Specific consumer products look exactly the same when they roll off the manufacturing line. To satisfy retailer requirements, however, these identical products are wrapped, sealed, tied and packed in dozens, even hundreds, of different ways for presentation on the retail shelf. Consumer packaged goods (CPG) companies often outsource product packaging to outside contract packagers, adding a costly and time-consuming step between manufacturing and the distribution center.
CPG companies can streamline their supply chains by integrating final product packaging into existing distribution operations and entrusting the function to the logistics professionals who manage warehousing and transportation. Performing final packaging in the DC can reduce combined distribution, packaging and transportation costs by 30%, and can cut at least 7 days in order-to-delivery cycle time.
Combining Customization with Distribution Saves Money
There are different types of contract packaging services. Primary packaging, such as filling a bottle or wrapping an individual unit, is typically performed as part of the manufacturing process. However, since it is not economical to change products on the manufacturing line into variety packs and other configurations for retail display, these kinds of secondary packaging, or co-packing services, are generally done by outside contract packagers. It is this final stage of packaging that offers an opportunity for cost-saving integration with distribution operations.
Combined packaging/distribution has become possible with the increasing sophistication of third-party logistics providers (3PLs), who have invested in the equipment and resources to take on complex product packaging assignments. Packaging performed in the 3PL-operated distribution center (DC) eliminates costly runs to outside packagers and shortens the product customization cycle.
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3PLs Step Up To Enable Leaner Supply Chains
The enhanced packaging capabilities of 3PLs means that integration of final packaging into distribution operations has now become a compelling proposition. 3PLs can also be your contractor packagers. Examples include:
- For a beverage manufacturer, a 3PL handles repackaging of product in the warehouse to create unique variety packs for club stores.
- For a candy manufacturer, a 3PL receives super sacks of candies and packages them into multiple configurations for final retail sale.
- For a water heater manufacturer, UL-certified technicians at the company’s 3PL warehouse change out heating elements and brand labels in response to contractor orders. By stocking only base models of its heaters in the warehouse and custom-configuring every order with on-hand parts, the company has reduced inventory carrying costs by 10%.
How Much Can Be Saved?
Companies that integrate product packaging into distribution operations can cut combined warehousing, packaging and transportation costs by 30%. Savings are driven primarily by these factors:
- Lower freight costs. Typically, products ship out to the contract packager and then back to the DC for final distribution. These extra runs hike freights costs an estimated 38%. Eliminating these costs on an $8 million spend would mean a savings of $3 million, not to mention the added environmental benefit of taking trucks off the road.
- Lower inventory carrying costs. Use of an outside contract packager adds about 7 days to the distribution cycle. Worse, companies typically lose visibility of their product during this time, creating uncertainty about the amount of product available for sale. Manufacturers deal with this uncertainty by adding inventory, which in turn adds warehousing, labor and financing costs.
- Reduced labor and equipment. Combined packaging/distribution operations allow for labor and rolling stock to be deployed where it’s most needed at any given time, across multiple functions. Cross-trained workers can be available to address peak demands in the DC or the co-pack area. Management costs are also reduced and the functions can share security, clerical, maintenance and other facility staff.
- Reduced damage. The more product is moved, the greater the potential for damage. Shipping product to and from an outside packager results in about 3% damage. If it’s a liquid product, the percentage will be higher, since damage to one bottle can destroy multiple cases.
Are 3PLs Ready To Take On Final Product Packaging?
Some are. Some aren’t. Moving a complex product packaging operation to a distribution center is a big shift, from a “ship it” to a “make it” operating environment. That has significant implications for 3PL operations, and they need to make important changes. Enhanced 3PL requirements include:
- Experienced packaging engineers, needed to design the packaging process and specify and modify the equipment required to automate and streamline operations.
- A rigorous quality control process, to manage the greater risk inherent in a packaging environment. The financial downside of a missed shipment is minor compared to an improperly packaged product for a large retailer order, which could result in chargeback fines or even recalls. Managing this risk requires methodical in-line and pre-shipment quality checks.
- Strict processes and KPI measurement tools to monitor and measure outside labor. Manufacturers want a variable cost structure for final packaging based on volume. 3PLs must be able to meet fluctuating demands using outside labor providers, while meeting all quality objectives.
Logistics providers that have developed their businesses to manage in a manufacturing environment are well positioned to assume the final packaging function. They have ready access to capital to buy labor-saving automation equipment and sophisticated information technology systems to manage both distribution and product packaging.
These 3PLs offer another notable advantage over contract packagers and the companies that manufacture the corrugated displays: They understand the impact of packaging on overall supply chain costs.
Case in point: A packager for a large CPG company designed a point-of-purchase display that took 28 hours to assemble. A 3PL suggested changes that maintained the basic look of the display but cut assembly time and labor costs in half.
Let’s be clear. Contract packagers are generally very good at what they do. The need for a new model is not driven by a flawed packaging capability; it’s driven by a flawed, unnecessarily complex supply chain process.
Large CPG Companies Are Leading the Change
America’s largest CPG companies are recognizing the inefficiencies in the current process for product customization and are leveraging 3PL packaging capabilities to streamline their supply chains.
- Several years ago, Kimberly-Clark consolidated contract packaging and distribution operations into ten 3PL-operated mega-centers throughout the US and Canada. This “service-in-the-DC” model cuts costs and increases speed to market by reducing supply chain touch points.
- When Procter & Gamble integrated packaging into its distribution operation, the company cut costs by 10% at its Northeast paper DC. Formerly, a contract packager operated a separate packaging operation within P&G’s DC. But the company turned the packaging function over to the 3PL that ran its DC and transportation operation. By sharing resources across functions, the 3PL was able to perform both packaging and distribution with improved quality, while using fewer people and at a substantial savings.
Product packaging trends are clear. It’s only a matter of time before manufacturers of all sizes recognize integrated packaging and distribution as an opportunity to get products to market faster with greater flexibility and at a lower cost.
Retailers Are Driving The Change
Mass retailers are the power brokers in today’s retail supply chains. They want what they want, when and how they want it. An “in DC” packaging operation gives brand managers the freedom to change packaging formats with great agility, to reflect the retailer’s merchandising strategies and without concern about vastly inflating costs.
Here’s an example. Let’s say a cleaning product manufacturer has an idea for a multi-product “Spring Clean-Up” bucket. Walmart likes the idea and requests 100,000 buckets for a pilot program that it wants to kick off in four weeks. A flexible, fast solution for product packaging and distribution enables the manufacturer’s sales team to book the order with confidence rather than bargain for more time to design and create the kits. That’s a powerful competitive advantage.
The Future of Product Packaging in the Supply Chain
CPG supply chains can no longer afford the added costs and time that comes with separate packaging and distribution operations. These functions will be integrated. And the integration will not stop at simple execution of final packaging. 3PLs that have evolved their businesses to meet this emerging market demand will enable CPG companies to pursue a total outsourced model for contract packaging, including:
- Display design and testing. A 3PL would work with a corrugate company to design a display that meets marketing’s specifications and is practical to build and ship.
- Sourcing and ownership of packaging materials. A 3PL would source materials and take ownership of this inventory until it’s used. As a result, manufacturers avoid administrative costs, as well as the cost of carrying this non-sales inventory.
- Equipment specification and purchasing. Shedding these assets enables manufacturers to direct available capital to support core business strategies.
Consumer product manufacturers, led by the largest global companies, have already begun to integrate final product packaging with distribution operations. Small and mid-sized manufacturers will follow suit as they recognize the potential of an integrated model to drastically reduce supply chain costs and cycle time.