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Thursday, August 14, 2008


Branding in the packaging industry

Packaging buyers tend to stick with branded products because they’re familiar with them and they know what they are getting. Generally, most successful packaging suppliers follow a strategy based on building brands.

What comes to your mind when you think of Bubble Wrap, Tyvek, and Valeron? These are all well recognized brand names in the packaging industry that are known not for what they are made out of but for what they do. Their suppliers — Sealed Air Corp., DuPont and Valeron Strength Films (formerly Van Leer Flexibles), respectively — could completely change the underlying material of construction, but their users will continue to buy these as long as they perform the functions that the brand is associated with.

Despite this, it continues to amaze me that the number of well recognized brands in the packaging industry is still so small. Our industry has been so focused on product attributes, manufacturing capabilities and materials of construction that we have failed to build brands.

The traditional approach to marketing in our industry has been rather product-centric. The basic assumption has been that if your product is superior to competitive offerings, customers will simply rush to buy it. Secondly, it has been generally believed that the customer is technical-competent enough to disregard the marketing message and evaluate the product strictly on its attributes and performance.

Thirdly, customers have been successful in commoditizing packaging materials so that they can negotiate better prices, and suppliers have fallen into this trap by introducing products that are practically indistinguishable from competitive products (or, in other words, customers do not always like brands because they are reluctant to pay premium pricing).

But why do companies continue to buy branded products despite the availability of cheaper/better alternatives? The answer is relatively simple: because they are guaranteed a definite level of performance on a consistent basis.

Developing brand equity
To develop brand equity, packaging suppliers must consider a number of factors regarding their product(s):

Performance: While the basic concepts of brand equity in the packaging industry are the same as those for consumer products, there are a few subtle differences. While heavy advertising with creative commercials may lead to building a consumer brand, this is not enough in our industry. Remember, the customers of these products are knowledgeable enough to still evaluate a product on its merits. Thus, you have to make sure that your product is as good as other competitive products.

Innovation: Product innovation is extremely critical to buyers of packaging materials. As companies struggle with either increasing shelf-appeal or reducing damage during shipping, they look to their packaging supplier for innovative solutions. Make sure that your product development does not become stagnant. Instead, as customers’ needs change, your product must continue to operate at the cutting edge.

Addressing product problems: There are innumerable examples of how companies can destroy years of brand equity simply by poor handling of product problems. The only time when product problems do not affect brand equity is when management reacts responsibly by immediately addressing the issue. My simple recommendation is to address a product problem immediately rather than denying it or blaming others.

Features and benefits: Suppliers of high-tech products get so enamored with the properties of their products that they fail to fully advertise what the product does for the customer. While charts and tables are needed, make sure that you connect the features with the benefits. Thus, the advertising message has to strongly emphasize how the product will add value to the user.

Co-branding: Consider a co-branding campaign with your key customers. Perhaps a clearly visible logo on a bag of potato chips with the message “Packaged in [name of packaging product].” While a company like Intel can successfully market an extremely high-tech product to an average consumer, packaging companies do not establish a similar connection with the consumers when packaging might very well be the reason they buy the product.

Look at products as brands: The most important approach to building a brand is to completely redefine the way you internally look at your products. If you think of yourself merely as a supplier of products that have certain attributes similar or better than other products in the marketplace, your customers will perceive these in the same manner and will compare them accordingly. If you think of yourself as a seller of brands that make your customers’ brands even stronger, your customers will start setting your products apart from competitive products.

Impact of brand equity on profitability
There is no hard evidence at this time that developing brand equity alone will necessarily result in higher profitability. However, my limited research shows that most successful packaging companies follow a strategy based on building brands. It is increasingly important to do so at this time when emergence of e-marketplaces is based on essentially eliminating product differentiation.

I can clearly visualize a future in which a product will either be a brand or a commodity. The former will demand premium pricing while the latter will be traded on an online exchange like any other commodity. Where do you want your products to be?

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Transforming your organization in times of rapid change

If you’re a packaging company frustrated with trying to “get your arms around” e-business solutions, you’re not alone. There are, however, some simple strategies that both packaging companies and e-business solutions providers can implement to successfully engage in business online.

As e-business solutions continue to emerge, the pace at which packaging companies are embracing them has been slow. These companies have been frustrated with not being able to identify the right solution for their needs.

My discussions with executives of both e-business solutions providers and packaging companies lead me to believe that some dedicated work needs to be done by both parties before they can better appreciate and complement each other.

A large proportion of packaging companies is seriously committed to exploiting online opportunities. By now, the benefits and strategic considerations are apparent to almost all decision-makers. However, actually making this transition is not easy, especially when these companies do not have the liberty of suspending their operations and dedicating themselves exclusively to making the transformation to online business.

The dilemma
Packaging executives still must meet their regular business goals and, eventually, the expectations of their investors. (It is not hard to imagine the scenario in boardrooms as evidenced by Arthur M. Stupay’s article). The situation is further complicated by the fact that by the time you get your arms around one solution, half a dozen competitors are already talking about a new, better solution.

