Reasons to Take a Second Look at Your Corrugated Vendor Contract

Posted by Jim Kurtz on Mar 12, 2021 8:00:00 AM

Vendor Contracts

In today's challenging market environment, reducing packaging costs is essential. It may not occur to most companies to look at their corrugated supply vendor agreements for potential cost savings — but it should. Strategic Resource Management (SRM) understands these contracts, and we work with companies every day to locate and capture these savings. Working in partnership with our customers, we often reduce annual corrugated costs by double digits.  

Taking a Second Look at Corrugated Contracts Pays Off

Too often, vendor contracts are finalized, then put away and forgotten, lost amid the pressures of day-to-day management. If you have not reviewed your purchase vendor agreements lately, there is a good chance you are spending too much. Industry insiders encourage taking note of changes in packaging practices, including warehousing techniques, warehouse robotics, application of pick and pack algorithms using chaotic storage techniques, LTL shipping, more residential deliveries, and greater numbers of small, partially filled cardboard cartons. These changes mean dramatic shifts in the mix, quantity, and even quality of corrugated products.

Problems, including excess costs, arise when businesses begin operating under new market conditions but are still purchasing corrugated products under out-of-date supply agreements. SRM is the industry leader in vendor contract analysis, focusing on finding and negotiating contract savings for maximum company benefit. This includes both cost savings and operating practices. 

When you partner with SRM, we will work with you to improve pricing and critical portions of your corrugated vendor agreement. Combining our paperboard expertise with your company's industry know-how, we will come up with options and alternatives to your current vendor agreements.

SRM Can Maximize Your Contract Review Benefits

SRM takes a holistic approach to vendor contract review, but our experience has taught us that the following three areas often offer sufficient reasons for a second evaluation of a corrugated contract. 

Pricing — Including Discounts and Incentives

In many ways, 2020 was an unusual year — and paperboard prices were no exception. Although mills are operating at only slightly higher-than-average capacity utilization levels, linerboard and corrugated prices have held steady or risen over the past year. Within the paper industry, there are various incentives available based on purchase volume levels. Most companies are unaware these arrangements exist, and others may not have the market knowledge to calculate the full value of these savings in a competitive marketplace. 

Additionally, companies should take full advantage of industry-wide practices for volume discounts and ensure these discounts are carefully spelled out in the vendor contract. Discounts may also be available based on penalties for supplier performance failures.

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Escalator Clauses

Escalator clauses provide a mechanism for suppliers to recoup increases in cost of raw material. These arrangements are commonplace in the industry. In the past, these clauses became afterthoughts following long periods of price stability. However, thanks to shifts in pricing and demand, they are now re-emerging as a hot topic. 

Based on the RISI index of paper costs, escalator formulas can vary widely. For example, a $10/ton increase in the index (a typical price change increment) may drive as much as a 2% increase to the total invoice. Vendor contract wording should be careful to spell out that only cost increases outside the supplier’s control warrant a price adjustment.

Delivery Schedules, Quality, and Supply Allocation

Sometimes the lowest product price does not translate to the lowest cost of ownership. Defective cartons, failure to meet schedules, or incorrect carton counts can stop production. To keep the lines moving and production at its maximum, it is important to agree in advance who pays for the spoilage or what failure-to-perform penalty is triggered. These quality-based guidelines safeguard both product integrity and a company's ability to fulfill its obligations.

When broad product demand spikes are placed on a supplier, that supplier may run short of product. As a result, the supplier may cut the quantity of products delivered to your site. Emergencies, disruptions in the supply chain, or unexpected increases in demand may contribute to shortages at your supplier. Careful analysis of what your corrugated contract includes ensures that under such circumstances, your supply allocations are preplanned. This provides time to adjust your production and make any disruption smoother.   

SRM is the industry’s premier contract analysis consulting group, and we are available to meet with your supply chain team to review your corrugated contracts. We can show you how to bring your contracts up to date, ensure supplier performance, and reduce costs. Connect with us today to schedule a consultation and learn more about how we can help you.

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Topics: Manufacturing, Vendors & Contracts