How to Evaluate the Profitability of Product Packaging
Packaging can impact organisations in unexpected ways. Without a way to get a good handle on how much your packaging operations cost, a company’s profits can be smaller than expected.
In the past, packaging was thought of as little more than a way to move products from one place to another. Companies usually consider the cost of packaging, but they did not realise the impact packaging plays throughout the entire supply chain. But smart organisations now account for every cost, and look for savings at every stage.
A company needs a reliable way to conduct an evaluation of packaging and find out how packaging can influence the profitability of a product. Here is what you need to consider when analysing the true costs of this often-overlooked part of your operation. These tips, insights and tools can help identify opportunities to make packaging a lever of profitability within your organisation.
What Contributes to the Overall Costs of Packaging?
The metric Total Cost of Ownership (TCO) is being used by organisations to determine their packaging costs. This cost estimate is designed to factor in the direct and indirect costs of packaging.
The following variables contribute to the TCO of packaging:
- Process efficiency
- Product damage
- Regulatory costs
- Risk potential
- Transportation and freight costs
- Workplace and warehousing costs
Find out more about TCO and how working with a Managed Packaging solution may be the simplest way to determine your organisation’s TCO. With a Managed Packaging solution, you can simplify your entire supply chain and identify hidden savings opportunities.
What Are Some Key Contributors To Hidden Packaging Costs?
Unoptimised packaging for products can be a drain on budgets over time. Although some organisations try to cut costs with low-quality packaging and materials, the temporary savings can cost more in the long run.
Here are the top 3 contributors to hidden packaging costs:
- Product damage
- Shipping and warehouse inefficiency
- Consumer experience and packaging
Damage to products can result in unexpectedly high costs for organisations. According to UShip, up to 20% of ecommerce packages arrive damaged. To fix these issues, the average manufacturer spends 9% to 15% of revenue on returns, according to UPS.
In all, return delivery costs U.S. businesses $381 billion a year, and those costs are projected to rise to $550 billion, according to Statista.
Shipping and Warehouse Inefficiency
Concerns over insufficient space for inventory and operations is the top concern for 44% of operations professionals, according to Logistics Management. Additionally, packaging optimisation yields shipping efficiencies that can lead to significant savings. Warehouse managers agree that streamlining processes to be just seconds faster can result in significant savings in time and cost.
Consumer Experience and Packaging
A wide majority - 72% - of American consumers say their purchasing decision is influenced by product packaging design, according to a survey. In fact, 50% of shoppers will recommend your product if it came in premium or branded packaging, according to Medium.
What Other Factors Can Drive up Packaging Costs?
Packaging costs begin with projections and purchases, but the price of materials alone don’t determine overall spending. Issues with packaging can push costs higher than organisations expect or budget for.
Here are some other factors that can contribute to higher packaging costs:
- Delayed packaging processing times
- Failure to reuse and recycle
- High shipping costs
- Inefficient manufacturing models
- Poorly designed packaging and materials storage
- Unprotective packaging materials
- Wasteful labor costs
- Wrong-sized boxes
Another factor that has risen to prominence is the impact of supply chain operations on larger social and environmental costs. According to McKinsey & Company, the supply chain contributes to more than 80% of greenhouse gas emissions and uses more than 90% of environmental and geological resources.
As more consumers become aware of and shrink their own carbon footprint, more expect the companies they do business with to do the same. Unilever’s global consumer study discovered that marketing sustainable goods effectively could open up opportunities of more than $1 trillion for companies. Failure to factor in social and environmental costs is a missed opportunity.
Use our Supply Chain Carbon Footprint Calculator to assess your organisation’s environmental impact.
How Can You Optimise Your Packaging?
Packaging that protects products so they arrive in perfect condition but that also minimises costs and makes shipping efficient is the goal of optimisation. Packaging for products that is optimised can result in saved costs, and increased profit.
A Managed Packaging program will make sure that your packaging is:
- Efficiently designed
- Sufficiently protective of products
Are Your Costs Justified?
Consumers are more aware of the environmental impact of brands than ever. A study from The Hartman Group found 52% of customers said it was important for packaging to be minimal.
Is Your Packaging Durable Enough to Hold Up?
Supply chain environment changes can threaten your packaging. Shipping among extreme climates can affect packaging, which can then damage the product. The key function of packaging is to withstand multiple modes of transportation, be it via ship, truck, or airplane, along with the numerous touch points throughout the supply chain. Damaged packages can also put supply chain employees in danger.
Is Your Packaging Efficiency Designed?
Efficiency in design is using the right amount of materials in order to protect and ship products. Efficient design means packaging is:
- Easy to handle
Does Your Packaging Protect Your Product?
A high return rate or supply chain complaints about product damage could indicate insufficient packaging. Besides the impact damaged products have on customer sentiment, additional costs include:
- Discounts and profit losses
- Environmental costs
- Repairs and adjustments
- Return shipment and reverse logistics costs
- Supply chain interruptions and delays
Is Your Packaging Sustainable?
If your packaging is not sustainable, then it may not be fully optimised. Optimised packaging goes hand-in-hand with sustainability because:
- Green packaging operations can result in lower costs
- Reducing excessive air space leads to more efficient transportation and a lower carbon footprint
- Sustainable materials improve the life cycle of packaging products
- Waste is reduced by making sure the right amount of materials are used
Find out more about what a Managed Packaging review can reveal and request a review today.
How Much Can You Save by Optimising Packaging?
A comprehensive Managed Packaging program can save a great deal of money, depending on inefficiencies found and solutions deployed.
Packaging engineers play a critical role throughout the supply chain and are instrumental in helping organisations discover significant savings opportunities. BillerudKorsnäs has optimised packaging for customers, resulting in a multi-million dollar reduction in airfreight costs for one company. In another case, BillerudKorsnäs helped a global footwear company save $1.2 million by standardising material usage and reducing box complexity.
With Managed Packaging, BillerudKorsnäs has helped companies realise:
- 15% to 30% in freight cost savings
- Dramatic reductions to product damage
- Significant savings due to packaging reuse
Let BillerudKorsnäs Help You Evaluate Your Packaging Needs
Uncovering inefficiencies in your supply chain requires an approach that is both careful and deliberate. A packaging solution customised for clients starts by identifying areas that can be improved:
- Can your packaging respond to external changes and pressures?
- Does your packaging integrate with other parts of your business?
- Do you have strategic company goals for sustainability?
- How does your supply chain perform along operational metrics?
- Is the cost of damage to your product above the industry average?
After a full, in-depth analysis of your supply chain you’ll be presented with the areas for improvement and optimisations that will make a significant difference in your operations. Contact us today to request a packaging review.