Providers of e-business solutions, meanwhile, have to recognize that the packaging industry has traditionally been very customer-centric. Most customers rely on their packaging supplier for quality products and entrust them with proprietary information. Packaging companies reciprocate by serving these customers extremely well. Such intimate customer relationships and a relatively stable scenario make it even unnecessary in many cases to actively seek new customers.

Additionally, the pressure to reduce costs is also relatively less due to high costs of switching packaging suppliers. Understandably, these are hard issues to grasp for dot-com companies, who typically start with a clean sheet of paper, have employees that are generally more receptive to change and are under tremendous pressure to increase their revenue in a short span of time.

What should packaging companies do?
The four major issues that I see packaging companies facing are:

• Which functions or set of customers should we shift online?
• Which will deliver the most value to our customers and investors?
• How do we prioritize so that we do not exhaust our resources?
• How fast should we move to keep up with technology but not spend exorbitant amounts of money?

These issues are not easy to address because they have to be balanced with corporate financial goals and limited availability of resources. Here are some guidelines to consider:

1) No business succeeds without best-in-class operations. Building the coolest e-business infrastructure is not going to be effective unless it is backed up by solid operations.

2) E-business has to be seamlessly integrated into the overall scheme. Without a proper integration of these processes into the hardware of a corporation, it will only result in more e-chaos, as some of the early adapters saw.

3) If you do not understand e-business fully, do not try to do it yourself. It is new, complex, and changes faster than anything that we are used to in the packaging industry. In the existing setup of most companies, it is hard to develop the necessary skills and speed. Therefore, I always emphasize that companies should seriously consider outsourcing this function and focusing their attention instead on managing change from a strategy standpoint.

What should e-business solutions providers do?
After looking at the solution providers to the packaging industry, it is clear that only a few of them have had an initial packaging-industry focus. A vast majority of them have served other industries and have not invested sufficient time into better understanding the unique needs of our industry.

While these companies may very well believe they have a solution for every problem of the packaging industry based on the success they may have had in other industries, individual packaging companies may not experience any of those problems for reasons cited above. I would accordingly encourage these providers to respect the dynamics of the packaging industry, better understand its priorities and offer a solution that addresses its problems.

The packaging industry has certain unique issues, and ours is not as homogeneous an industry as the term “packaging industry” may lead some to believe.

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Future of manufacturing in the packaging industry

As e-commerce changes the underlying economics of business, is the old business model — based on scale — under serious threat?

In my consulting work, some of the packaging companies that I like to track are AEP Industries; Avery Dennison; Ball; Bemis; Crown, Cork & Seal; Owens-Illinois and Sealed Air. These companies supply a wide variety of packaging materials, and looking at them I can get a fairly good indication of the overall industry trends.

However, by looking at their performance in the past 52 weeks, I am disappointed. Other than AEP Industries and Bemis, the rest have not been profitable investments.

Market share as a driver
What concerns me is that when the economy is so good, the packaging sector continues to perform rather disappointingly. What would happen if the economy slows down? My discussions indicate that only the top management in the packaging industry is concerned about the performance of the stock; the middle-level management is still driven by market share.

I am surprised to see that companies continue to add infrastructure to produce more and eventually gain market share. I am a firm believer of profitability over market share, but most middle-level executives do not seem to believe in that because nine times out of 10 their compensation is determined by sales and not earnings, and rarely the stock price.

I am starting to believe that the old business model based on scale is under serious threat. E-commerce is changing the underlying economics of business. In the past, large infrastructure resulted in high market share, which eventually meant excellent cash flow and future growth. This is no longer the case. Vertical integration (as traditionally understood) is starting to become a meaningless business model because it is now possible to outsource practically everything that someone else can do “better, cheaper or faster.”

Traditionally, companies relied on leveraging their infrastructure to bring down the cost of manufacturing to either drive down the overall market price or to increase their margins. Now this is no longer the prerogative of companies with the biggest infrastructure. A small organization can put together a virtual team of providers where each focuses on what it does best — be it manufacturing, technology, product development or marketing. This is a serious threat to a typical company that tries to do everything, since margins on its core competence can be eroded by inefficiencies in everything else that it does.

Is manufacturing no longer attractive?
As I said in one of my previous columns, if you are not the absolute best at manufacturing a product, stop manufacturing it and focus on what you do best. On the other hand, if you are the best, focus on maintaining that position. Somebody in the future will definitely figure out a way to beat you, and you should be prepared to react immediately.

What about those companies that already have a large base of assets? My recommendation is this: retain what you do best and get rid of the rest. I know this is a rather radical recommendation, but the alternative is even worse. I make this recommendation based on my past experiences.

I lived in Japan from 1992 to 1997. During this period, I saw a revolution taking place there. The bubble had essentially burst, and signs of recession were setting in. During the bubble economy, the wages had reached such high levels that the cost of manufacturing went through the roof. However, during the recession when demand dropped, such high cost of manufacturing made the Japanese uncompetitive in the market.

