Much of the cost and complexity in CPG supply chains happens post manufacturing.
Think about it. You might have one product – a potato chip – that gets packaged in dozens of ways. Historically, this final packaging has been handled as a discrete supply chain function. But an increasing number of CPG companies are recognizing the huge cost advantages up – to 30% of combined warehousing/packaging/freight costs – of integrating final packaging with distribution center operations, and working with secondary packaging suppliers that can make that happen.
Forces driving change
For clarity, let’s make a distinction between types of packaging. Primary packaging is the level of packaging done closest to the product, where the packaging material actually touches the product, like candy wrappers or drink bottles. Secondary packaging is the supplemental packaging layer in which the primary packages are enclosed, like the box of candy bars or the six-pack of performance drinks.
The following diagram shows the historically distinct functions of secondary packaging and final distribution, and what it looks like when they are combined into a single function and facility to shorten the supply chain and lower costs.
Several market forces are driving more companies to combine secondary packaging and warehouse distribution operations:
- SKU Proliferation. Consumers want to buy products the way they want (variety packs, bulk purchases) and retailers want to display products in ways that will maximize sales and margin (bundled promotions, point of purchase displays). End result: more SKUs. The further upstream you configure final SKUs, the more complex and costly your supply chain becomes. By finalizing product configuration and packaging in the warehouse, closer to the consumer, CPG companies become more agile and are able to manage shorter manufacturing runs and speed time to market.
- Margin pressure. Margins are lower for grocery products, where competition is high and differentiation is low. Integrating co-packing with distribution center operations offers huge potential to drive down operational costs and better compete in price-sensitive categories.
- Increasing capabilities of third-party logistics companies (3PLs). 3PLs have added the packaging expertise and automated infrastructure to handle even the most sophisticated final packaging services. As a secondary packaging supplier, Kane Logistics:
- Operates multiple, high-volume packaging operations for leading food and beverage brands
- Invests in job-specific machinery for customers in both the confectionery and food & beverage space to assist in club store and mass market execution
- Has created dozens of package configurations for a Fortune 100 beverage manufacturer, allowing the company to streamline its supply chain and control inventory across its vast distribution network
- Has built clean rooms and transformed bulk volumes of class-2, FDA-regulated medical devices into shelf-ready packages
Should you automate secondary packaging?
The most efficient solution for large, CPG companies is a mix of automated and manual processes. Given the increasing cost and scarcity of logistics labor, it’s tempting to look at automating as many warehousing and packaging processes as possible. But the most efficient packaging operations are the most flexible. For instance, if the 36-pack is not selling, your retail partner might request a 24-pack instead, requiring you to re-engineer the packaging line. If you’ve automated the process, that change may require additional or different equipment, costing big money and a 12-week lead time to deliver.
In contrast, a semi-automated production line can be re-engineered in hours, or even minutes.
Naturally, you should look to automate tasks that are consistent and predictable. Investments in carton erectors, shrink wrap machines and heat sealers deliver strong labor savings and a relatively quick ROI. But as far as creation of finished packs, its often most economical to leave that to people.
What are the benefits of integrating final packaging with distribution center operations?
The overall cost benefit could be as much as 30% from integrating final packaging and distribution center operations. Other advantages:
- Faster cash cycle. If you use an outside copacker, it’ll add about 7 days to the distribution cycle. That slows your “manufacture-to-sale” cash cycle and requires more inventory, which in turn adds storage, labor and financing costs.
- More agile supply chain. Postponing final product configuration until just prior to fulfillment makes you more responsive to retail customers’ requests. For one food company, KANE converts a base number of product types into 50 different configurations.
- Lower freight costs. When you manage secondary packaging as a discrete function, you’re paying to move products between copackers and the warehouse. Eliminating that extra step can generate huge freight savings.
- More economical packaging solutions. When 3PL people gain a say in secondary package design, downstream efficiencies almost always occur. Why? Because 3PLs work backwards from the truck trailer and warehouse to suggest smart packaging options that result in efficiently stacked pallets, maximum trailer utilization, and boxes right-sized for lower cost shipping. Here’s an example. A contract packager for a large CPG company designed a point-of-purchase display that took a combined 28 hours to assemble. In addition, the shape of the display resulted in inefficient use of trailer space. The 3PL that was building the display suggested changes that maintained the basic look of the display but cut assembly and labor costs in half and improved trailer utilization by 10%.
- Reduced damage. Shipping product to and from an outside copacker results in a 3% freight damage increase. More touches, more damage.
- Sales growth. This is perhaps the most powerful benefit of integrating final packaging with distribution operations. Much of final packaging work is in response to retailer requests for different configurations – like variety packs or multi-SKU promotion kits. 3PLs that combine expert packaging and logistics skills are better able to respond quickly to such requests. For example, let’s say you have a Father’s Day promotion that combines 3 different shaving products in one kit. Target loves the idea and wants 100,000 kits in 4 weeks. A nimble, vertically integrated supply chain can help you book that huge order.
Can a 3PL be your secondary packaging supplier?
It makes sense for warehouse-based 3PLs to want to extend their product offering to include secondary packaging. But packaging is not just another “value-added service.” It’s a completely different operating environment where they’re not just shipping something, they making it, too. So it’s important to vet your secondary packaging suppliers carefully to ensure they have:
- Experienced industrial engineers who know packaging. You need them to design the packaging process and specify and modify required equipment.
- A rigorous quality control process to manage the greater risk inherent in a packaging environment. The financial downside of a missed shipment is nothing compared to an improperly packaged product for a large retail order, which could result in chargeback fines or even recalls.
- Strict processes and KPI measurement tools to monitor and measure outside labor. 3PLs must be able to meet fluctuating demands using outside labor providers while meeting all quality objectives.
Move secondary packaging downstream
When you move secondary packaging as far downstream as possible – even co-located with your final distribution center – you create a far more efficient, more adaptable supply chain. It’s why warehouse-based 3PLs that have well-established packaging operations may be the best choice for your secondary packaging supplier.
Are you evaluating your secondary packaging strategy? We’re happy to share what we know. Contact KANE to start a discussion.