SOLUTIONS FOR:
Leadership
THE TRUE COST OF OWNERSHIP
The corrugated industry has managed an interesting trick. Corrugated manufacturers know that owning boxes is a losing proposition. They are low value items that consume a lot of square footage. So corrugated manufacturers do not want it. They want to get it off the floor.
On the other hand, they also want to setup their machines and run them all day long. Long runs with fewer setups means better margins per box. The value proposition to the corrugated buyer is “the more you buy, the lower the price”.
Combine that proposition with a tendency to increase lead times and add in a habit of missing due dates, and you compel your customers to buy larger quantities of boxes and store them. That is the only way they feel safe.
That makes sense to a buyer. Because a buyer knows that running out of boxers is a very visible catastrophe. When a company can’t ship products, everyone knows it. Whereas a little too much inventory is a less visible problem.
But therein lies the problem. The buyer’s incentives are not aligned with driving profitability, because they are unaware that there is an alternative. Space is money. Every square foot of a manufacturing or fulfillment operation generates a certain contribution to the bottom line. Good leaders understand that the total revenue generated by the facility, less the cost of operating the facility can be calculated into a contribution per square foot value.
Revenue – operating cost = contribution divided by square feet of the facility.
Each square foot has a real cost, whether rented or owned. Every square foot of your facility that is not driving contribution is costing you money.
At Tavens we think about this problem, and we have developed an alternative for buyers of corrugated that ensures they have the boxes they need without storing them.
Corrugated boxes take up a lot of space and are a negative contributor.
Purchasing corrugated packaging can often be a very frustrating proposition. It is a critical item that does not cost much but has massive implications when it is not available. It is a customized product, but ubiquitous. It consumes a massive amount of real estate but has a very low intrinsic value. It can have relatively long lead times, is often late, frequently mis-manufactured and occasionally unavailable at a critical moment.
There is reason corrugated packaging suffers these issues. Corrugated packaging is cheap. It is sold cheaply. The margins are paper thin (no pun intended) and most corrugated producers focus on driving down costs by improving efficiency, throughput, speed and volume of production.
Consequently, they have built businesses that are focused on productivity rather than building out the necessary and expensive infrastructure to meet real customer needs. It is a tradeoff. No company has infinite resources, so choices must be made. The corrugated industry has focused on reducing cost, through integration, consolidation and increased productivity. They have not focused on the customer experience.
This model is appropriate to the largest consumers of corrugated packaging. These companies work to commoditize their products and processes to drive down costs and acquire market share. For these very large manufacturers of standardized products the current corrugated industry is a very good partner.
But for other companies, fast moving, innovative, specialized, high value manufacturers seeking to provide a unique solution for a specific market, the current corrugated industry is a terrible partner. The economic model is driven by minimum order quantities and large volume. Specialty packaging is often hard to create, implement, produce and get quickly.
The corrugated buyer for these companies has to sit on a lot of corrugated inventory for a very long time, consuming space (it's incredibly bulky) and consuming money. But it is incredibly necessary, because without the appropriate packaging these companies cannot ship the products their customers want.