The majority of packaging converters do not appear to be prepared to make the transition to e-commerce. This jump will require a reengineering of business processes.
I tend to look at the packaging industry as a combination of three value blocks. We start with the raw material manufacturers, then we have the packaging companies or converters (who convert raw materials into cans, bottles, bags, etc.), and finally there are the end-users. There are others in the value chain such as distributors, designers, equipment manufacturers and packagers, but their role is not strategic to the value chain and can be safely grouped elsewhere for the purpose of this discussion.
In looking at some of the recent developments, I have concluded that the strategic control of the value chain has shifted to the converters. They seem to be capturing the highest value in the chain. The raw material manufacturers typically serve more than one industry, and packaging happens to be one of them. Accordingly, their business model is driven by volume rather than capturing higher value. The end-users treat packaging as a “necessary evil” and tend to focus on minimizing its cost (except for such cases as cosmetics packaging). That leaves the converters to capture the highest value.
This dynamics of the packaging industry value chain is also reflected in the manner each of the value blocks has embraced e-business models. The raw materials suppliers have been very active in integrating e-business models since the efficiencies on both buy and sell side are simply enormous. This is also reflected in the emergence of exchanges and consortia. The end-users, on the other hand, have been focusing primarily on the buy side in their e-business initiatives.
Penetration of e-business in packaging industry
An interesting finding from my recent research work is that, partly as a cost-cutting initiative and partly due to the pressure from their suppliers, converters are embracing e-commerce in purchasing raw materials since the savings are clearly visible. However, the converters have been relatively slow to integrate e-business in their core business process.
During the past two years, while the raw material suppliers and the end-users have invested millions of dollars in e-business tools, about 50% of the converters are yet to have even professional websites (ones that provide sufficient information that enables visitors to make a business decision). Moreover, I am not aware of many converters that have fully e-commerce-enabled websites, though I understand that approximately 10% of them do provide varying degrees of ordering capabilities from their websites. This leads me to believe that due to their complacency — which arises probably out of wanting to capture the highest value in the chain — the converters are relatively slow in exploiting the newly available tools.
On the other hand, my discussions with executives at end-users lead me to believe that they are starting to require their suppliers to enable their information technology (IT) infrastructure to be compatible with their systems to ensure machine-to-machine connectivity and to make almost all functions of their relationship accessible by electronic means. The end-users are driving this as part of their buy-side logistics initiatives. This means that very soon the converters will have to upgrade their IT systems to conduct business with their major customers.
It is clear that a vast majority of converters are unprepared at this time to make that transition. While the technology part can be easily outsourced to an IT firm, the bigger challenge is going to come from reengineering of business processes. Take, for instance, customer needs assessment. When selling is done in person, there is a whole lot going on other than selling. You come to know about your customer’s concerns, future plans and unmet needs. E-business systems, including customer relationship management (CRM) programs, provide excellent data on customer behavior, but you still have to use other means to uncover hidden needs and better understand future plans.
Suggestions for packaging companies
If you are carefully observing the market trends, you must have noticed how customer relationships are changing. While a packaging supplier’s priorities still have to be centered around making it easier and less expensive for its customers to do business with them, the company will need to uncover its customer’s “hidden needs” so that it can fulfill those needs before its competition does.
Since selling will be executed through electronic means, a supplier has to retrain its sales force to become “customer relationship representatives,” whose sole responsibility will be to prepare their company’s business for the future needs of its customers.