Containerboard prices in the United States have remained relatively unchanged since April 2010, which, according to RISI, represents one of the longest periods of price stability in this market since 1970. Most analysts in the paper industry expect a continuation of stable prices early in 2012. Downward pressure will likely occur in the first quarter due to weakening export demand in the US, which will drive an overall decline in recycled containerboard prices. In addition, as the spread between published price/ton and transacted price/ton approaches $100, the pressure for an industry-wide price decrease will increase in 2012. These trends are not likely to be offset by any significant increases in domestic demand during 2012, which would counteract the downward pricing pressure.
So, in a flat to declining containerboard market, how does a company actively manage and significantly decrease corrugated packaging costs? We believe there are three key activities a company should undertake to actively manage cost reduction in this area, and take advantage of over 1,800 corrugated packaging manufacturing facilities in the United States.
Understand and simplify requirements. Many companies develop packaging solutions over a long period of time, but rarely step back and take an objective view of the true current requirements. We have found with many of our clients that SKU rationalization is a real opportunity to eliminate and combine certain boxes. In addition, value engineering is usually another excellent opportunity that can eliminate 10-15% of box costs. For example, changing the raw material combinations of liner, flute and medium can maintain box strength with lower paper requirements. You can also swap the width, length and depth dimensions. The objective is to keep the cube size of the box unchanged, but use less paper in the manufacturing process. Depending on the original box specifications, a change like this can reduce paper costs 10-20%. If the buyer can help the box plant achieve longer, more uniform runs with SKU consolidation, and develop highly predicable requirements to increase manufacturing efficiencies, then the box plant will be able to pass along efficiencies in the form of cost reductions.
Know the industry asset base. Each box manufacturer has certain strengths, which drive efficiencies. For example, one manufacturer may be very effective at smaller runs, with high SKU counts, warehousing and kitting services. Another plant may be vertically integrated, part of a super-regional company, run in excess of 100 million square feet per month and highly efficient at larger orders. If most of your requirements are large runs and uniform boxes sizes, then using a small independent sheet plant will be a mismatch on service and cost. In addition, understanding current and projected plant capacity will play a major role in selecting the manufacturer with the lowest total delivered cost. Although demand will move up and down depending on economic conditions, the box plant looking for incremental volume to maintain operating efficiencies will be the most competitive on price. The challenge is finding this information in a cost-effective manner, since plant managers are generally reluctant to share current and projected capacity.
Develop target costs. Once you have simplified your product requirements and identified the box manufacturers with the best capabilities for your needs, the key to negotiating lowest total costs is development of a should-cost model. According to Bill Jones, Managing Director Mustang Innovation, the most efficient plants have the highest ratio of paper costs to total costs. So, you will need to understand the total paper weight per 1000 boxes and the total cost using the most recent linerboard index from Pulp & Paper Week or the Official Board Markets yellow sheet. There are other key factors in determining the final delivered should-cost for boxes, and include flute type, edge crush test, prices based on thousand square foot volume brackets, box style (die-cut, RSC, half-slotted container, etc.), print coverage, set-up, warehousing, kitting and delivery frequency. Once the should-cost target is established, you can use the information as a starting point in negotiations. However, even though you have a should-cost target, you will need to understand your prospective manufacturer also has a price target. Ultimately success will be determined by closing the gap between the two numbers and reaching agreement on a mutually beneficial deal.
For companies purchasing corrugated packaging, the good news is that you should see flat to slightly decreasing paper costs in 2012. However, if you have not critically evaluated the total cost of boxes in your organization in the last couple years, take a deeper dive to mine some additional savings. Expectations should be set at the 10-20% savings range.