Packaging Replenishment as a Tool of Benefits Creation

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1 Packaging Replenishment as a Tool of Benefits Creation LENKA BRANSKA, ZUZANA PECINOVA, HANA LOSTAKOVA Department of Economy and Management of Chemical and Food Industry, Faculty of Chemical Technology, University of Pardubice Studentska 95, Pardubice CZECH REPUBLIC Lenka.Branska@upce.cz, Zuzana.Pecinova@upce.cz, Hana.Lostakova@upce.cz, Abstract: - The primary purpose and objective of building value chains or networks is to achieve greater business efficiency by creating such benefits that are not attainable without cooperation of the partners. These benefits may arise from cooperative implementation of various business activities and also in various parts of the value chain, or network. One of these activities is creating a packaging design and managing material flow of packages. If a network is correctly identified of stakeholders who would participate in the activity and if the activity is carried out so as to contribute to the creation of value not only for direct customers but for customers throughout the chain, not only the transaction benefits but also the strategic benefits may be created. This paper deals mainly with how cooperation should take place between members of the value chain, or network, so that packaging management becomes a tool to create benefits for all members of the network. Key-Words: - Value chain, Value network, Customer value, Strategic benefits, Packaging, Supply chain management, Collaborative Planning, Forecasting and Replenishment. 1 Introduction Market developments change the behaviour of customers and suppliers. As a defence against competition, the integration is realized and customer value is created, delivered and improved on the basis of cooperation between entities in the value chain or value network. Supply chain or supply networks (meant in the concept of the value network) have led firms to find new business opportunities based on collaboration and coordination to improve their efficiency and capacity to be able respond to dynamic markets needs [1]. Customers are increasingly demanding. Surplus of supply to demand improves their position towards suppliers they are also becoming more educated and also, as a result of globalization and information technology development, more informed. Companies today are dealing with a new type of customer one that is better educated, more collaborative, and infinitely more resourceful than at any time in the past. They want to be heard; they want to have a say in how customer value is created and what they would like to consume [2]. Effective caring for the customers' needs requires close cooperation of partners in the value network. Collaboration involves two or more companies working together to jointly achieve greater success than can be attained in isolation [3,4]. Another characteristic feature of the current market environment is permanent change and the resulting uncertainty in business. Enterprises are facing uncertainty regarding unknown future events and uncertainty regarding trading partners responses to future events [5]. Cooperation in the chain/network based on trust enables to reduce the uncertainty arising from business partners behavior radically. For firms, in the current conditions, it is of vital importance to develop cooperation with their business partners - customers on one hand and suppliers on the other. The importance of collaborating with customers in the development of innovative products and services has been recognized for many years [6]. Nevertheless, cooperation in any field (not only in research and development) may be the source of benefits. The goal is to improve future behavior in a relationship, or a joint, collaborative activity in which two firms strive to create more value together than they would create individually or with other partners [7,8]. Cross-enterprise collaboration involves the integration of human, financial, and technical resources to create a better business model [4]. Corsten and Felde demonstrated that supplier collaboration has a positive effect on buyer ISBN:

2 performance both in terms of innovative capability and financial results [4,9]. Owing to increasing bargaining power, greater resources and other synergies resulting from the interconnection and cooperation, value chains/networks enable not only achieving better results on the market in the form of higher growth of sales, higher profits, better customer satisfaction and increase in their loyalty, but also increase in competitiveness and position of the enterprise and all customers in the downstream customer chain. A chain/network will be stable if it is based on trust and development of relationships and if it creates adequate benefits for all its members. Trust in buyer-seller relations may be an important source of competitive advantage because it lowers transaction costs, increases satisfaction and facilitates investments, along with other favorable outcomes [5]. Buyer-seller interactions are focused on two areas; first, integrative interactions characterized by cooperative behaviors that satisfy the objectives of both trading partners; and second, distributive interactions characterized by competitive behaviors directed towards self-interest at the expense of the other trading partners [5]. Managing the value chain/value network and various activities thereunder allows you to create benefits in different places of the chain/network. The long-term stability is increased by measures that lead to strengthening the strategic position of