Much of the cost and complexity in CPG supply chains happen 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 by contract packaging companies. But an increasing number of CPG companies are recognizing the huge cost advantages – as much as 30% of combined warehousing, packaging and freight costs – of performing secondary packaging in the distribution center.
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. It’s higher for grocery products, where competition is high and differentiation is low. Copacking in the distribution center 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 secondary packaging services. At KANE, for instance, we’ve:
- Built clean rooms and transformed bulk volumes of class-2, FDA-regulated medical devices into shelf-ready packages
- 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
- Invested in job-specific machinery for customers in both the confectionery and food & beverage space to assist in club store execution
What are the benefits of doing final packaging in the distribution center?
- Faster cash cycle. If you use an outside copacker, it’ll add about 7 days to the distribution cycle. That slows your “make to sell” 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’ demands.
- 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. Unlike marketers, 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.
- Reduced damage. Shipping product to and from an outside copacker results in a 3% damage uptick. More touches, more damage.
For these and other reasons, it’s best to think of your warehouses not as product distribution centers, but product transformation centers.