The Japanese companies reacted fast and started cutting down their Japanese manufacturing base. They established plants in several parts of the world and kept only the value-added operations in Japan. Japanese companies realized that they should focus on what they do best, that is, product design and marketing. Manufacturing could be accomplished by building skill set and infrastructure overseas.

As a final thought, do what General Electric does. Every couple of years, it reinvents itself. The company looks hard at what it needs to do to thrive till the next opportunity to reinvent arises.

The hard reality of business is that while you may invest enormous resources in developing internal capabilities and strengths, sometimes the environment changes faster than you can anticipate. This is exactly what is happening now. Don’t try to beat the marketplace. Instead, adapt your business model to the marketplace.

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Exploiting the Internet to generate revenue

I am often asked by packaging industry executives how they can exploit the Internet as a source of revenue generation because, when they present a case for integrating Internet in their business process, this is the first question that is asked of them. There is no simple answer to this question because it depends on such factors as type of business/products/customers that a company has, typical order size, degree of customization required, and nature of relationships with customers.

Since most companies in the packaging industry have not made e-commerce a significant part of their business activities yet, it is difficult to say what the potential savings can be and how much of their business can be moved online. There is still too little information available to us. However, there is some learning to be had from companies in other industries that have taken a more aggressive approach to making the Internet a tool to find new customers, improve customer relationships, and reduce the cost of transactions.

Some of the companies in other industries that have realized huge savings by exploiting the Internet in their core business are Cisco Systems, Oracle, General Electric, and Dana Corporation. Some of these companies actually do a lot more customization than we do in the packaging industry. Most of them also have long-term relationships with their customers and have to regularly worry about proprietary information. Thus, these companies have quite a few similarities with us.

Why not the packaging industry?
The key question that packaging industry executives should ask is, “If other industries like ours can take this approach, then what is stopping us from doing it?” My discussions so far lead me to believe that the delay in implementing these initiatives is being caused by both packaging industry executives and providers of IT solutions. For instance, one of the areas with potential for cost reduction is package design and taking it to manufacturing. With the number of teams and steps involved in the process, some of which may not be in the same physical location, the Internet provides a perfect opportunity to move these functions online so that different participants in the process can work remotely.

The problem is that packaging industry has a process in place for doing this today, and there is resistance to change it, as there is for any change. The problem gets compounded by the fact that there is no simple IT solution available today for us to do it. Until the day such solutions become as simple as entering your user ID and password to access the design system, companies will not be receptive to investing thousands of dollars in developing proprietary systems.

Why do some companies still think it is wise to make huge investments and develop proprietary systems? In my opinion, this has been prompted by three considerations: these companies recognize that inefficiencies in business processes can be minimized by use of new tools; secondly, they believe in using information technology as a competitive weapon; and finally, they want to keep pace with the changes in business environment.

While I have talked about these issues in my previous columns, let me reemphasize why proactively driving inefficiencies out of the business processes should be every executive’s priority. For centuries our economic system was built on making profits simply because somebody else could not find information fast enough – for instance, information on who the suppliers are, what prices are they willing to offer, does someone have excess inventory to unload, and how soon is it possible to get a large enough number of suppliers to compete for a piece of business to receive a lower price? The rate at which information flows today (and this is just the beginning) has made it so much easier to get these tasks done within a matter of hours at practically no cost.

Our goal of using the net should not be limited to revenue generation. It should actually encompass higher sales, lower costs, and better relationships (which eventually translate into higher sales and lower costs).

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How to deal with the marketplace changes?

In recent weeks I have received emails and phone calls from packaging industry executives who are concerned about the future. While the industry has been branded as “laggard,” “slow to change” and other not-so-flattering descriptions by analysts in recent months, several industry executives have started to embrace new business models.

However, as these executives start to implement these new business models, they are already seeing these models failing at some of the early adopter companies. The recent demise of several business models that only a year or so ago were hailed as revolutionary is enough reason to cause serious doubts. To many senior-level executives in the packaging industry, this only means even more confusion regarding future steps.

I will try to address some of these concerns in a two-part article. In this article, I will try to put the recent events of the so-called “new economy” in perspective, and then next week I will analyze what it means to the packaging industry and what are some of the things that industry executives could do to meet these challenges.

Turbulence is permanent
During the past several months, mankind has witnessed changes that had not been seen so far. Certainly, the inventions of fire or the wheel and eventually electricity/automobile/telephone caused similar changes in the way humanity lived or how commerce was conducted, but a major difference is the timeframe. It took thousands of years before we could fully exploit the power of fire or the wheel. It took us decades to perfect the automobile or the telephone. But in the current environment we are starting to see revolutionary changes within weeks or, at the most, months. And it is not just the Internet — it also includes the changes in communication technology, relationships between companies, number of new products and their short lives — the list is long. If something does not change at similar speed, it appears that it is not worth talking about.

No wonder this is causing so much turbulence in our lives. Starting from the business world and the stock market, to how we are expected to perform our jobs, we are being exposed to changes at a rate that our generation is not accustomed to. Additionally, businesses today are structured in a manner in which they find it hard to respond to constantly changing market forces. Companies and executives that were organized and conditioned to develop multi-year plans and goals now realize that within months they have to revise their plans and rewrite their goals because new companies have emerged out of seemingly nowhere and have rewritten the rules of the game in their competitive space.

