Packaging and the Supply Chain

Stephen DeAngelis

September 22, 2010

In yesterday’s post entitled The Packaging Challenge, I discussed a number of issues surrounding product packaging. Supply chain blogger Steve Banker wrote an interesting piece about a case study involving packaging that complements that post [“The Importance of Packaging in Supply Chain Management,” Logistics Viewpoints, 21 June 2010]. Banker writes:

“I recently read a great business school case study by Terry Tremwel (Walton College of Business, University of Arkansas), Dan Lynch (Eli Broad Graduate School of Management, Michigan State University), and Jim Crowell (Walton College of Business, University of Arkansas) called ‘Phoenician Phoods, Breakfast Cereal Manufacturer and Distributor.’ The case focuses on a business executive at a fictitious food company that has to make a tough decision involving SKU rationalization, packaging, case pack size, transportation costs, manufacturing optimization, and new product rollouts.”

Here’s the set-up from the case study:

“The date is October 2008, “Sara [Haran] is the Executive Vice President of Business Units for Phoenician Phoods of America, Inc. Phoenician Phoods (PPA) [is] the fourth largest Ready-To-Eat (RTE) cereal manufacturer in the U.S.A. In the past 24 months, PPA’s major competitors had rolled out multiple initiatives to either increase prices or reduce their package sizes. PPA had seen [its] gross margins sink, even as they were losing the battle for shelf space to [its] better funded competitors. Revenues were in decline. Kellogg’s reduced the size of 1/3 of [its] line-up of cereals in early 2007. General Mills had revamped nearly its entire product package line in a “Right Size, Right Price” roll out in June 2007. PPA was have great difficulty in keeping [its] 10% market share, due to inroads by [its] competitors in the all-important $2 to $4 price range. PPA had taken the strategy of increasing prices as costs increased, and even then [its] price per ounce was better than [its] chief competitors. But, as [its] retail prices exceeded $4 per package, [its] market share plunged by 1.3% in 2007. The trend continued into 2008, decreasing another 1%.”

It should be noted that the reported activities of Kellogg’s and General Mills actually did occur. The case study authors also factually report that “research indicates that cereal size influences the profitability of SKUs (Stock Keeping Units — products with unique UPC codes) in the category, even when controlling for facings, price per ounce, and price per box.” They continue:

“Products that are ‘A’ and ‘B’ SKUs in rate of sales seem to benefit from larger case sizes, while ‘C’ and ‘D’ SKUs benefit from smaller case packs. This appears correlated to a reduction in out-of-stocks, due to the case size more closely matching the required rate of replenishment. Benefits include a reduction in labor requirements from reduced trips to the back room. These are the core supply chain management issues: choice of case pack size to match product sales velocity affects product availability and lowers costs due to inventory, transportation, packaging, and labor.”

Those were the challenges and facts being confronted the fictitious Ms. Haran. In his post, Banker notes that “a more profitable SKU is more apt to keep its facings and stay on the shelf.” He continues:

“But this is a ‘nested-doll’ problem. Dry cereal is a light product that sells at a good velocity. So, most of the shipments will likely be full truckload. The trucks will cube out before they weigh out. The size of the package and the number of products in a case affects the case dimensions. The pallet used will be one that conforms to Grocery Manufacturing Association guidelines (40 inches wide by 48 inches long by 50 inches high) to allow for efficient truck loading and reduced transportation spend. The packages should be sized so that the cases stack in a way that meets these pallet guidelines. The packaging and palletizing and wrapping should allow these pallets to be stacked two high without crushing the goods on the bottom pallet. There is a ‘product swell’ tradeoff that can be made to help with this nesting problem. In order to conform to government requirements, the boxes when sealed must have not less than 80 percent of the package contents be product. A box size that helps you build to the right pallet dimensions may have to make use of ‘product swell’ – add extra cereal to each box – to be in compliance.”

Banker notes that there is a “Catch-22” to all of this. “A product in a new package is a new SKU. A retailer is unlikely to give a consumer goods (CG) company more shelf space. So, introducing new SKUs means retiring old ones. Planning and executing for a product’s end of life is something many CG companies struggle to do well.” He concludes:

“The core supply chain management issues involve choosing the right product, case, and pallet sizes in a manner that will help increase product sales while lowering inventory, transportation, and packaging costs. As you can see, there are many complex tradeoffs.”

Let’s take a quick look at the SKU challenge noted by Banker. According to Nikhil Balkudi, the “biggest challenge faced in supply chain management is [the] explosion of number of SKUs. It is very common scene that total number of SKUs are 50 to 100 times the number of ‘Real’ product offerings.” [“How to Control Proliferation of SKUs?,” Supply Chain Management, 13 August 2010]. Balkudi continues:

“There are many reasons for which multiple SKUs are created from same ‘real’ Product. Some of them are listed below.

1) Customer Segmentation – Some customer[s] can buy in big size[s] but others do not have paying capacity so they buy in small[er] quantit[ies] so business[es] create different SKUs to cater to each of these customer segment[s].

2) Consumer Behavior – Irrespective of paying capacity in some markets customers have [an] inbuilt tendency to buy in bigger or smaller sizes. Depending on that for [the] same product in different markets we need different size SKUs.

3) Seasonal Consumption – [The] same product can be consumed differently depending on time of the year. Winter products will have [a] smaller demand during summer. Accordingly, you need different SKUs to tackle different seasonal requirements.

