Why box buyers should index packaging costs
Market dynamics every packaging procurement professional should consider when negotiating price
Your supplier’s profit margins can largely dictate your price. Looking inside the packaging market to understand mill production costs, transportation costs and exchange rates will help you gauge price fluctuations and anticipate them in the future.
In this new era, what leverage do you have to minimize packaging costs when your suppliers accurately tell you it’s a low margin business? Look further back up the supply chain and model your cost scenarios.
Three things to know about box costs
- The largest, and most variable cost, is in the paperboard material used to make boxes
- Not all paperboard material is made using the same process, or fiber input
- Knowing key differences and vocabulary can improve your box supplier negotiations
Let’s walk through an example
Your packaging design team has engineered a shipping box that meets functional and brand requirements. They pass specifications to procurement so a packaging commodity manager can find suppliers and negotiate a sourcing contract.
But since your last negotiation a few things have developed:
- The first wave of more eco-conscious consumers have inspired switches from plastic packaging, and placed pressure on brands to reduce over-packaging.
- As the movement evolved, brands have seized the opportunities to offer paper packaging that is not only highly recyclable, but also boasts a sustainability “stamp” signaling that it is made from post-consumer waste – as known as recycled fiber.
- Enter the rise of “brown paper” as a solution. Natural kraft packaging which includes virgin woodfiber, has a greater sustainability connotation because the aesthetics of bleaching have been eliminated from the process.
- Meanwhile, the increased pressure on near-immediate delivery triggers technology advances in paper making to offer paperboard of similar strength, but lower weight. This is called ‘lightweighting’.
Influence your brand’s design and sourcing choices
A buyer could put out for an RFP for a corrugated shipping box defined by strength needed to protect contents (ECT tends to be the standard). It is also possible a buyer specifies a box made from at least 60% or up to 100% recycled materials. However, few buyers specify those details. Presently, it is more likely that a supplier might suggest or highlight benefits of lightweight paperboard material if at all.
Without industry-specific knowledge of the paper packaging markets and players, a buyer could easily not only pay more out of the gate per box sourced – they could also end up agreeing to costly price adjustment terms.
Sure, a buyer needs to discuss with their box supplier MOQ, delivery schedule, lead time. They’ll also become familiar with costs associated with its supplier’s menu of value-add operations as it converts rolls of paperboard into your branded box.
But asking informed questions about supply chain steps upstream, at the paperboard mill level, is where a buyer can achieve tangible savings over time, perhaps even contributing to design decisions earlier in the process to best illuminate brand values and control costs.
Ask yourself and other stakeholders at your company:
- What raw materials were used to make my box?
- What is the supply/demand balance for those raw materials at the moment? How might this balance be impacted?
- Besides raw materials, what other considerations could be impacting my price? Has my supplier’s energy costs gone up but their raw material costs have gone down?
- Can I identify if my supplier is a recycled mill or integrated mill? What costs do they carry?
Identify trends and take note of historical price
Analyzing historical trends within the grade can reveal clues about future prices. You can use these insights to negotiate, plan and report more efficiently. Naturally, looking at the highs and lows will give you an idea of price range, and noting the duration of the cycle will give you an idea of the volatility. Knowing what stage of the cycle you are in will help you determine if and when your price might change.
Now look at that history in context and consider:
- Average costs
- Export prices
- Large-scale events
Better data means better negotiations
Understanding market dynamics is quickly becoming essential for any brand buying boxes whether to mitigate risk or create strategic advantage.
Brands who buy boxes that can understand and anticipate the impact of market and price signals will be advantaged in a rapidly growing and competitive market.
Get a clearer view of key price and cost changes that could impact your box price and bottom line. Click here to access three free index models, powered by Fastmarkets Index Builder.