The reaction of the stock markets has been exactly similar. The degree of change has been so rapid that old rules no longer apply and new rules are not accepted yet by everybody. The result has been lots of confusion, nervousness and lack of direction.

Not too long ago, we saw some new rules emerge that made it more important, for instance, to attract eyeballs or create brand awareness or increase the number of transactions, but those rules are no longer valid. It appears that the wider base of investors did not feel comfortable with the new rules of the game and the stock market is now trying to figure out rules that would be fairer in evaluating new economy companies but still satisfy the basic principles of economics.

Impact on the packaging industry
Change of this magnitude has adversely impacted the packaging industry, too. While the stock market has severely battered several packaging companies, the demands on the industry to meet the needs of customers in the new economy has posed new challenges:

• The designs are different, and they change more frequently.
• Time pressures are intense.
• Supply chains are more complex.
• Competition is increasingly global.
• Most importantly, the future is so uncertain.

When packaging industry executives see companies with world-class, best practices struggling to meet market expectations, they do not see many successful models that they can follow for their own businesses. I will be addressing these issues next week based on my study of companies that are taking mature approaches to managing change.

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Customer facing organization

Recently I have been talking to a lot of packaging companies that either have no independent web presence at all or are in the process of improving it to better connect with their customers. To my surprise, I have also been speaking to several e-business solutions providers, who are now starting to think about the packaging industry in less generic terms. Some of the questions that they all ask me are:

• How much information should be communicated through the Internet?
• How can we duplicate the personal relationships over the Internet now that we have customers that are no longer within our standard geographic territory?
• What is the most effective strategy to manage the conflict in communicating with customers through personal interaction and the Internet?

Amount of information to be shared
As part of an unscientific survey that I conducted with a few executives, I presented the following two scenarios to them:

Scenario 1: Company A has a website that provides comprehensive information related to the company, its products, customer testimonials and all the other standard information that you typically see.

Scenario 2: Company B has the standard information but has also gone several steps ahead by including details on problems with products encountered in certain cases, limitations on product use and, most interestingly, a detailed comparative evaluation of their products with their competitors.

Among the individuals that I talked to, the overwhelming majority wanted to conduct business with Company B. Some of the reasons cited were:

• A website that appears to be direct and straightforward develops a sense of trust.
• Warning about potential problems and highlighting limitations right away is helpful in making better decisions and preventing problems from happening.
• Comparative assessment with competitive products is time-saving and makes them trust Company B for future purchases.
• Company B is not only selling products but is also imparting knowledge. As one executive put it, “I will do business with Company B indefinitely because I can trust them to always act in my best interest.”

Managing long-distance relationships
As we all know, whichever type, long-distance relationships are difficult. The only comforting factor is that current technology can make these less painful. If we analyze the basis of business relationships, it is not because someone is better than others at memorizing your children’s names; it is because of the sense of trust that develops by someone always doing what is good for your business.

While it would be hard to duplicate the relationships that are developed in person, it is still possible to duplicate a lot of other things. For instance, it doesn’t take long for you to acknowledge and help a customer who walks into your office in person. Why then does it take companies days or weeks to respond to e-mails?

As long as companies can duplicate the fundamental principle of a business relationship — “acting in the best interest of the other party” — it really does not matter if you cannot shake each other’s hands.

Managing channel conflict
It is not surprising that some of your privileged customers will be upset that information that they received, either on an exclusive basis or at least ahead of others in the past, is now available to everyone at the same time. Several companies are quite upset that it is now so easy for even their small competitors to find out about new technologies so easily.

There are two simple ways to handle this. Since some of these developments are still new and people are trying to adjust to the new realities of business, it will take some time before we all get used to the ease of accessing information. If you want to be a risk-taker, just go ahead and do it and some time very soon everyone will have gotten used to it. However, if you do not want to upset your traditional customers, it is not hard to control what information is available to whom by using the various security tools that are now available.

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Packaging converters business model

The majority of packaging converters do not appear to be prepared to make the transition to e-commerce. This jump will require a reengineering of business processes.

I tend to look at the packaging industry as a combination of three value blocks. We start with the raw material manufacturers, then we have the packaging companies or converters (who convert raw materials into cans, bottles, bags, etc.), and finally there are the end-users. There are others in the value chain such as distributors, designers, equipment manufacturers and packagers, but their role is not strategic to the value chain and can be safely grouped elsewhere for the purpose of this discussion.

In looking at some of the recent developments, I have concluded that the strategic control of the value chain has shifted to the converters. They seem to be capturing the highest value in the chain. The raw material manufacturers typically serve more than one industry, and packaging happens to be one of them. Accordingly, their business model is driven by volume rather than capturing higher value. The end-users treat packaging as a “necessary evil” and tend to focus on minimizing its cost (except for such cases as cosmetics packaging). That leaves the converters to capture the highest value.