direct customers with their customers, but also the strategic position of these customers with their clients up to the final consumers. Management of the value chain, or in a broader sense, the value network and, within it, management of various activities should therefore be focused not only on providing common transaction benefits, but also on the development of relations and creation of relational and strategic benefits in various parts of the chain. The emergence of strategic benefits for the direct customer and his customers may be demonstrated on the example of packaging management. The nature and amount of benefits depends on the level of cooperation and level of trust between trading partners. According to [5] there are 3 levels of trust and thus also 3 types of benefits derived from cooperation. In addition to the economic benefits, relationship and strategic effects may develop. Economic benefits are resulting from the supplier's ability to meet customer needs in terms of reducing consumption of resources and sacrifices spent in providing and using the product. They are resulting from time savings and reduced transaction and administrative costs [5]. Relational benefits may result from greater trust and strengthening of relationships between trading partners. Improved long-term relationships based on cooperation allow sharing information and communicating openly. This will bring the benefits consisting in improving the operational efficiency of both partners, increasing the level of service and increased competitiveness. The highest form of trust among trading partners is necessary for achieving strategic benefits. They require close and intense relationships between partners, leading to improved image, enhancing reputation, gaining new markets and promoting investment. Thus these are the benefits resulting from the measures that lead to strengthening the strategic position of customers in the markets served by them. Unfortunately, these strategic benefits have not been defined in detail in the literature. In our opinion, strategic benefits must be based on measures consisting in both tangible and intangible forms of support and strengthening the position of customers in the chain with their customers, consumers or clients. They must be such as to strengthen the position of buyers in the market in the long term and increase their competitiveness in the industry and thus improve the competitiveness of the company as a supplier, but also the competitiveness of the entire value network. Their contribution lies in the creation and cultivation of significant synergies. These strategic benefits combine both tangible benefits (e.g. participation in modernization of machinery and production processes with customers to improve their supply and their customer care systems), but particularly intangible benefits. The intangible benefits increase emotional and social aspects of the value of the clients' customers, such as a pleasant surprise and pleasure when buying, increased prestige, customers image improvement with their clients, etc. These intangible benefits may be provided through the development of intangible assets of the firm, such as high level of education, skills and professionalism of workers, unique knowhow, ability to create new innovative solutions, team spirit as an integral part of the corporate culture, empathy in relation to all entities of the customer chain, etc. They are derived from commitment and trust in marketing relationships that encourage trading partners to: (1) resist attractive short-term alternatives in favor of the future long-term benefits of continuing the relationship; (2) believe in cooperation to preserve and enhance the relationships; and (3) believe that ISBN:

3 the partner will not act opportunistically. This approach includes top management commitment, high-quality standards, open communication, information sharing, and long-term trading partner relationships, thus contributing to strategic benefits [5]. In addition to these benefits, cooperation in chains/networks contributes to reduction of uncertainty in business relations, which is an important success factor in the highly turbulent environment. 2 Problem Formulation The question is which of the company activities should be managed in the cooperation of the value chain members to achieve benefits for the individual links and the value chain/ network as a whole. Some activities may be more important from this perspective, while others may be only a source of small or rather insignificant benefits. As regards the packaging management, its modification as a result of the development of cooperation in the value chain or value network can result in significant contribution in terms of diverse and differently valuable benefits resulting from the specifics of the packaging management. Cooperation in the packaging management on the inter-company level can be developed under these situations: Companies as links of the value chain/network do not have the packaging management integrated with the company material flow. Development of the cooperation in the packaging management will probably focus on improving relations with the direct suppliers of packages, but it is likely that rather partial or less significant benefits will be achieved. Individual companies in the chain have their own fully integrated in-house material flows, but without the full integration of packaging management. The improvement will undoubtedly focus on the development of cooperation with the supplier (or suppliers) of packages and integration of packaging flows with the main material