If you’re looking to reduce your cost of goods sold (COGS) and increase profitability, it may be time to review your packaging designs and systems.
Many companies see packaging cost as just a small piece of their total COGS involving only the actual packaging materials used, but this mindset leaves a lot of money on the table. In fact, a packaging system overhaul can be key to reducing the cost of labor, shipping, logistics, warehousing, and returns — in addition to the direct material cost reduction. Here’s how:
Labor
Packaging has a significant impact on labor costs with the most obvious impact being how long it takes to package your product. The easier and quicker it is to pack the product, the less you’ll spend on labor. However, packaging actually plays a much wider role when it comes to labor. Take for example the industrial manufacturing company we worked with that made large, high-value machines. Due to their packaging design and the constraints of their operations, incoming parts were unpacked and the incoming packaging was discarded. Machines were then assembled with these parts before being partially disassembled for shipping. The parts were set on carts and sent to shipping to be packed. Altogether this meant a minimum of four touches for every item. To save time, we recommended they rearrange their process so that the person disassembling the machine places the parts directly into the shipping containers rather than onto a transfer cart. This change saves time and also ensures parts aren’t lost in transit.
A packaging system overhaul can be key to reducing the cost of labor, shipping, logistics, warehousing, and returns — in addition to the direct material cost reduction.
Shipping & Logistics
When it comes to shipping, it is critical to balance the amount of packaging protection with the size of the package. Finding the right balance here means finding a solution which simultaneously minimizes the shipping cost and risk of damage. Creating packaging designs in this sweet spot can save your company hundreds of thousands of dollars per year. To do it right, you will need to consider the supply chain hazards your product will face in your supply chain as well as the shipping method used. Your solution should also take into account the pallet configuration and the number of products per shipping case. The end goal is to ensure all packaging included in your packaging system is value-added — that is, it is there to serve a purpose that is worthwhile.
Warehousing
Warehouse space is expensive, which is why it is imperative to focus on density when designing your packaging. Some warehouses use racking, while others use floor stacking. In the facilities that use racking, it is vital to take measurements of the available racking. You want to use these measurements when you design your packaging so that when a pallet is filled, it can utilize as much of the racking space as possible. Likewise, when in a floor stacking situation, it is important to design packaging and pallets to be stacked high enough to utilize the full warehouse space.
Returns & Damage
Damaged products are not only costly, but they also impact customer service and goodwill. At a minimum, your material and shipping costs are doubled because you are delivering the product twice. Your costs continue to stack up though because you also have to factor in the cost of your customer service team and reverse logistics. Avoidance is the key here — ensure your packaging solution is optimized for protection the first time.
An end-to-end supply chain hazard gap analysis is helpful to start assessing your packaging designs. Once you have an idea of the hazards, you can design solutions to prevent those hazards from damaging your product and ensure all the packaging components used add value to the system. Direct material costs are just the tip of the packaging cost iceberg. Packaging optimization can be an easy win when trying to boost product profitability.
Alec Fotsch is a Sr. Consultant in the Packaging Optimization practice at Chainalytics. In this role, he provides end-to-end engineering support for packaging optimization projects, working to ensure solutions improve costs and consider environmental impacts.