This dynamics of the packaging industry value chain is also reflected in the manner each of the value blocks has embraced e-business models. The raw materials suppliers have been very active in integrating e-business models since the efficiencies on both buy and sell side are simply enormous. This is also reflected in the emergence of exchanges and consortia. The end-users, on the other hand, have been focusing primarily on the buy side in their e-business initiatives.

Penetration of e-business in packaging industry
An interesting finding from my recent research work is that, partly as a cost-cutting initiative and partly due to the pressure from their suppliers, converters are embracing e-commerce in purchasing raw materials since the savings are clearly visible. However, the converters have been relatively slow to integrate e-business in their core business process.

During the past two years, while the raw material suppliers and the end-users have invested millions of dollars in e-business tools, about 50% of the converters are yet to have even professional websites (ones that provide sufficient information that enables visitors to make a business decision). Moreover, I am not aware of many converters that have fully e-commerce-enabled websites, though I understand that approximately 10% of them do provide varying degrees of ordering capabilities from their websites. This leads me to believe that due to their complacency — which arises probably out of wanting to capture the highest value in the chain — the converters are relatively slow in exploiting the newly available tools.

On the other hand, my discussions with executives at end-users lead me to believe that they are starting to require their suppliers to enable their information technology (IT) infrastructure to be compatible with their systems to ensure machine-to-machine connectivity and to make almost all functions of their relationship accessible by electronic means. The end-users are driving this as part of their buy-side logistics initiatives. This means that very soon the converters will have to upgrade their IT systems to conduct business with their major customers.

It is clear that a vast majority of converters are unprepared at this time to make that transition. While the technology part can be easily outsourced to an IT firm, the bigger challenge is going to come from reengineering of business processes. Take, for instance, customer needs assessment. When selling is done in person, there is a whole lot going on other than selling. You come to know about your customer’s concerns, future plans and unmet needs. E-business systems, including customer relationship management (CRM) programs, provide excellent data on customer behavior, but you still have to use other means to uncover hidden needs and better understand future plans.

Suggestions for packaging companies
If you are carefully observing the market trends, you must have noticed how customer relationships are changing. While a packaging supplier’s priorities still have to be centered around making it easier and less expensive for its customers to do business with them, the company will need to uncover its customer’s “hidden needs” so that it can fulfill those needs before its competition does.

Since selling will be executed through electronic means, a supplier has to retrain its sales force to become “customer relationship representatives,” whose sole responsibility will be to prepare their company’s business for the future needs of its customers.

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Empowering customers in the packaging industry

Let me talk about a typical end-user of packaging materials — a food company, we’ll call it Company X, that uses bottles, cans and films for packaging its range of products.

Company X purchases packaging materials from several manufacturers and distributors. It employs an army of purchasing agents to accomplish this mammoth task, and this is not always seamless. Some of the jobs that the purchasing folks perform are requisitioning, research, qualification, receiving quotes, writing purchase orders, tracking supplier performance, certifying, negotiating and even fire-fighting (when goods do not show up as promised).

Good news, bad news
Well, here is some good news and some bad news. The good news is that a lot of these painful tasks can now be automated, transferred to other agencies, outsourced to the suppliers or eliminated altogether. The bad news is that our friends in the purchasing department would need to learn new skills. The Internet has empowered the department of purchasing at Company X to the point that not only can it eliminate some of the aforementioned inefficient business processes, but it can also start integrating its supply chains.

The fragmented base of the packaging materials suppliers has created these inefficiencies in the value chain that can potentially be eliminated. Despite the critical role of packaging in shipping and presentation to the customers, end-users still treat it as an item on which value is captured by its supplier and not by them. While this perception may not be so widely prevalent among the medical and pharmaceutical companies, such thinking is very typical among other users of packaging materials since they operate on extremely tight limits for their packaging costs.

From our research at Kline & Company, economics is forcing Company X and its peers to manufacture the absolute minimum number of core products and outsource everything else. This is making their supply chains not only extremely complex but also a key driver of profitability, especially for such companies as X, which use a wide variety of packaging materials.

Suggestions for sellers
For sellers of packaging materials, especially undifferentiated products, the emerging e-procurement systems present new challenges. The need for your products is not going away, but you will have to become smarter about doing business. You will have to keep pace with your customers and also stay ahead of your competitors in incorporating these new processes in your business model. Here are a few suggestions:

Suggestions for buyers
If you are a buyer of packaging materials, your traditional responsibility to procure materials in a cost-effective manner is about to disappear. Your role is about to change dramatically and here are suggestions to prepare yourself:

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Internet commerce for a packaging company

A recent study reveals that the packaging industry need not be discouraged by misleading indicators that predict the doom of the “new economy” but instead should continue to focus on being prepared for the long term.

When I speak to packaging industry executives at companies of all sizes these days, I am surprised by the degree of confusion that is widely prevalent. I can appreciate their anxiety — there are signs that the economy may be slowing down (though a recession appears unlikely), the competitive dynamics have completely changed and new business models are emerging (and failing, in some cases).

Since April, the stock market has further complicated the picture by sending several misleading messages to all of us. The media, which needs spicy stories all the time, has been delighted with the bloodbath on Wall Street. The same magazines and journals that were talking about nothing else but “dot com” companies and how they will change everything, are now similarly making a big deal about how it is all over.

No wonder, we just don’t know what road to take and what lies ahead. The risks appear to be so high that many of us in our professional roles are afraid of committing to anything for fear of being proven wrong within weeks.

Focus on long term
As a consultant, I try to be as objective as possible and help my clients take a longer-term and strategic perspective rather than be carried away by hype or discouraged by roadblocks. While everyone seems to be having fun at the expense of failed “dot com” companies or how stock prices of some have crashed, the reality is vastly different insofar as the strategic issues are concerned.

I have been regularly addressing in depth the fundamental issues underlying the new economy in my previous articles, but this time I want to share some eye-opening findings from a recently released study by The University of Texas’ Center for Research in Electronic Commerce. These findings should be able to convince all of us that we, in the packaging industry, need not be discouraged by misleading indicators and instead continue to focus on preparing ourselves for the long term.

Some of the findings from the fourth bi-annual Internet Indicators study that I think are relevant for us in the packaging industry are as follows:

What does it mean for us?
These findings clearly show that real and significant business improvements are possible if we can adapt the tools to meet our specific needs. For instance, those packaging companies that have embraced online tools for collaborating on package designs with their customers and colleagues are already seeing major improvements in productivity. Several executives have confirmed to me that merely having a website has helped their company increase the number of good leads, reduce the cost of marketing communications, and, above all, their potential customers can evaluate and consider their products right away without having to wait for catalogs to arrive in the mail.

We all know that companies with bad business models eventually die whether they have a “dot com” in their name or not. On the other hand, we should learn from the mistakes that these failed companies made and then develop a business model that is better suited to our business, fits our corporate philosophy and can be implemented at a speed that meets the needs of our customers.

What drives growth within an enterprise is innovation, that is, coming up with breakthrough ideas and implementing them before anyone else does. General Electric, which believes in reinventing itself every couple of years and completely changing its business models (to the point of destroying its own business models, developed and perfected by it over the years), should be our role model. While the future is as unpredictable as always, it still makes sense to learn from industry leaders.

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Large packaging suppliers should help small suppliers become e-businesses

The advantages of connectivity, e-commerce and exploiting other tools for more effectively purchasing products or reducing supply chain inefficiencies are clearer to small businesses than to larger ones. The reason is simple: small packaging suppliers, in many cases, compete with some of the largest companies but do not have the same bargaining power when it comes to purchasing raw materials or being able to force suppliers to expedite a delivery when absolutely necessary. If they can do anything to get that extra penny out of their costs, they are in a more competitive position.

The major problem facing small suppliers in our industry, however, is the lack of availability of suitable products that enable them to do that. As e-marketplaces are trying to build their businesses, their focus is on increasing the number of transactions. Since large companies typically conduct more business transactions, there is a greater tendency to design products for them and to pursue their participation more aggressively. To many in the packaging industry, this means that the game has not changed a whole lot. Wasn’t the Internet supposed to be the greatest equalizer?

Issues before small- and medium-sized suppliers
While discussing the unmet buy-side needs of this highly diverse and fragmented group of packaging companies, I came up with the following themes that were consistent across the industry:

An equally important, but not as critical in the industry yet, is enabling these suppliers to sell online and to streamline their back-end processes. Most estimates put the number of small businesses at this stage at just 10%. This does not appear to be a serious problem right away since customers in our industry continue to buy through traditional channels and the point at which they will no longer do business with a company that is not integrated into their system is about 12 to 18 months away. (This period can shrink somewhat as the slowdown in the economy puts increasingly higher pressure to cut costs.)

Recommended roadmap
The turmoil in the business world is not likely to subside any time soon as we see slower growth in the economy, higher competition from global suppliers and, consequently, pressure to reduce costs. Some of the tools available today already enable small businesses to take advantage of purchasing over the Internet (though I am told that only about a quarter of the companies use the Internet to procure even office supplies, airline tickets and other similar products that every company should be doing today). While it may be difficult to procure specialized raw materials for small-volume buyers right now, they can definitely start with other products. This will not only reduce cost but also make the company’s executives more web-savvy and hopefully speed up the implementation in other areas.

The second solution that I am proposing may appear to be less practical right away but I would like to generate an industry debate on this issue. The larger packaging companies are already making or are planning to make significant investments into their IT infrastructure to address the realities of business today. Since the new economy thrives on partnerships and alliances, the larger companies should allow smaller companies to take advantage of their bargaining power, IT infrastructure and memberships of e-marketplaces. This will be a win-win situation for everyone because once the IT infrastructure has been set up, the marginal cost of an additional transaction approaches zero.

I am convinced that we can still compete in a healthy environment while enabling everyone to grow.

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New purchasing models for the packaging industry

With downward price auctions becoming a reality, suppliers can’t simply sit back and hope that this trend will go away. Instead, they have to seriously start redesigning their business processes to meet these new marketplace realities.

During recent weeks, I have received several e-mails from packaging industry executives who have expressed concerns about the emergence of “downward price” auctions, in which suppliers continue to lower their prices until the auction is closed. As one B2B e-marketplace describes it, “Buyers watch as prices fall in real-time, before their very eyes.”

Most of these executives I’ve heard from work for companies that have traditionally differentiated themselves by providing value-added service(s), just-in-time (JIT) delivery, warehousing, next-day deliveries, special runs, design and testing. Naturally they are extremely disappointed as their key customers who have had long-term relationships with them suddenly tell them they expect to see them on a B2B e-marketplace for all future business deals.

New realities
Their disappointment is not surprising to me since we all have been made to believe that if you served your customers in the best possible manner, you would be rewarded with their business for a long time and there would be no incentive for customers to switch their suppliers. Looking at some recent developments, however, it seems there is little that can be done about it since the Internet has made possible a new paradigm.

While we have always heard the expression “Customer is king,” now is the first time that we can truly say it has become a reality. The reason this is so painful to us is that it is not a result of mistreating our customers. No, the customers have made this happen, and we were simply not prepared for it.

Customer segmentation
Since downward price auctions are now a reality, there is no point in hoping that this is going to go away. Instead, we have to seriously start redesigning our business processes to meet these new marketplace realities.

The first thing that companies need to do is to re-segment their customer base. The situation will, of course, be unique for each company, but customers can essentially be split into the following three groups:

Connoisseurs - These are the ones committed to using only the best materials in their products. Of course, they would like to pay the lowest price but not at the cost of compromising product quality. The goal should be to keep the connoisseurs you already have and try to find more of them. The best channel to serve them is through direct sales.

Realists - These are those customers that understand what they need to do in order to succeed in the marketplace. They supply products that barely meet the needs of their customers, and as such, they seek exactly what they need at the most competitive price. These customers are most likely to embrace the e-marketplace-type models. You have to recognize the needs of this group and serve them accordingly.

Penny-pinchers - These are the least desirable group of customers for any supplier. They are driven by price only, and quality is the last thing on their mind. Try to get rid of them as soon as possible or serve them only through a low-cost-to-serve channel like an online ordering system.

The 20-60 rule
The final goal should be to have at least 20% connoisseurs and 60% realists. Whether you like it or not, you will always have some penny-pinchers. The secret to success lies in identifying what each customer cluster values and then serving it through the most cost-effective channel.

If you have no connoisseurs in your customer base, it is probably a good time to rethink your business practices and completely eliminate value-added components from your product portfolio. Another alternative is to spin-off the value-added services group as a separate unit and sell these only to those customers who want these on a “pay-as-you-use” basis.

The popularity of downward price auctions has been boosted by pricing pressures that are the norm today in almost all end-use segments of the packaging industry. Accordingly, there is a trend to treat products as undifferentiated commodities and thus ideal for purchasing through an auction. In my assessment, this is a trend that is not going away. Therefore, rather than denying it or continuing to believe that you are not a supplier of commodity products, my recommendation is to move fast and change as the market realities change.

At the end of the day, you have to provide what your customers want, and there is no way a company can survive without recognizing this simple truth.

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Improving supply chain efficiencies for packaging customers

The old model of integrated manufacturing, generally seen as inflexible, is now facing many questions. With today’s modern communication technologies, companies can now increase system flexibility by creating a supply chain involving multiple vendors rather than trying to do everything themselves. What will this mean to the packaging supplier?

One of the barriers to innovation and adoption of new technology in the packaging industry that I constantly hear about is the reluctance to change equipment. We all understand how costly it can be to change packaging equipment every few years. For instance, in many cases advantages of flexible packaging over rigid packaging are clearly visible, but a financial analysis generally indicates delaying such a changeover until the assets have depreciated.

Thus, generally only new plants take advantage of state-of-the-art technology while old plants are stuck with inefficient equipment and processes until the plant is ready for the next round of renovation.

Questioning the old model
The end-users of packaging materials, generally for reasons beyond their control, have traditionally been expected to install their own packaging lines. Making heavy investment in plant and equipment can in many cases retard the progress of technology in the industry.

Interestingly, there are instances when a packaging supplier will bear the total cost of new equipment or heavily subsidize it when it is no longer in a position to support it. Generally, this is a privilege usually granted only to large customers. Small customers are still pretty much on their own and have to shell out significant sums of money to keep up with technology.

This old model of integrated manufacturing has recently been questioned because of the availability of possible alternatives. A major downside of integrated manufacturing is that it breeds inflexibility. A soup manufacturer that is also integrated into manufacturing of packaging materials cannot respond to changing customer tastes as fast as a competitor that procures packaging materials on an as-needed basis and can easily switch suppliers or product depending on market movements.

Supply chain focus
Integrated manufacturing has traditionally been justified on grounds of lower cost and higher profit margins. This, in fact, is the case when the number of suppliers competing for your business is limited and coordination of suppliers can be a nightmare. Currently available communication technology, however, makes it possible to manage the supply chain more efficiently and cost effectively.