flow. Individual companies have their own fully integrated material flows including packaging flows, or there is cooperation of the particular chain/network links at the management of the main material flow across the chain. In this case, the effort is focused on development of cooperation at the level of the whole chain. This is the most convenient situation from the perspective of achieving benefits. The form and size of the benefits generated result from the form created of the packaging management. It is influenced not only by which of the situations specified above it is created, but also by what packages will be part of the newly designed system (of the packaging management). Undoubtedly, this system will have a different form if it includes packaging: primary (consumer), secondary (handling) or tertiary (transport). Depending on the level of the thus defined level of packages (i.e. consumer, handling, transport), requirements for packages as well as their circulation will be differentiated. This determines the mechanisms that will be used to create packaging management system. When designing the packaging management system (i.e. the form and circulation) of the primary packaging, we can use the principles of modern management of material flows, such as Quick Response or CPFR (Collaborative Planning, Forecasting and Replenishment), as well as systems and models of company stock management. These approaches and methods are not, however, sufficient for designing the handling or transport packaging management system. In that case, we must also use management science modeling methods, such as transportation theory. When designing the packaging management system, which should contribute to the growth of benefits in the value chain, it is necessary to approach the problem in a comprehensive manner. We need to address both the issue of the form of each packaging level (primary, secondary, tertiary) and the form of the material flow. Being of high importance, both the issues must be addressed in cooperation with partners in the value network. The benefits of cooperation in the value chain/network when creating packages and principles to be adhered to in this activity were dealt with in the previous work of the authors [10]. This paper deals mainly with methods to modify the primary packaging flow in the value chain/network. It deals with the issue especially in a situation where individual links of the value chain/network have integrated the inhouse material flows, without fully integrating the packaging management. It deals with ways to develop CPFR-based cooperation with the supplier of packaging so that benefits are created in the value chain/network. ISBN:

4 3 Problem Solution If the partners in the value chain/network are to integrate the packaging management in the material flow (at the level of the enterprise or even the chain), it means developing CPFR-based cooperation with the supplier of packaging to create economic benefits first, which will become the basis for the emergence of other benefits. Integration of activities within the chain/network must deliver compliance of activities to become the basis for a fast, smooth and efficient material flow. This requires adjusting the supply and replenishment systems between the partners. Joint design of supply and replenishment systems assumes, however, that the partners (manufacturer and supplier of packaging) must link the information flow, which will form the basis of automatic replenishment of packages by the supplier. However, the actual replenishment of packages in a newly conceived system is impossible without collaborative planning of the need for packages and sharing of information on current demand for the producer's products (as well as the products of the manufacturer's customers). To secure smooth material flow of packaging materials to manufacturer (and throughout the main chain), it is not enough merely to conduct a joint forecasting and planning, but the companies in the chain must work together to prepare a mechanism by which the individual items of inventory to customers are replenished according to the current requirements of customers [11]. 3.1 Planning the mechanism for replenishment of the primary packaging Concluded among the links of the chain, framework (preliminary) agreements may be used for an agreement on the mechanism of packaging replenishment. Therein, issues are to be arranged such as the appearance of the product, the price (or method to determine it in the future), payment terms, etc. and also everything necessary for continuous packaging replenishment [12]. It is necessary to set [11, 12]: Mechanism for sharing information on current manufacturer requirements and at least also on those of a direct customers of manufacturer (in particular the way and the interval of information transmission). The mechanism for the packaging replenishment management and control variables determining the time and/or size of the delivery. Deliveries of packaging can be either periodic (with variable sizes of the delivery, i.e. P-system) or in constant volumes (in irregular periods), i.e. Q-system. Division of activities and mutual responsibilities at packaging replenishment. It must be quite clear who is to set the reference variables and how, how the ordering process is carried out and how the other partner will participate in the decision-making on the delivery of packaging or check supplies which are within the responsibility of the other partner. Other matters arising from applying the CPFR method, such as a treatment of security of transferring and sharing of information and the penalties for errors that lead to economic losses. Probably the most important for the creation of benefits arising from interconnecting the material flow between the manufacturer and supplier of packaging is the setting of the stock management system and the setting of control parameters for replenishment of packages. Other parts of the agreement actually create the conditions for successful replenishment of packages. 