Packaging plays a key role in the success of a product, particularly in the Consumer Packaged Goods industry. It is one of the most important elements of the marketing mix, since it has the potential to affect the consumer’s purchasing decision at the point of sale. In spite of being a significant source of costs, most companies source packaging materials in a tactical manner - usually, upon the expiry of an existing contract, packaging suppliers are requested to respond to an RFP, to negotiate on pricing, and to enter into a contract. At times, trials are conducted on samples to ensure that materials conform to product design, branding and production parameters. However, this tactical approach to sourcing often results in an inefficient supplier base and bloated inventories leading to high costs in supply chain operations.
This article discusses effective practices in sourcing packaging materials for consumer packaged goods. The scope of the article is limited to the “flexible laminates” packaging material, since this is one of the most commonly used packaging materials in the consumer packaged goods space. The Procurement department in various organizations, while sourcing packaging materials, typically considers parameters such as (i) Cost factors of the packaging material, (ii) Inventory Level and Re-order Point, (iii) Supply Sources and Capabilities and (iv) Wastage (while packing the primary product). These considerations contribute to the complexity of sourcing packaging materials, and the complexity is only enhanced when additional considerations such as environmental aspects are included, since material substitution aspects assume importance.
Effective Practices for Sourcing Packaging Materials
Given the importance of packaging materials in the consumer packaged goods industry and the complexities involved in its sourcing, effective sourcing practices play an important role in achieving efficiencies and cost reduction. The subsequent sections of this article discuss these practices across the following areas:
Timing of Purchase
Price Identification: After the identification of key packaging parameters, the next step is to understand price behavior of underlying raw materials and intermediates that influence the price of packaging material. In case of flexible laminates, the most common underlying material used is polyethylene, which is available as a film extruded from petrochemical resins such as HDPE, LDPE, and so on.
To understand the price behavior of flexible laminates, it is helpful to assess the price behavior of underlying raw material and intermediates such as crude oil/natural gas and petrochemical resins. In order to track the price forecasts of crude oil and natural gas, one may subscribe to various paid reports. The spot, forward and futures rates for petrochemical resins provide definite information about how the prices will behave in the future.
Timing of Purchase: Another aspect to be considered while sourcing packaging material is determining the right time for sourcing. This decision is influenced by key factors such as inventory level and the demand-supply scenario for raw materials and intermediates.
Inventory planning of packaging materials is related to production. It is also influenced by price, delivery and quality perspectives such as price fluctuations, erratic delivery schedules (non-conformance to purchase orders), and material rejections due to quality issues, that impact the optimum inventory maintenance process. Also, at times, production and inventory planning often goes haywire due to unpredictable sales forecasts. In such cases, sourcing professionals, in an effort to reduce inventory carrying costs, have to buy on spot to keep production planning safe. This leads to loss of savings. Maintaining optimal inventory level is a considerable challenge and globally, the Economic Order Quantity (EOQ) concept is used to determine optimal inventory level.
Having determined the EOQ, the next question is whether to buy on spot or forward basis. In intense market conditions, when the price of flexible laminates is likely to go up due to constrained supplies, forward contracts should be the preferred option, as this provides the additional benefit of going “long” apart from securing a supply source. But, when the price of flexible laminates is likely to go down, repeat spot buys can bring in benefits. However, while deciding on either option, sourcing professionals should additionally take into consideration the difference in the spot and forward prices. Ideally, the difference in the spot and forward prices should be equal to the finance charges plus any earnings that are due to the holder of the contract.
Additionally, going for forward contracts will depend on factors such as seasonality, festivity (time around the holidays), climate cycles (the demand for frozen food dips in winters) that impact demand. In such scenarios, long-term contracts at low price levels but with high inventory costs may help address high inventory requirements, but do not adversely impact the working capital of the company. However, this decision should not be made solely on the basis of demand projections. The impact of price movement should additionally be factored in, to arrive at the right timing for ordering.
Let us consider the scenario depicted in the diagram to understand how the above-mentioned factors play an important role in determining the timing for sourcing. In this scenario, the inventory level dips at an uneven rate due to production plan fluctuations and touches the re-order point near the end of week eight. Hence, this becomes the point when sourcing of flexible laminate packaging should complete. At the same time, one can see that the price is also rising gradually, but unevenly. So, if one plots the trend in price and stock depletion till week four and extrapolates it for subsequent weeks one can see that the end of week five may be the optimal sourcing point instead of the end of week eight. Had the price not been rising this steeply, or the inventory not depleting this fast, the optimal sourcing point would have shifted further down the line on the time scale. This is an effective tool that can provide a tremendous edge by allowing the buyer to ride the price tide and have optimum inventory carrying costs.
Supplier Assessment: Supplier assessment comes into the picture when an existing contract with a supplier ends or revalidation of the existing supplier base is required or inclusion of new suppliers under empanelment is underway. Some of the parameters which should be analyzed for assessing suppliers are listed below:
Sourcing Process: Now, we will discuss some practices that may be adopted while actually sourcing packaging material. The sourcing of packaging material can be performed in three steps:
A. Defining the packaging material: For a new product line or for packaging design changes for an existing product, the Request for Information (RFI) route should be taken for the reasons such as (i) Validating that the packaging constitution and design is acceptable, (ii) Validating that the packaging constitution and design is acceptable to the supplier base for production and supply, (iii) Understanding the cost structure, (iv) Identifying negotiation levers.
B. Trial for quality assurance: The next step is to perform a trial run using the packaging material. In this step, the design layout and the color shade card is provided to select suppliers. The suppliers then prepare roto-gravure printing cylinders and take print runs with lamination, winding, and slitting for preparing the trial roll. During packaging trial (and also during ongoing production run) the defect aspects such as Shade Mismatch, Off-registration, Doctor Blade Line, Ink Splashes, De-lamination, Tunneling/Winding Marks , Low Bond, Low Seal Strength, Curling, Bad Roll Winding Quality, Off-slit, Static Problems, Transit Damage, Repeat Length Variation, Odor, GSM Variation should be checked at the buyer’s end.
C. Negotiation for price optimization: Suppliers generally tend to use price and GSM (grams per square meter) as negotiation levers. If the GSM is high, fewer yields of the flexible laminate will be produced, and the price per unit of flexible laminate will be higher than that of laminate with lesser GSM. Negotiation, after study of the cost break-down structure of the packaging material, should ideally be conducted via the routes of Online Static Negotiation (Rfx), Online Dynamic Negotiation (Reverse Auction), or a combination of both to arrive at the right price. Also, negotiation happens best if done on a source-to-contract application as this enables automated online negotiation on readily available templates, which leads to reduced cycle time.
Effective sourcing practices help companies in achieving significant efficiencies and cost reductions in supply chain. These help in reducing the frequency of purchasing orders and lowering inventory carrying costs. In addition, effective sourcing practices take a strategic view of the customer-supplier relationship by recognizing that suppliers are a valuable part of the company and important partners in reducing waste and non-value-adding costs. Effective sourcing practices, thus, can be used to strengthen a company's competitive advantage by getting the best services and products at the most optimal cost. The potential of effective sourcing can be realized by utilizing technology and e-sourcing tools that greatly assist the sourcing process and increase efficiency.
Syamantak Mukherjee is part of the Sourcing and Procurement Solutions team at TCS’ Platform BPO Solutions Unit. He has 12 years of experience with about 8 years of domain experience in pre-sales, consulting and business process transformation and transition for clients across various business verticals. As Procurement Practice Lead for India, APAC, and MEA at TCS’ Platform BPO Solutions Unit, he is responsible for consulting on sourcing projects of select critical categories for various client engagements.