The Packager's Dilemma and the Value of Differentiation
How much differentiation and innovation can you really add to a cardboard box and a few ounces of Styrofoam peanuts? This existential question makes up the foundation of the packager's dilemma. Their product is often seen by customers as an easily replaceable commodity. When cost of raw materials increases, the packager must either absorb those costs and decrease margins, or lose the CPG customer to a competitor.
According to a market report by Smithers Pira (smitherspira.com), by the year 2022, the value for packaging services will reach $50 billion, seeing a compound annual growth rate of 9.5 percent. But this lively market still relies on traditional materials. Every CPG manufacturer needs packaging – but for the packager, success and growth will be increasingly dependent on being able to combat the perception of their product and the entire packaging industry as a commodity market.
Packagers can succeed and make their products indispensable by adding value on both sides of the supply chain – and "uncommoditizing" the product with a total value approach to supply chain and operations.
Five Steps to Packaging Differentiation
The packager's goal is to make CPG manufacturers say, "I want your packaging, and nobody else's." That is challenging when the product is seen as little more than a cardboard container — but with a total value approach, manufacturers will see the packaging product as having additional value. Five steps will transform the product offering, improve its perception by customers, and "uncommoditize" the packaging product and service.
Step one: Speed up the process. For CPG manufacturers, speed is everything. Speed to market allows them to better capture initial market share, create a longer sales life cycle and boost profitability. When the packager is seen as a partner in the process, capable of contributing to that goal of fast response and speed to market, we begin to see differentiation on the part of the packager — and the CPG customer will be more willing to have a conversation about paying some of the packager's increased costs of materials and production. Providing that speed means the packager goes from merely providing a commodity product, to providing a valuable service that contributes to the customer's speed to market and increases their bottom line.
Step two: Innovate. The next generation of products includes smart packaging and other innovations, contributing even more to the packager's perception of value. Environmentally friendly packaging has become especially important to today's consumers, and packaging that improves shelf life, monitors freshness, displays quality information, increases safety or improves convenience are all innovations which "uncommoditize" the product and increase value. Digitization innovations are also an in-demand innovation, with tools such as barcodes, image recognition, QR codes or NFC/RFID tags, particularly with the Internet of Things being used to improve warehouse efficiency.
Step three: Be flexible. Continuous improvement in manufacturability will help meet customer demands and open up new markets, especially in offering flexible Minimum Order Quantities (MOQs). Producers of goods are opening the door to mass customization, which has been enabled with innovations like IoT, production improvements and better operations management. Packagers need to match this trend with the same level of customization in packaging. A large MOQ works contrary to that goal — and working more collaboratively towards a flexible ordering policy will help the packager open up new markets. A Zero MOQ policy is realistically possible, especially with innovations in digital printing and continuous improvement in packaging manufacturability.
Step four: Implement strategic sourcing. A packager's own supply chain is a competitive weapon. When approaching it transparently and openly, customers will see the value, and be more willing to take on a price increase if they are able to see that the packaging supplier is doing everything possible to keep costs in check. Strategic procurement practices are critical to any supply chain, and are especially important when attempting to de-commoditize a product and create a perception of value. As packaging innovation increases with new offerings, best-in-class sourcing must reflect those needs — and a deep level of visibility will help show the value stream and benefits available to the CPG customer.
Step five: Profile your customers. What are the true costs of serving the customer, when looked at in a more granular fashion? Not all customers are equal — some cost more to serve than others. Achieving visibility into these true costs will help the packager differentiate "A" customers from "D" customers, understand the real margin perspective and service accordingly. A packager cannot be all things to all people, but instead, must deliver the greatest value at the lowest cost to business. Understanding the cost-to-serve of each packaging customer is key to understanding how those innovative strategies are paying off.
Transformation from Commodity to Value
Packaging companies must understand the inbound forces that affect their own value chain, while also working toward differentiating and adding value to the products and services they offer. Both packagers and suppliers must be more proactive to be able to survive in the digital age. Innovation is essential, and packagers will need to continuously re-evaluate their offerings, understand what innovations customers are looking for and meet those demands head-on.