Jack Welch used to say “Costs are a Bottomless Pit.” Every time you scrape the bottom of the barrel you can get some more pennies. However, with years of shaving off costs from your products, for most companies (beyond the best performing global leaders) packaging is often the poor cousin of the main product raw materials. This leaves packaging unoptimized on cost and often also on innovation and sustainability.
First of all, we need to shift the paradigm that “I can optimize but need to pick any 2 of Better, Cheaper, Greener i.e. Innovation, Cost & Sustainability. Not all 3 together.” This needs a mindset change now. It is indeed possible to create a positive virtuous cycle of optimizing your materials – by reducing or changing the inputs and hence costs, opting for more sustainable design, and with so much innovation going on no need to lower the design and aesthetics quotient. Fasiculus has a structured 3-9-9 Methodology to optimize packaging –
This 3-9-9 Optimization Methodology represents the Mutually Exclusive Collectively Exhaustive (MECE) set of 3 levers to optimize pretty much anything are – Price X Specs X Consumption. This is the essence of Fasiculus’ methodology which can then be further implemented through 9 Strategies which are executed using 9 respective tools.
Let’s walk through some of the key levers, strategies and tools.
1. Volume/ Bundle :
Scale buying is the easiest of levers. However so many businesses and business units within them end up buying their own small quantities be it factory by factory, country by country or brand by brand. Aggregation undoubtedly increases Buyer Power yielding the first set of price advantage.
2. Intelligent Costing : Elon Musk introduced his definition of first principles in this 2013 TED Talk:“Boiling things down to their fundamental truths, and reasoning up from there.” This led him to purchasing the raw materials which cost 2% of a rocket’s price and then building versus buying rockets for SpaceX missions. Same thinking also led to designing lightweight, aerodynamically efficient, electric cars in order to offset heavy batteries. And then he built the batteries in house with a fundamental change – taking the materials needed and combining them into the shape of a battery cell leading to much cheaper batteries. This is how SpaceX cut the price of launching a rocket by a factor of 10.
P&G has this same thinking but calls it Loss Analysis and has an interesting approach. It starts with defining the absolute minimum quantity of inputs that one would need to produce that product, almost as if in space with no gravity and friction and waste, i.e. The Ideal State. It then maps where the current inputs and costs are. The difference is “The Loss”. This is followed by detailed analysis into each element which helps identify ways to reduce this gap and over time push the product closer and closer to the Ideal State.
When it comes to packaging, Fasiculus has mastered this art and science to produce Should Cost methodologies and calculators to help produce Intelligent Costing for the package in this case.
3. Standardizing the requirements helps in 2 ways mainly – helps aggregate more volume of the same type of product which in turn will allow better Volume Bundling. Also helps have better knowledge of what is being bought, lesser inventory holding as one needs to hold less net amount of stock of that requirement. It’s a given, that the trade off with Product differentiation needs to be borne in mind.
4. Innovate Upstream –
Top players innovate upstream in key Raw & Pack materials This can only be done for critical and high input value materials as it is a complex and time-consuming process. It could also be the suppliers’ supplier, e.g. the paper mill supplying the carton manufacturer. Working with the R&D teams of the supplier can pay off in bringing innovative technologies ahead of competition as well as designing the product in conjunction with the upstream material provider.
In closing, packaging cost can be tamed. Take an Intelligent Costing and first principles approach. Re-engineer along the lines of Price, Specifications and Consumption and you can be well on your way to uncovering hidden profits for your brands.
The team at Fasiculus has been doing this for years for some of the most competitive brands in the planet and will be happy to connect with you and your teams.
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