Caused by the unprecedented and ongoing economic situation from the COVID-19 pandemic, price inflation is being closely monitored by leading experts. Many industries are already seeing pressure on transport, raw materials, and increased demand. Among these areas is packaging — specifically, packaging that is manufactured from corrugated cardboard.
What is causing packaging costs to rise? And in what ways can your team overcome or mitigate these increases?
There’s a reason we refer to it as a supply chain: Each link is connected, and when one suffers, it has the potential to affect the success of others. This blog outlines the factors contributing to current corrugated packaging price inflation and how food packaging manufacturers can execute strategies to save on the bottom line.
Inflation Across the Board
Before we jump into pricing inflation for corrugated packaging, it is worth noting that nearly every industry is currently experiencing price inflation despite strong bounce-back following the lifting of many coronavirus-related restrictions. In fact, by the end of October 2021, consumer prices increased by 6.2%.
Although some optimism is returning to manufacturers and companies, many realize the unsustainable increases to their overheads is being passed down to consumers.
The question becomes: Are price increases unavoidable or can they be overcome? Fortunately, when it comes to corrugated packaging, there are a number of ways to even out cost increases.
Although the average cost of packaging has increased alongside the majority of consumer goods, developing a strategic procurement strategy requires one to look around every corner.
Four Contributing Factors to Food Manufacturing and Packaging Inflation
As suggested earlier, the links of your supply chain affect one another, which means price inflation for corrugated packaging isn’t only caused by price increases in the material itself but also by who produces the packaging, how it gets to where it needs to go, and who needs it.
Material Increase Costs
The price of corrugated packaging is at an all-time high. There are a number of reasons for this:
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Lockdowns caused an increased staff absence in factories that manufacture packaging, making less paper available and driving up costs
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Imbalances in the paper market caused by an interruption to the planned maintenance and increased exports are only now beginning to be corrected
These factors are reflected in the price of paper, which filters into the cost of corrugated packaging.
How can you mitigate or balance these costs? It depends on the type and style of the packaging:
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First, it is possible to analyze the material that goes into the packaging and to change it to a lighter, cheaper board grade or a high-performance liner, which would mitigate cost increases that are related to the material.
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Second, you might be able to make more efficient use of the material by adjusting pack designs or switching to custom-sized boxes that reduce the overall amount of material used.
There have been announcements of a $70/ton increase for paper, however, with COVID restrictions easing and new paper manufacturing capacity coming on board, many experts predict that corrugated prices could begin to fall in the second half of 2022.
Supply and Demand
It’s no secret COVID restrictions resulted in a massive increase in e-commerce, which jumped to $26.7 trillion in 2020. Because of the switch to online shopping, virtually all businesses selling online had an increased need for corrugated packaging to ship orders.
Supply and demand economics led to increases in both raw materials and finished packaging. Combined with labor shortages and other disruptions experienced by paper manufacturers, the situation became further complicated by businesses stockpiling supplies. With lead times from paper packaging manufacturers stretching to months rather than weeks, many e-commerce businesses purchased excess materials to ensure a continued supply of orders.
Although increased volumes in online orders are considered by many to be a good problem to have, there is little to be done to alleviate this particular contributor to increased prices. However, auditing and optimizing your inventory management process could help mitigate similar situations in the long term.
Labor Costs and Shortages
One of the more overlooked contributors to the cost of packaging is the cost of labor. Wages in U.S. manufacturing have been steadily increasing over the past year, adding to business costs throughout the supply chain.
Despite the uncertainty with the job market, nonfarm payroll employment has risen and unemployment has continued to decline. With fewer Americans looking for work, some manufacturers face competition for suitably trained and skilled staff.
Transport Costs
The cost of transportation and freight is another contributor to the overall increase in corrugated packaging. As of November 2021, fuel oil and gasoline of all types have experienced a nearly 60% increase in cost. Add increased workload for freight companies, and transport costs continue to increase significantly.
Although these transportation costs aren’t directly tied to packaging costs, they contribute to the overall cost of the product.
To alleviate this cost:
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If spare warehouse capacity is available, it is possible to order large volumes to minimize delivery charges and use the extra space to store packaging inventory.
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If you are able to use a different board grade, transit cost savings could be realized through lighter weights and less volume.
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Custom-size packaging can reduce transit costs and allow you to send more items per pallet, thereby reducing shipping costs.
Ultimately, price increases might be inevitable. This doesn’t mean that you need to accept them, however. Instead, you can look around every corner and under every unturned rock to ensure you are cutting unnecessary costs.
How Food Packaging Manufacturers Are Finding Creative Solutions
Price inflation may be inevitable, but that doesn’t mean your bottom line has to suffer. Knowing what contributes to a product’s costs allows you to better address them with a solution.
When you partner with a team of consultants from SRM, you work with a creative solutions provider, which means we examine each link of the supply chain to better understand where we can cut down on costs.
If you are looking for solutions to corrugated packaging costs, you’ve found the right team. While other consultants have mostly neglected this area of procurement, our years of keeping a finger on the pulse of the market have made us experts in seeking out the best prices for the product, which requires creative solutions to optimize transportation costs, inventory management, and more.
For more thought leadership on procurement, consider subscribing to The Bottom Line, SRM’s manufacturing blog.
