Integrate Contract Packaging Into Distribution Operations to Cut Costs by 30%
Specific consumer products look exactly the same when they roll off the manufacturing line. To satisfy retailer requirements, however, these identical products are wrapped, sealed, tied and packed in dozens, even hundreds, of different ways for presentation on the retail shelf. Consumer packaged goods (CPG) companies often outsource final packaging to outside contract packagers, adding a costly and time-consuming step between manufacturing and the distribution center.
CPG companies can streamline their supply chains by integrating final packaging into existing distribution operations and entrusting the function to the third-party logistics (3PL) professionals who manage warehousing and transportation. Doing so can reduce combined distribution, packaging and transportation costs by 30%, and can cut at least 7 days in order-to-delivery cycle time.
Let’s be clear. Contract packagers are good at what they do. The need for a new model is not driven by a flawed packaging capability; it’s driven by a flawed, unnecessarily long process for customizing products. Performing final packaging at the distribution center achieves the following benefits:
- Lower freight costs. When products ship out to a contract packager and then back to the DC for final distribution, the extra runs add 38% to freight distribution costs.
- Lower inventory carrying costs. Use of an outside contract packager adds about 7 days to the distribution cycle and loses visibility to product, creating uncertainty about the amount of product available for sale. Manufacturers deal with this uncertainty by adding inventory.
- Reduced labor and equipment. Combined packaging/distribution operations allow for labor and rolling stock to be deployed where it’s most needed in the facility.
Beyond cost savings, the most powerful benefit of an “in DC” packaging operation may be an enhanced capability for late-stage product customization. Mass retailers are the power brokers in today’s retail supply chains. They want what they want, when and how they want it. A more flexible solution for final product configuration gives brand managers the freedom to change packaging formats with great agility, to reflect the retailers’ merchandising strategies.
Here’s an example. Let’s say a cleaning product manufacturer has an idea for a multi-product “Spring Clean-Up” bucket. Walmart likes the idea and requests 100,000 buckets for a pilot program that it wants to kick off in four weeks. A flexible, fast solution for product packaging and distribution enables the manufacturer’s sales team to book the order with confidence rather than bargain for more time to design and create the kits. That’s a powerful competitive advantage.
Implementing a combined packaging/distribution strategy requires contract packaging to be handled within a 3PL-operated distribution center. Are 3PLs ready to take on contract packaging? Some are. Some aren’t. Moving a complex contract packaging operation to a distribution center is a big shift, from a “ship it” to a “make it” operating environment. This new environment requires:
- A rigorous quality control process to manage the greater risk of a packaging environment. The financial downside of a missed shipment is minor compared to an improperly packaged product for a large retailer order, which could result in chargeback fines or even recalls.
- Experienced packaging engineers to design the packaging process and specify equipment.
- Strict processes and KPI measurement tools to monitor and measure outside labor.
Some logistics providers have made this shift and, because of that, integration of final packaging into distribution operations has become a compelling proposition.
America’s largest CPG companies have been quick to recognize the potential of the strategy to streamline their supply chains. Kimberly-Clark, for instance, has consolidated contract packaging and distribution operations into ten 3PL-operated mega-centers throughout the U.S. and Canada. It’s only a matter of time before manufacturers of all sizes recognize integrated packaging and distribution as an opportunity to get products to market faster with greater flexibility and at a lower cost.