of it. This group also includes a higher percentage of respondents who mention executive management as a job function involved in selecting the packaging provider 42.9 percent, compared with 25.1 percent overall. For these companies, packaging outsourcing may be more closely aligned with strategic business goals. While food and beverage headed the list of products requiring secondary packaging outsourcing with this group, significantly more respondents mentioned Plastic/Metal/Glass/Wood (20.4 percent) and Chemicals/Paint/Household Cleaners (20.4 percent). Medical/Pharmaceutical (20.4 percent) remained near the top of the list while Health & Personal Care (18.4 percent) moved down slightly on the list. Expanded service offerings Survey results reveal a clear desire to streamline the outsourcing process. When packaging partners perform more functions, manufacturers can reduce the number of suppliers and streamline their supply chain. While few respondents use 3PLs for packaging services, they see good value in having services such as warehousing, distribution, and transportation provided as part of the packaging service offering. For 30.8 percent of respondents, it would be valuable or very valuable if their provider offered warehousing services. Respondents had similar views of the value of distribution (41.4 percent) and transportation (37 percent) as part of the service offering. This interest level would suggest that respondents may be open to working with a 3PL for packaging as well as logistics needs. Saddle Creek packaging customers frequently utilize the company s other logistics services. For example, one beverage manufacturer who uses Saddle Creek to build and warehouse rainbow packs was unexpectedly faced with a backlog of its popular sports drink in the Southeast due to a particularly rainy summer. By using Saddle Creek s transportation services, they were able to divert the extra product to other locations around the country. This flexibility allowed the manufacturer to effectively manage inventory in the face of changing business needs. 8

9 The desire for more involvement from packaging providers is sought earlier in the supply chain as well. Of respondents who say they currently outsource, 44.2 percent say that it would be valuable or very valuable if their secondary packager also provided primary packaging services, and 49.5 percent say they would find the addition of packaging design services to be valuable. Other services would also be welcome, according to the Contract Packaging Association study which indicates that 90 percent of survey respondents said their company is being increasingly charged with the responsibility to buy, specify, recommend and purchase materials, container, equipment and other packaging services. Customers are definitely asking us to get more deeply involved in their supply chain, confirms Saddle Creek s Pericht. They are asking questions such as, What if you purchase, or even manufacture, the packaging materials? How about working with the bottling company? and Can you store and ship products too? It is a great opportunity to find ways to create efficiencies and further streamline their supply chain. Challenges Companies that rely on contract packaging services do face challenges, of course. The biggest business challenges, according to responses to an open-ended survey question, are most often related to quality concerns (40 mentions), costs (30 mentions), and timeliness (25 mentions). Comments regarding quality ranged from concerns about technical qualifications, adhering to product quality standards, consistency and service performance. For those citing costs, a number of respondents mentioned labor, transportation and material costs specifically. Timeliness considerations include speed to market, on-time delivery and tight turnaround times. Interestingly, just one respondent mentioned sustainability as an area of concern, perhaps suggesting that this topic has taken a backseat as manufacturers focus on business essentials in tough economic times. For those respondents who plan to outsource somewhat or substantially more in the next 12 to 18 months, quality of service was a key concern. About half of the write-in responses regarding challenges mentioned quality and reliability. 9

10 Value of 3PLs Third-party logistics companies (3PLs) are uniquely positioned to address manufacturers' business challenges. They can warehouse raw goods or work-in-process materials, perform the necessary packaging function and ship from the same location, which increases efficiencies and controls costs. Because all of the operations take place under a single roof, communication and planning are improved, helping to ensure performance quality and timeliness. In addition, they have the knowledge, systems and processes in place for peak performance. This kind of integrated operation maximizes supply chain efficiency. Outsourcing to a 3PL can also offer the opportunity to share a facility with multiple manufacturers. This not only helps to defray the overhead costs, but it also accommodates peaks and valleys in the shipping cycle. An experienced 3PL can find the right combination of companies with complimentary shipping cycles. When one company s business is spiking, another s may be slower and vice versa. As manufacturers look to packaging providers for more extensive capabilities, they often are challenged to find a provider with a full range of services. The Contract Packaging Association survey reports that logistics services is an area of strong growth for the industry, but it has the lowest participation rate (16 percent) from contract packaging providers. The majority of companies don t offer warehousing or transportation to support their packaging operations, and finding a company with a national presence can also be a challenge. For these reasons, it is critical for manufacturers to evaluate potential partners carefully. Choosing the right provider When looking for a packaging partner today, manufacturers need to consider a number of variables. How well does the provider work to improve processes? Can they take costs out of the supply chain? Are they able to accommodate fluctuations and changing business needs? A good provider will work with the manufacturer and routinely review forecasting, scheduling, processes, equipment and other variables, looking for opportunities for improvement. It needs to be a collaborative effort between the manufacturer and the packaging provider rather than a transactional relationship. 10

11 The following checklist provides a good starting point in the search for a packaging partner: Flexibility to right-size the operation to meet business fluctuations Built-in transportation capabilities with a reliable carrier network Convenient, well-equipped locations Experience in packaging similar types of products Reliability and a strong reputation in the marketplace Strong IT systems Proven ability to reduce supply chain costs Commitment to continuous improvement Moving forward The outsourcing of secondary packaging is an area of significant growth. Companies in a range of industries see value in the practice, particularly with regard to increasing flexibility and reducing costs. The value is such that many plan to increase their level of outsourcing in the near future. In addition, manufacturers would welcome providers who can extend the scope of secondary packaging services along the supply chain to create efficiencies and streamline the outsourcing process. Full-service third-party logistics companies are uniquely positioned to take on this expanded role. Manufacturers will experience the greatest success if they approach the relationship with their packaging provider as a partnership. Working together with a carefully selected provider, they can speed products to market and meet customer demands efficiently and cost effectively. 11

12 About Saddle Creek Corporation Saddle Creek Corporation is a third-party logistics company that provides integrated warehousing, transportation and contract packaging services nationwide. Saddle Creek sponsored this research project in conjunction with Contract Packaging magazine. For more details, visit