3.2 Planning the primary packaging replenishment system and method to set control variables for the primary packaging stock replenishment The actual stock replenishment among partners who make up a value chain or value network should be based on the P-Q system for stock management, which are described in the literature e.g. by Gros [13]. Benefits can arise in the value chain with the use of P-replenishment system, as well as with the introduction of the Q-replenishment system. However, their use must be adapted to the requirement of continuity of the material flow through the value chain. If the partners (the manufacturer and his supplier of packages) use the P-system to replenish primary packages, the greatest benefit is the regularity of deliveries. It means that the supplier of packages can better prepare the expedition and his partner can prepare receipt of deliveries and storage of packages in the enterprise. These business activities can be better organized with both the business partners. On the other hand, it is a system that poses a greater risk of premature exhaustion of packaging stocks and this fact must be taken into account. This could jeopardize the ability of manufacturer to provide the required (complexly conceived) products to their own customers when the time comes. Therefore, when calculating the upper order level (with which to calculate the current size of the supply of packages) we need to allow for higher levels of ISBN:

5 safety stocks and when calculating it we need to work with a multiple of the standard deviation from the expected consumption of packaging. We recommend that the safety stock would be calculated using 3 standard deviations from the expected consumption at least when the new system is on a trial basis. The upper order level can be defined as relatively stable only in the event that there are no significant variations in the value chain in terms of the needs of the downstream customers. If this limit is flexible, it will help to improve the performance of each link in the value chain. In terms of creation of various benefits in the value chain, it can be better to use the Q-packaging replenishment system. The advantage of using this system is, in particular, greater certainty of the continuous flow through the value chain/network. This system increases the efficiency of coordinated activities due to the possibility of reducing the size of the safety stock, protecting the replenishment system from collapse (in its calculation we can work with a lower multiple of standard deviation from the expected needs for packaging). Using the Q-system, however, must mean changes in internal activities of both the partners. They should secure greater flexibility of both the packaging supplier and recipient (i.e. the manufacturer). The supplier must be able to dispatch a delivery of packages in a not very appropriate moment (e.g. Sunday 3 am), the manufacturer must have the internal processes organized in order to accept the delivery and possibly store the packages. In our opinion, in the implementation of these delivery systems it is necessary to implement a trial period to tune them. In the trial period, fixed safety stock can be held in companies of customers (manufacturers) that may help protect the continuity of the packaging material flow as well as of the main material flow. The trial period allows verifying the accuracy of the method to forecast the needs for packaging, the appropriateness of the selected replenishment mechanism, including the assessment of the correctness of the procedure for setting the lower and/or upper order levels of the selected stock replenishment system. 3.3 Development of further cooperation (in relation to other links of the chain) and in the management of secondary and tertiary packaging Development of cooperation between the enterprise and the supplier of packaging can bring benefits not only to both partners, but also to customers of the producer, or even to other customers in the value chain, standing closer to the final consumer. Increase in these benefits may occur if this supplier of primary packages serves (on a similar basis) other articles of the value chain, or network. In the target solution, he can become the exclusive supplier of packaging to all the links of the chain or network, or he may even be the entity with full responsibility for the management of packaging throughout the value chain/network. In this case, however, delivery of secondary packaging (transport and handling) needs to be resolved. Simplification as against the primary packaging consists in standardization of the handling and transport packages, which occurred with the development of the global trade. This leads to a radical reduction in the variability of packages in the value chain/network and packaging management solutions are mainly focused on determining the needs for them and the way to monitor and manage their flows based on suitably defined control variables. Analyses carried out in enterprises in which there is a relatively high level of mechanization showed that the critical point is the solution of circulation of pallets, containers and other means of transport.. In improving the performance of this business activity, the supplier of packaging should focus on resolving circulation thereof on a fixed trajectory, or a circuit, so that the movement of empty pallets and other packaging is minimized as much as possible (keeping fully occupied with other products, returnable packaging, etc.) and the number of handling and transport packages (e.g. pallets and containers) is optimal [14]. 