Do You Know the Total Cost of Ownership for Your Packaging?
To determine the holistic picture of their packaging costs, organisations are prioritising the Total Cost of Ownership (TCO) of their packaging.
Historically, packaging has been a simple way to get products to an end customer. Relatively little thought went into the cost of the packaging, where it came from, or where it would eventually end up. Even less effort went into the dunnage used to protect the products.
Fast-forward to 2020 and companies are awakening to the real costs of their packaging. They're recognizing the need for aesthetics and performance in packaging, with a newfound emphasis on sustainability that has changed the packaging market. With global ecommerce sales reaching $3.5 trillion in 2019, the race is on to control packaging expenses as a way to reduce overall supply chain costs. To determine the holistic picture of their packaging costs, organisations are prioritising the Total Cost of Ownership (TCO) of their packaging.
How do you calculate the Total Cost of Ownership (TCO) in packaging?
In packaging, Total Cost of Ownership (TCO) is a cost estimate designed to help buyers and owners determine the direct and indirect costs of packaging. The following variables contribute to the TCO of packaging:
- Product costs
- Process efficiency
- Risk potential
- Workplace and warehousing costs
- Transportation and freight costs
- Regulatory costs
No two packaging processes are identical, and organisations need to define the costs inherent to their processes and their products. A TCO calculation may look like this:
To get an accurate picture of the TCO for your organisation, you may need to do a far-reaching audit of all departments to determine the initial costs, operational costs, risks, warehousing, freight, and regulatory costs. This may involve your operations, procurement, supply chain specialists, your organisation’s legal team, financial personnel and many other professionals inside and outside of your organisation.
Working with a Managed Packaging solution may be the simplest way to determine your organisation’s TCO, while simplifying your entire supply chain and identifying hidden opportunities for savings.
5 packaging challenges to avoid
The introduction of UPS and FedEx dimensional freight charges in 2015 changed the calculus of packaging costs, among other shifting variables.
The costs of packaging go beyond the price of the box, container or envelope itself and include:
Inefficient use of warehouse space
Every inch of space in the distribution facility is valuable. If you have wasted space within the cartons in your distribution center, it can send a ripple effect through your operation. The main cause of wasted space in distribution centers is cartons not being optimised. Maximise warehouse space utilization by investing in right-sized packaging for your product as well as for transport, and position those materials in a way that helps streamline the placement and picking of goods.
Damage to products
Ecommerce damage not only costs companies an estimated $6 billion a year, but it also requires return shipments, re-issue, and reimbursement costs. High damage rates are not sustainable, are many times more expensive to replace the product and product damage also hurts a brand’s image. According to PMMI, replacing a damaged product can cost an ecommerce vendor up to seventeen times more than the original cost to ship. If your packaging cannot make it to delivery, the financial consequences are steep.
Failure to reuse and recycle
Today’s consumers are increasingly conscious about what happens to their boxes once they are done with them. To align with your customers’ sustainable values, seek out packaging that is optimised for reuse and recycle.
Wasteful labor costs
Improving your packaging gets products to the customer faster and more efficiently by reducing labor, repackaging, and returns due to damage. It allows companies to get their products on the shelves and into the hands of their customers faster. Delays and inefficiencies resulting from low-quality packaging can have significant impacts on the bottom line.
Damage to your brand
For customers’ purchase decisions, packaging can play an important role in the customer’s purchase decision. Customers want high-quality, attractive packaging that enhances the user experience, as opposed to low-quality packaging that cheapens the product overall. The latter can deter buyers from coming back for more or recommending your brand to their friends and family.
How much can you save?
Packaging engineers play a critical role throughout the supply chain and are instrumental in helping organizations discover significant savings opportunities. Billerud optimised packaging for customers, resulting in a $300,000 reduction in airfreight costs in one example. In another case, Billerud reduced a global footwear producer’s transport spend by $1.2 million by standardising material usage and reducing box complexity.
Work with packaging experts to determine the Total Cost of Ownership
According to Pitney Bowes, 87 billion parcels were shipped worldwide in 2018, constituting a 104% increase in volume from 2014. These packages also represent a significant monetary investment (in the packaging and dunnage itself), labor investment (for the workers who touch each of those boxes 20 times or more, and time investment for the companies using them.
Recognizing that packaging is not their core business focus, more companies are working with managed packaging providers that offer a turnkey service to design and product packaging for companies. With global design and engineering centers and dozens of qualified packaging partners, Billerud has become the single point of contact for some of the world’s largest brands, managing their packaging process from structure design to supplier coordination to packaging production.
Similar to how a company would outsource its logistics to a third-party logistics provider (3PL), tax preparation to a CPA firm, or technology management to an IT firm, managed packaging takes the stress out of the packaging process and lets companies do what they do best. Connect with a packaging expert at Billerud to determine the exact costs of your packaging.