Move: Packaging Optimization - Why Less Isn't Always More

I once visited a Boston-based manufacturer of electrical components to consult with them on a packaging project. I was told to be prepared because the company president wanted to know what in the world packaging had to do with freight costs. 

That kind of disconnect isn't uncommon in manufacturing organizations. Packaging is commonly seen as a marketing responsibility by consumer products firms while industrial firms usually view packaging as an engineering exercise. And the engineer's specialty doesn't seem to matter as long as the individual has a state-issued certificate. 

On the bottom rung of the packaging ladder are firms that try to use a limited number of shipping cases on a wide variety of primary units in the mistaken belief that they are limiting complexity and saving money. In reality this kind of approach adds lots of unexpected cost in logistics segments such as warehousing and transportation so that the company's bottom line actually declines. I refer to this approach as saving nickels by spending quarters.

I have learned as a customer and practitioner of packaging optimization that whatever expense packaging comprises, warehousing cost is about three times that amount and transportation cost is six times larger. By considering these expenses in an integrated manner it is possible to drive down total costs. Unfortunately the detailed knowledge of cost drivers in transportation is relatively weak in many companies. One supply chain vice president at a $5 billion enterprise once looked at me incredulously and said, "You're kidding!" when I told him that density was the #1 factor in setting LTL [less than truckload] and small package freight rates. 

Costs by the Book

The National Motor Freight Classification book is the Bible of the LTL industry. Listed in its 700 pages are the freight descriptions and associated freight classes of thousands of products from abrasives to zippers. The LTL industry uses information in this book to establish a base for setting freight costs. What many supply chain professionals do not realize is that the NMFC book has 150 pages of packaging rules that have an impact on freight classes and associated shipping costs. Further, many educated packaging engineers have told me their universities gave them no classroom exposure to the NMFC book.  And if packaging engineers lack NMFC knowledge, how much would a marketer or engineer have?

So here is the issue: If the people making the key decisions on packaging for their employers are totally unfamiliar with NMFC packaging rules that drive freight costs, how can they possibly make cost-effective decisions about shipping cases? The reality is they can't and there is no software that can fill this knowledge gap on correlating packaging specifications to transportation expense.

Meanwhile as they develop new prices or review old ones, small package and LTL carriers are focusing more on density ratings. UPS, FedEx and even USPS began applying dimensional weight to parcel shipments in 2007. This means carriers have established a required density [weight per cubic foot]. Any package not meeting this threshold will be billed on size rather than weight. Dimensional weight has been applied to air shipments for years. 

When dimensional weight began to be applied to ground shipments in 2007, shippers took a 20% increase in freight expense due to their own inefficiency. And we now see LTL carriers routinely weighing and measuring any shipments that appear to be misstated in classification. In those situations the shipper will be assessed a re-weighing charge, the higher freight cost of the increased freight class, and will often see an across-the-board reduction in their discount level too. 

Products having multiple freight classes based on density include paper, candles, candy, hoses and headlights. Paper has one of the broadest class ranges, going from 60 to 400 [the higher the class number the higher the shipping cost per pound]. So if the product is packaged more efficiently the freight class and shipping cost can be lowered. While it is unlikely that a packaging improvement can reduce freight class from 400 to 60, we do have one client that saw its headlights go from class 250 to 150 after we optimized their packaging to improve density. This change in freight class delivered a 40% reduction in shipping costs. No matter how adept a negotiator is, I don't believe a 40% reduction in cost is possible without an underlying improvement in efficiency.

The Right Number of Box Sizes

E-commerce shipments are growing by leaps and bounds around the globe. The latest statistics show both Germany and U.K. reporting almost 15% of retail sales in this channel – but the related packaging efficiency is abysmal; our consulting work and verification from a major packaging supplier show the typical e-commerce shipper is getting 60% cube utilization. This means they are shipping 40% filler and air, which is costly in both freight expense and environmental impact. 

The nub of the issue is that a large e-commerce company will have 15,000 products available for sale. But because buyers will purchase varying mixes of items, the outbound shipments will comprise over one million unique combinations of weight and cube which drive freight cost. So the question that all shippers must address is, "How many shipping cases do we need to optimize over one million different shipments?"

The usual answer is six. There is no analysis behind this conclusion, it is merely a guess. And I have yet to find a company where the optimal solution is six. Since everyone understands that one box is too few and one million too many, why six is the most widely selected solution is a mystery to me. But merely adding additional boxes isn't the solution either. The right number and sizes of shipping cases can be determined only with detailed analysis. This is a mathematical problem, not a packaging problem.

The discouraging part of optimal packaging selection is that so many companies think of it as an intelligence contest, assuming that because they have smart employees they can figure out the optimal solution with spreadsheets and brute force. Here is an example of that thought process in action:

One of my colleagues visited an e-commerce shipper where he discussed our analytical approach backed by proprietary software. The senior vice president felt his company could generate the optimal solution internally because he had two packaging engineers on his staff. So he invited them to join the discussion and asked for their reaction when the presentation was finished. 

The senior packaging engineer laid out this scenario for his boss: If he could do 500 analyses per hour working 250 days per year, he could complete one million analyses per year. With the assistance of the junior packaging engineer similarly employed fulltime for a year, they could complete two million analyses in a year. He then pointed out to the senior v.p. that with the aid of software, our company was able to accomplish 800 million analyses in 90 days. The comparison is that to complete the work internally would require 400 years compared to three months using outside consulting support. 

However, when the shipping case selection is derived from computer analysis, the following list from a real project we completed is an example of what is possible:

At one logistics company we worked with, engineers who saw that the optimal solution increased total shipping cases from 16 to 19, challenged the change. Like most shippers, they were trying to use as few shipping cases as possible, in the mistaken belief that fewer is better. They arrived at this wrong conclusion without any analysis. Usually, trading down to fewer shipping cases does deliver unquantifiable minor improvement, but logistics costs increase substantially. In this particular project, the client requested a detailed analysis of the total impact of reducing shipping cases back to 16. They identified three cartons that were relatively similar in size, and replaced them with one universal carton. Here is the impact of that seemingly minor change:

Many choose to forego a thorough analysis because they think the answer is intuitive. But managers who shortcut the analytical process later wonder why their costs have increased. Others do not even realize that packaging efficiency can greatly impact freight expense. Furthermore, because shipping expense is in a different cost center from shipping cases, the cost problem never is recognized.

Save 10% in Logistics Costs

When managers understand the opportunity that exists in packaging, and approach it scientifically, the cost reduction and performance improvement is excellent. More than one client has exclaimed that they must have provided us with inaccurate data, because the cost reduction couldn't possibly be that big.

Over the past 25 years, our packaging optimization clients have averaged 10% cost reduction in their total cost of packaging, warehousing and transportation. One of them—a major consumer product manufacturer—reduced costs by $100 million through packaging optimization, once they fully recognized the relationship of packaging to logistics operations.

Jack Ampuja is president of Supply Chain Optimizers (www.supplychainoptimizers.com), a consulting firm that has done 500 packaging optimization projects over the past 25 years.