4 Conclusion Suppliers of packaging become members of the value chain/network, or its support bodies. They must therefore not only contribute to the emergence of benefits in various places of the chain/network, but in the interest of long-term stability and strengthening of partnerships, actual benefits must also draw on their emergence which are impossible without such cooperation. Packaging is an integral part of products, increasing their perceived value and affecting the costs incurred, being thus a source of various types of benefits. The economic benefits result from the increase in the efficiency of business processes in packaging management. The cooperation among business partners in normal commercial transactions brings cost savings to the customer as a result of choosing the most suitable packaging suppliers in terms of their adaptation to his material flows (size, material, ease of handling, removability, recycling, etc.), both ISBN:

6 as for packaging on the side of business inputs and products. Further development of cooperation, strengthening of relationships and increase in trust among business partners can achieve additional benefits. In the field of packaging management, these are benefits consisting in deepening cooperation in the design and creation of packages that are tailored to customer needs (enabling to process the package along with the material, the size of the package corresponds to the production conditions of the customer, etc.) In the field of packaging system creation, these are the effects arising from the above-described principles. It requires information sharing, open communication and reliability of business partners. These benefits of the development of relations include more savings arising from the effects of increasing the efficiency of material flows, better mutual communication and increased competitiveness. Strategic benefits as long-term gains may arise only in a very close cooperation and trust of business partners, manifesting themselves in improving organization s image, strengthening its reputation, increasing long-term investments, and reaching new markets. In terms of the packaging management, these are effects of long-term cooperation in the development, design and manufacturing of packaging and management of circulation thereof, which allow increasing the value for customers. An example may be a design of such a form of the product packaging for customers which will allow them to improve their competitive position in the markets served by them while increasing the value not only for the immediate customer, but throughout the value chain. Acknowledgements The authors thank for the financial support provided by the Grant Agency of the Czech Republic under the project No 403/12/1279 Tools for strengthening the long-term relationships with customers based on integration and cooperation of value network subjects. References: [1] Alarcon, F., Alemany, M.M.E., Ortiz,A., Conceptual framework for the characterization of the order promising process in a collaborative selling network context. International Journal of Production Economics, Vol. 120, No.1, 2009, pp [2] Bhalla, G., Collaboration and Co-Creation: New Platforms for Marketing and Innovation, Springer, [3] Daugherty, P.J. et al., Is collaboration paying off for firms? Business Horizons, Vol. 49, 2006, pp [4] Daugherty, P.J., Review of logistics and supply chain relationship literature and suggested research agenda, International Journal of Physical Distribution & Logistics Management, Vol. 41, No. 1, 2011, pp [5] Ratnasingam, P., Inter-Organizational Trust for Business-to-Business e-commerce, IRM Press, [6] Greer, Ch., Lei, D., Collaborative Innovation with Customers: A Review of the Literature and Suggestions for Future Research, International Journal of Management Reviews, Vol. 14, No.1, 2012, pp [7] Selnes, F., Sallis, J., Promoting relationship learning, Journal of Marketing, Vol. 67, No.3, 2003, pp [8] Cheung, M-S., Myers, M.B., Mentzer, J.T., Does relationship learning lead to relationship value? A cross-national supply chain investigation, Journal of Operations Management, Vol. 28, No. 6, 2010, pp [9] Corsten, D., Felde, J., Exploring the performance effects of key-supplier collaboration: an empirical investigation into Swiss buyer-seller relationships, International Journal of Physical Distribution & Logistics Management, Vol. 35, No. 6, 2005, pp [10] Branska, L., Pecinova, Z., Lostakova, H., Modification of packaging management in a company as a result of involvement in a value network, 21 th Anniversary International Conference on Metallurgy and Materials Metal 2012, Brno, 2012, in press. [11] Branska, L., Lostakova, H., CPFR Method Application in Supply Chain Involving Continuous Productions, 20 th Anniversary International Conference on Metallurgy and Materials Metal 2011, Brno, 2011, pp [12] Branska, L., Quick Response Method Application in Supply Chains Involving Chemical Continuous Productions, habilitation work, Tomas Bata University in Zlin, [13] Gros, I., Logistics, Institute of chemical technology Prague, [14] Tomek, J. et al., Management of material flow in the enterprise, SNTL/Alfa, ISBN: