Determining If Reusable Packaging Makes Cents
By Chaille Brindley
Date Posted: 10/26/2006
Despite all the rhetoric, most packaging decisions are made based upon dollars and cents not the philosophical merits of any one approach. No matter how many benefits one type of packaging may have over another, if it breaks the bank, most companies will stay clear. This article covers the real world numbers behind the cost justification of a reusable program. From cost comparison to developing a winning proposal, these keys can make the difference in the boardroom.
The thought of instituting a reusable packaging program sounds very foreign to most corporate bean counters. They do not realize the real savings a company can experience if it will institute the discipline needed to protect the packaging asset.
Many experts believe that a reusable system can result in considerable savings over expendable packaging in appropriate applications – as much as 15 to 20% or more over present packaging costs. Optimizing transport packaging can be a solid cost cutting opportunity for companies. For many companies, packaging is below the radar screen, in spite of the fact that a well designed and implemented program can often yield millions of dollars in system-wide savings.
IDENTIFY WIN-WIN SITUATIONS
Let’s face it. Not every situation lends itself to reusable packaging. A sophisticated supply chain with multiple parties and numerous stops can create a logistical nightmare when it comes to getting a pallet or container back. Turn rates can impact the financial viability of returnables. The financial ramifications of four turns per year compared to two can make a staggering difference. It is important to begin with your best candidates. Look for products that turn over quickly versus sitting idle in inventory for 6 months or longer.
The key difference in cost between one trip packaging and returnables is the cost of expendable packaging versus the return freight and logistics. The shorter the return distance, the greater the savings for a reusable. The best candidates are those traveling a short distance, with limited shipping and collection points. Where a regular carrier handles the delivery and pickup, so much the better.
Others disagree, pointing to the lack of return discipline even at a single company. The intangibles, especially loss and damage rates, strongly impact the financial picture of a returnables program. Companies with sloppy reverse logistics or asset retentions practices frequently destroy or misplace the asset. But if a company can instill the importance of treating returnable packaging as an asset, it can save big bucks. Some experts cite shrink (loss/destruction) rates range from .5 to 2% per year in a controlled environment. Loss rates can be much greater in an open supply chain such as the retail grocery industry. Some grocery companies have reported 10% shrink rates for their DC to retail plastic pallet applications. Some dairies report loss rates 3 times higher or more.
The number of players, the shipping distances, the relationship between the companies, the attractiveness of the packaging — all these factors affect the shrink rate. Loss also depends on how much control a company has over its suppliers. If you are a key business partner, then the supplier will probably lose fewer of your containers. If you are a minor customer, the supplier may not care as much, and may ship your pallets to someone else. The key is to contact suppliers and have retrieval procedures agreed to by all parties. Some companies may even include retrieval guidelines in contracts.
FINANCIAL MODELS
Two cost models (ABC and XYZ) are utilized in this article For a large project, you will need detailed financial records because senior management will be involved. Executives are primarily interested in return on investment — the amount of money a company will save by switching to a reusable system. Net present value is the preferred approach to measuring true savings because it takes the time value of money into consideration.
But be aware that different companies request different financial models/formats. The recommended approach is to use whatever justification model your company employs to budget capital dollars for new tooling or investments. Provide the model that your company’s financial people expect to see.
There are several key variables when it comes to counting the cost/benefits of a returnable system. The base is the cycle time or float — the amount of packaging required to adequately supply the project. Shipping distances, container usage and number of stops largely determine the float. Long distances do not necessarily mean a reusable program is not a viable option. For example, Menasha Services has setup programs for companies in
Border issues can impact the float. If a company is shipping in and out of
Typically, returnable packaging will last five to seven years without having to be replaced as long as it is handled properly, although some reusable packaging have been in use for more than ten years.
The ABC model calculates the float by adding the five critical points in a supply chain — days at a depot, time in transit to the customer, the days in use, time spent on a customer’s dock awaiting collection and the days in transit to the depot. In this example, the number of days in use by the customer is a bit high. The total cycle time is multiplied times the containers required per day to calculate the float.
CLOSER LOOK—THE ABC MODEL
The ABC model is loosely based on a real life situation where a granulated product is shipped in a closed loop. A third party management company acquires the containers and leases them to the user. The user did not buy the packaging outright because it did not want to pay the entire packaging cost upfront. The calculations compare the costs of the old system using cardboard gaylords on wood pallets versus plastic containers. A third party is retained to manage the packaging fleet. Not all of the loads are shipped on returnable packaging because some destinations receive such a small number of containers that retrieval becomes cost prohibitive. These shipments are sent on expendable packaging.
The bottom line — the reusable system saves more than $460,000 in hard costs. Reusable containers cost $16.31 per trip versus $24 for expendable packaging. The formula factors in the following costs: container management, rental, retrieval, return freight, cleaning, repair, third party profit, miscellaneous expenses and losses. For a detailed look, please see charts A, B, C, D, E, and F.
CLOSER LOOK — THE XYZ MODEL
The XYZ model presents an executive summary, not all the detail behind the data. The project NPV is spotlighted at the top. This is the expected case scenario. This particular consultant prepares three different scenarios — worst case, best case and expected situation. By switching to reusable packaging, the company will save an estimated $1,267,543 in five years. Estimated inventory turns is six per year, and the project runs for ten years.
SOFT COSTS/BENEFITS
There are many unknown factors that can impact the viability of a reusable system. Optimizing the space in the container can increase the number of units in each load. Over time, a few extra units here and there can make a difference. Interestingly, expendable packaging typically can hold more parts per cubic inch than reusables. Features that make a returnable strong enough to survive several years of use takes away from the overall space utilization of the pack.
Ergonomics remains a big issue for many companies. Depending on who you talk to, both expendable and returnable options offer various ergonomic advantages. Usually per part the expendable will be a little lighter because cardboard boxes weigh less than plastic totes. But a disadvantage of expendable packaging is that a lot of employees open up cardboard boxes with utility knives. Knives are major safety hazard that can increase the number of injuries and possibly even insurance premiums. Handles and hand holds, which make it easier to lift loads, come standard on most reusable packaging.
Slivers and exposed nails on wooden pallets can cause a snag in automated systems. Also, these can be a danger to workers due to these hazards. Plastic packaging is produced from molds, which lead to greater consistency, whereas two wood pallets may differ significantly in weight and measurements. Other factors include the warehouse and truck space savings offered by nestable or collapsible packaging.
DO THE MATH!
Are you looking for a place to save money and make the product transportation process more efficient? Take a look at your company’s transport packaging. Consider the benefits and disadvantages of both expendable and returnable options. Run the numbers and test the outcome in the real world. You may be surprised what you find.
