Sourcing managers can induce service differentiation through innovative packaging
Ragavendran T, Associate Spend Pool Lead – Packaging
What strikes your mind if one takes the following names?
- Nike Air
The product and quality associated with them? Mostly yes. Would it change if we showed you the below pictures and asked you the same question again? Would your mind waver between the product and packaging and thereby your loyalty to the firm?
This shows the importance of packaging and the way consumers perceive a brand as a result of attractive, utilitarian packaging.
Take for example the latest minion ads on Amazon shipping boxes. This idea has not only won consumer interest, but also intrigued several participants across the value chain.
Procurement organization is responsible for sourcing package material. And since packaging plays an important part in the value chain, sourcing managers have an opportunity to create business advantage — provided they sense an opportunity in bringing about service differentiation through innovative packaging. The partnership with internal marketing team holds the key because in some cases packaging can either positively or negatively affect the brand perception.
What goes through a consumers’ mind when they click on an e-commerce website?
- Product fit (range) and ease of navigation and use
- Speed of delivery
- Quality of delivery
Now with a whole bunch of retailers — both new age and brick-and-mortar — offering a wide variety of products, service differentiation becomes a critical factor. And amidst intensifying competition for customer dollars, packaging sourcing managers can hope to bring about service differentiation by asking: “How does the package look when it reaches the consumer? Impressive or messed up?”
Past research has shown that people shift to competitors if they find the packaging not up-to mark.
This is the reason why companies like Amazon have a separate feedback system for packaging alone.
A survey conducted by Harris Poll in the U.S. a couple of years ago showed that 66% of Americans firmly believed that the amount of packaging reflects the true care the firm shows on the consumer. Another 48% believed that packaging reflects the value of shipment. 34% believed that packaging reflects the retailer’s environmental aspects. Interestingly, around 51% of Americans believed that excess packaging is worth if it provides adequate protection.
And studies have shown that in emerging markets, consumers usually prefer excess packaging than what is typically required. This could be anything from a bubble wrap to a sealing tape, poly bag or cartons and corrugates. However, as the market matures, consumers may prefer elegance over excess.
With annual e-commerce growth rates of around 10-11% in the next 2-3 years in the U.S., the packaging industry is also set to grow. If you feel that the above number is a strong one, hold on — we expect compounded growth rates of around 30-35% in India and around 20-25% in China in the next 4-5 years.
In 2015, U.S. online and e-commerce spend during the holiday season was $110-$115 billion. Total online sales for the whole of 2015 was close to $320 billion or about 9-10% of all retail sales. In the period from 2016-2018, this number is expected to increase at a CAGR of around 10-11%.
Who is happy listening to these numbers? The packaging folks of course!
As per estimates by few industry watchers, a company like Amazon would spend roughly $230-$240 million per year on corrugates alone (assuming small-medium sized box dimensions. This would go up significantly if we consider products like electronics/other consumer durables). Now, 60% of all shipments for an e-commerce company involve corrugated boxes. As a result, the total spend on packaging is estimated to average around $400-$450 million for a major e-commerce player. Mid-sized players will incur less than this estimate.
However, a section of society wants to lower the amount of packaging materials in order to:
- Reduce environmental impact
- Lay your hands sooner on the product (reduce unpacking time for consumers)
- Reduce logistics cost (more weight, more the cost)
Also, here are some more reasons why firms should reduce packaging (from a manufacturer perspective):
- Improves operational efficiency
- It’s a great branding tool
- Packaging is a costly affair and there could be potential savings
- Makes supply chain more sustainable
Many manufacturers such as International Paper, Mondi Group, DS Smith, among others, have always focused on packaging specific to e-commerce, and are always on the lookout for lowering the amount of materials in packaging. Other mid-small sized firms may follow suit – but how long will this take is the question.
Retailers with substantial e-commerce presence can consider following parameters:
- Reduce, Reuse, Recycle
- Consolidate orders to the best extent possible
- Encourage consumers to return packaging (Yes. Some stores take them back)
Now, what’s in it for procurement managers dealing with packaging products?
- How to “Standardize” packaging procurement? :
- Specification Harmonization – Say for example a 2 colour direct print on RSC (regular slotted container) brown box with a standard dimension instead of multiple small and medium boxes.
- Better the fit, lesser the fillers one might need.
- Volume Consolidation – Buyers get better discounts if they are standard boxes than customized ones
- Proper Inventory Management
Of course, packaging algorithm does not work well always. It ultimately depends on the packer, who also makes the decision on the size of the box. Standardization and training to employees in the packaging line would save some significant costs for e-commerce companies. Meanwhile, companies should continue to innovate and also reduce packaging to the best extent possible. All said and done, sooner or later, we may see a big change in the way companies approach packaging.
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