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Thursday, August 14, 2008


Impact of margin compression on the packaging industry

As access to pricing information becomes more readily available to packaging material buyers, suppliers will need to rethink some of their strategies and embrace business models that are based on much more than price alone.

The packaging industry remains one of the few privileged industries since customization is still widely popular. Manufacturers of both industrial and consumer goods may have almost indistinguishable products, but they still make their best efforts to use unique packaging.

The obvious advantage to packaging material manufacturers is that, despite the underlying raw materials being essentially commodities, they can still differentiate their products and obtain premium pricing. This differentiation has been the major driver for pricing patterns, and consequently, margins.

Information access
The second dimension of pricing is not talked about openly very often. The price that a supplier quotes for its products is also largely dictated by the amount of information that its customer can access about competitive products, number of suppliers, supply situation and pricing levels. Over the next few years, this will likely change dramatically. The business environment will see radical changes and competition will intensify as efficient access to information will be more widely available.

Whether buyers purchase a million pounds or a thousand pounds, they will have almost equal access to information. Pricing will become increasingly transparent in contrast to traditional practice in which price was top-secret. Buyers already find it easier and cheaper to obtain comprehensive information about a supplier, its products, inventory levels and its pricing relative to every one of its competitors. As a result, suppliers will find that the power they derived from information gaps in the past will disappear, to the point that pricing will no longer be their prerogative.

In fact, low price will no longer be a privilege available to large-volume customers but will be a prerequisite for being a player in the broader marketplace. Once the first low-cost supplier publishes its prices, the competitors will have to follow, and prices will stabilize at a point that will be set by the most efficient manufacturer.

The third dimension to margin compression is the emergence of online marketplaces that are based on maximizing purchasing efficiencies through encouraging real-time price-based competition among suppliers and making the purchasing process more efficient by use of information technology. Such marketplaces have only a limited role to play in the packaging industry at this time but will very soon become fairly dominant.

Strategies to meet these challenges
In this new business environment, several new businesses will emerge, and small companies will be able to thrive by serving niches. Manufacturers of consumer goods and other specialized products will continue to work closely with their packaging suppliers to create unique, proprietary package designs.

Improvements in information flow will still drive packaging industry growth, but there will be market share shifts as those companies that embrace business models for the new market realities will emerge as the winners while the laggards will struggle trying to compete on price alone.

In this environment, companies will have to do a lot more than just managing their costs and embracing sophisticated customer relationship management programs. Here are some ways that companies can succeed going forward:

All packaging companies have unique market and technology situations, but the impact of margin compression will be most pronounced on suppliers of such products as corrugated boxes, wood-based packages and basic substrates like films and paper. Now is a good time to rethink your pricing and customer relationship strategies.

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Outsourcing to mid size companies

Obviously the large companies are most interested in outsourcing and offshoring and can get a much higher rate of return on their investment. They understand the concept, have some experience with it, and are actively looking to reduce costs almost all the time.

But what about mid-size and even small size companies?

They are total opposites of the large corporations. Don't know, don't get it, and have no clue how to go about it.

Here is a document that provides some thoughts on what can be done to target these companies and how to go about it.

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