Thus, the two key questions that end-users should be asking now are:

• Is owning packaging equipment hindering access to new technology?
• It is possible to increase system flexibility by creating a supply chain involving multiple vendors rather than trying to do it ourselves?

Some of the large companies are already treating their packaging needs as a component of the overall supply chain management. Transferring most of the responsibilities to the packaging supplier, these companies can then focus on what they do best, that is, their own product line.

What’s it mean to packaging suppliers?
Two major advantages that packaging companies will realize as a result of their customers implementing the latest supply chain management systems are economy of scale and higher system efficiencies. By being responsible for actually supplying a packaging solution rather than material or equipment, the overriding considerations would be higher system efficiency, speed and state-of-the-art manufacturing, rather than a customer’s willingness to upgrade to a higher level of technology.

Secondly, packaging companies can more efficiently manage their production schedules and inventory levels because these would be driven by demand from a pool of customers they serve and by how efficiently they can meet the demand based on maximizing their internal resources.

This implies that supply chain management will also become a major consideration for packaging companies. They will have to integrate their information systems with their customers and suppliers in order to meet their obligations in the most cost-effective manner. Some converters will find it difficult to implement these systems because this can mean significant upfront capital investments.

I am hoping that emergence of such systems on a wider scale will benefit both the packaging suppliers, their customers and other myriad industry players who are part of this group. By letting each company focus on its core business and getting better at managing alliances and partnerships, higher profits should result for everyone.

A focus on maximizing supply chain efficiencies will not only result in strong competitive advantages to the leaders, it can also mean higher rates of innovation in the entire packaging industry.

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Ppotential for e-marketplaces in the packaging industry

Based on the packaging industry’s fragmented market structure, e-marketplaces make sense in niches. A high degree
of fragmentation creates new opportunities for both buyers and sellers when they can meet each other in an e-marketplace.

A question that I get asked very often relates to the potential for e-marketplaces in the packaging industry. This question has become even more relevant recently since several e-marketplaces are being developed in the packaging industry, though rather belatedly, and e-marketplaces are beginning to generate sizeable revenue in other industries.

In my opinion, the reasons for the slower emergence of e-marketplaces in the packaging industry are threefold. One, the packaging industry did not appear to be as suited for e-marketplaces as other industries that have a larger number of undifferentiated products. Secondly, the materials used in the packaging industry such as metals, polymers, paper, etc. were already being sold on other exchanges. Finally, the sponsors of earlier chemical
marketplaces had also assumed that packaging could simply be treated as a subset of the chemical industry.

Does a packaging e-marketplace make sense?
The packaging industry is not as homogeneous as some of the e-marketplaces would like it to be. For instance, while polymers can be manufactured by only large companies, small and medium sized companies can easily convert it into films, and even smaller companies can convert it into more usable forms. This is true for metals, glass, paper, wood, and all other materials that are used in the packaging industry. Thus, the packaging industry is a mix of
companies of all sizes, and such diversity and fragmentation is not always ideal for an e-marketplace. However, based on the market structure, e-marketplaces make sense in niches.

As I see it, the manner in which business will be conducted in the very near future will be largely dictated by the number of buyers and sellers or the degree of concentration. Of course, this will also determine the power buyers and sellers will have.

Small number of buyers and sellers: If this is a small group, there is no value added by moving to an e-marketplace
since the most effective method of doing business would still be through direct sales. In fact, the Internet only provides a better means of communication within the group.

Small number of sellers and large number of buyers: In this scenario, buyers should seriously consider pooling their resources to develop a consortium. This will not only enable them to reduce their cost of selling, the buyers are also likely to benefit through transparent competition.

Large number of sellers and small number of buyers: In this case, the aggregation model is more likely to serve the interests of both buyers and sellers. A large number of sellers pursuing a small number of buyers is inherently an inefficient selling process and aggregation can eliminate some of these inefficiencies.

Large number of buyers and sellers: This seems to be one of the most common scenarios in the packaging industry. Such a high degree of fragmentation creates new opportunities for both buyers and sellers when they can meet each other in an e-marketplace. This also enables both buyers and sellers to find each other easily and cost-effectively.

If and when should you join an e-marketplace?
At this time, it is becoming extremely hard to predict which business model is going to sustain in the long run. That is clear not only from the speed at which business models are being changed but also from the nervousness in the stock market.

E-marketplaces do provide a relatively cost-effective means of bringing buyers and sellers together, but they have to generate a large volume of trade to become profitable themselves. So far the only companies that have benefited from participating in an e-marketplace are buyers and sellers. This phenomenon partly explains why buyers and sellers are increasingly coming together to sponsor such marketplaces.

Since the initial results have shown positive results for both buyers and sellers, it is a good idea to seriously consider
participating in even more than one e-marketplace. But do not fire your sales or purchasing teams yet. You should continue to be proactive in embracing new business models but also have the speed to change gears if market dynamics changes.

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Packaging industry trends

Subsequent to the discussion of the packaging industry business model, here is a presentation delivered by Jay Dwivedi while he was at Kline & Company on some of the developments and trends in the packaging sector.

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Wednesday, August 13, 2008


Packaging industry business model







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