4) Legal Requirement – In some territor[ies] there [is] … mandatory information that need[s] to be printed on Labels. Hence, [the] Label has to be customized depending on [the] market — which lead[s] to multiple SKUs for same product even for same size.

5) Marketing Campaigns – Packaging is called 5th P of marketing. To catch the eye of … customers in [a] crowded market place, packaging is changed often creating new SKUs.

6) Logistics Considerations – Packaging that works in one geograph[ical] context does not necessarily fit with logistics practices in some other geography. This warrants creation of additional SKUs to suit [the] logistics scenario in each of the geographies [where the] product is sold.

“We can keep adding reasons to above list but bottom line is simple — supply chain management is getting complicated because of [the] explosion of SKUs. It is very common that [the] core number of product offerings of the company is 50 to 70 products whereas [the] total number of SKUs are between 5000 to 7000. Another dimension of the problem is [the] number of storage locations in distribution network. If company has 100 distribution warehouses then effectively supply chain management has to deal with 700,000 SKU-Location combinations. Imagine the amount of Planning and Execution effort spent in ensuring that each of these SKUs reach at the right place at the right time.”

Balkudi notes that the SKU challenge is faced in a number of economic sectors from consumer goods, to pharmaceuticals, to chemicals. He concludes:

“Proliferation of ‘Unwanted’ SKUs, in my opinion, is the source of biggest waste in Planning activity. My rough thumb rule estimate is that 20-30% of total SKUs are unwanted and created without proper thought. So effectively speaking 20% to 30% of effort in planning activity is a waste. I [offer the] following thought process [as] one … way to control SKU [proliferation]. Perform SWOT analysis for your core product offerings. Surely there must be some products which are real champions. Customers simply crave for these products. Every company has such block buster’s. [The] SKU strategy followed hardly matter[s] in [the] case of these products. Customers will ‘Pull’ these products out of your supply chain in whatever size, shape or packaging they are available. In fact, if the products are extremely good and low quantity [and] SKUs are not available, then [a] couple of customers can combine also to buy a bigger size. In one of my assignments with Crop Protection company, some of their products offerings were so good that [a] few farmers use[d] to combine to buy [a] bigger size package if [a] smaller one [was] not available in the market place. You can surely reduce number of SKUs for these champion products without affecting sales revenue. On the other hand if product is facing stiff competition in marketplace because it is ‘Me Too’ type, then you need battery of SKUs to tackle competition.”

There is an excellent discussion concerning packaging found on Wikipedia. The entry notes that “packaging is the science, art and technology of enclosing or protecting products for distribution, storage, sale, and use. Packaging also refers to the process of design, evaluation, and production of packages. Packaging can be described as a coordinated system of preparing goods for transport, warehousing, logistics, sale, and end use. Packaging contains, protects, preserves, transports, informs, and sells.” The entry also succinctly lists the purposes of packaging and labeling:

 

  • Physical protection – The objects enclosed in the package may require protection from, among other things, mechanical shock, vibration, electrostatic discharge, compression, temperature, etc.
  • Barrier protection – A barrier from oxygen, water vapor, dust, etc., is often required. Permeation is a critical factor in design. Some packages contain desiccants or Oxygen absorbers to help extend shelf life. Modified atmospheres or controlled atmospheres are also maintained in some food packages. Keeping the contents clean, fresh, sterile and safe for the intended shelf life is a primary function.
  • Containment or agglomeration – Small objects are typically grouped together in one package for reasons of efficiency. For example, a single box of 1000 pencils requires less physical handling than 1000 single pencils. Liquids, powders, and granular materials need containment.
  • Information transmission – Packages and labels communicate how to use, transport, recycle, or dispose of the package or product. With pharmaceuticals, food, medical, and chemical products, some types of information are required by governments. Some packages and labels also are used for track and trace purposes.
  • Marketing – The packaging and labels can be used by marketers to encourage potential buyers to purchase the product. Package graphic design and physical design have been important and constantly evolving phenomenon for several decades. Marketing communications and graphic design are applied to the surface of the package and (in many cases) the point of sale display.
  • Security – Packaging can play an important role in reducing the security risks of shipment. Packages can be made with improved tamper resistance to deter tampering and also can have tamper-evident features to help indicate tampering. Packages can be engineered to help reduce the risks of package pilferage. Some package constructions are more resistant to pilferage and some have pilfer indicating seals. Packages may include authentication seals and use security printing to help indicate that the package and contents are not counterfeit. Packages also can include anti-theft devices, such as dye-packs, RFID tags, or electronic article surveillance tags that can be activated or detected by devices at exit points and require specialized tools to deactivate. Using packaging in this way is a means of loss prevention.
  • Convenience – Packages can have features that add convenience in distribution, handling, stacking, display, sale, opening, reclosing, use, dispensing, and reuse.
  • Portion control – Single serving or single dosage packaging has a precise amount of contents to control usage. Bulk commodities (such as salt) can be divided into packages that are a more suitable size for individual households. It is also aids the control of inventory: selling sealed one-liter-bottles of milk, rather than having people bring their own bottles to fill themselves.

 

From the time that humans first started gathering berries, they have been constructing packages. They may not have put as much thought into the first rudimentary packages (such as reed baskets) as we do into packaging today’s products, but packaging has nonetheless played an important role in humanity’s progress and that’s not going to change. Product packaging is going to continue to play an important, if complex, role that affects almost every division of a company from production to sales.