Let me talk about a typical end-user of packaging materials — a food company, we’ll call it Company X, that uses bottles, cans and films for packaging its range of products.
Company X purchases packaging materials from several manufacturers and distributors. It employs an army of purchasing agents to accomplish this mammoth task, and this is not always seamless. Some of the jobs that the purchasing folks perform are requisitioning, research, qualification, receiving quotes, writing purchase orders, tracking supplier performance, certifying, negotiating and even fire-fighting (when goods do not show up as promised).
Good news, bad news
Well, here is some good news and some bad news. The good news is that a lot of these painful tasks can now be automated, transferred to other agencies, outsourced to the suppliers or eliminated altogether. The bad news is that our friends in the purchasing department would need to learn new skills. The Internet has empowered the department of purchasing at Company X to the point that not only can it eliminate some of the aforementioned inefficient business processes, but it can also start integrating its supply chains.
The fragmented base of the packaging materials suppliers has created these inefficiencies in the value chain that can potentially be eliminated. Despite the critical role of packaging in shipping and presentation to the customers, end-users still treat it as an item on which value is captured by its supplier and not by them. While this perception may not be so widely prevalent among the medical and pharmaceutical companies, such thinking is very typical among other users of packaging materials since they operate on extremely tight limits for their packaging costs.
From our research at Kline & Company, economics is forcing Company X and its peers to manufacture the absolute minimum number of core products and outsource everything else. This is making their supply chains not only extremely complex but also a key driver of profitability, especially for such companies as X, which use a wide variety of packaging materials.
Suggestions for sellers
For sellers of packaging materials, especially undifferentiated products, the emerging e-procurement systems present new challenges. The need for your products is not going away, but you will have to become smarter about doing business. You will have to keep pace with your customers and also stay ahead of your competitors in incorporating these new processes in your business model. Here are a few suggestions:
- While transactions will be automated in the near future, certain supply chain management tasks can never be automated. Your customers will still value your input on how they can reduce “their” costs using “your” products.
- These market developments will naturally result in consolidation at the converter level. In the meantime, you should start thinking about partnering with other suppliers to your customers to collaborate on raising your customer’s supply chain efficiencies.
- Conduct a manufacturing cost assessment for your products, and if you think that you are not among the top five lowest cost producers in the industry think seriously about either reengineering (if that can lower your costs) or discontinue manufacturing and start outsourcing that product.
Suggestions for buyers
If you are a buyer of packaging materials, your traditional responsibility to procure materials in a cost-effective manner is about to disappear. Your role is about to change dramatically and here are suggestions to prepare yourself:
- Develop a short-list of those suppliers that meet your standards for being part of your supply chain. Very soon you will be responsible for not only purchasing but also for driving profitability of your enterprise through effective supply chain management.
- While you might still play golf with your suppliers, your purchasing decisions will largely be facilitated by decision support tools that would consider a larger number of variables from across the whole enterprise. Your role will, thus, become more strategic and less operational.
- Your day-to-day responsibility will be more analytical and cross-functional. You will have to think about “what needs to be procured at the targeted profitability” rather than specifications and price. A vast majority of these decisions will probably not require your intervention, and you will have to step in only to determine which supplier can fulfill your needs in terms of functionality required and targeted contribution to profitability of your enterprise.