The New World of Packaging Costs Matters in Your Vendor Contracts

Posted by Jim Kurtz on Apr 29, 2019 10:31:16 AM

The New World of Packaging Costs Matters in Your Vendor Contracts

Interesting times are ahead for companies that purchase significant volumes of pulp and paper, a group that includes virtually any manufacturer with packaging needs. After a decade-long run of price stability, the standard rate for pulp and paper has risen three times over the past two years. Moreover, the rapid growth of ecommerce is driving fundamental changes to packaging models. What used to be a single box of 24 items shipped to a single retailer is often now 24 separate boxes sent to individuals located at various points across the country or globe.

A new SRM Academy paper explores the economic dynamics of the pulp and paper industry, suggesting steps manufacturers can take to position themselves for success in an increasingly complex environment. Let’s look at a few of the high points.

Learning Lessons from the Past
Up until January 2017, an extended period of price stability in paper commodities had enabled manufacturing professionals to concentrate on process changes driven by ecommerce. They’ll now need to contend with these factors simultaneously, and for all but the grizzled veterans, dealing with a spiraling cost environment will be an unfamiliar test.

Even those who have been in the field for a dozen years or more will face new challenges, as consolidation across pulp and paper producers combined with the closure of inefficient plants has reduced capacity and altered the competitive landscape. Consequently, negotiating the best possible price is no longer sufficient. It’s also essential to secure a reliable supply of packaging material. Imagine the awkward conversations that would ensue if sales are lost because the product is ready and orders lined up, but no boxes are available in which to ship them.

It’s imperative to understand the pricing formulas underpinning packaging rates as well. In most cases, these equations incorporate inputs such as the RISI index to account for changes in commodity prices. This is a logical approach since producers should not be penalized for market factors beyond their control. However, it takes a trained eye to deconstruct these formulas and ensure they don’t also introduce price creep by codifying cost increases in other areas that may well be declining.

Evening Out the Knowledge Imbalance
Manufacturing professionals simply cannot know as much about pulp and paper market dynamics as the vendors steeped in its details on a daily basis. For this reason, enlisting a third party subject matter expert during the vendor contract negotiation process can level the playing field and pay major dividends for manufacturers; in some cases saving 8 to 15% of relevant costs, by some measures.

There’s not a lot of magic or fairy dust behind these benefits, but rather the school of hard knocks. A skilled vendor management expert will be able to craft effective formulas providing the appropriate protection, understand supply alternatives like OCC, and be aware of win/win incentive programs available in the marketplace.

With industry trends all now pointing toward increased supplier power (e.g. plants running near capacity), it’s time for manufacturers to renew their focus on this critical operational area. Although vendor management is typically thought of as a cost exercise, a Total Cost of Ownership focus can deliver benefits to both the top and bottom lines.

I encourage you to check out this SRM Academy report, which addresses these items in greater detail, and contact us if you like to discuss further – we’re here to help.

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