The packaging industry is enormously energy and raw material intensive. For example, the raw material content of finished products lies between 50 and 70 percent. Rising prices have a correspondingly strong impact. In our article we focus on commodities and look at how the industry can react to this vulnerability. One worthwhile step is the professionalisation of purchasing. We show you several steps and approaches to counter internal and external problems.
The packaging industry is currently facing various problems in connection with the shortage of raw materials. Both external and internal factors play a role. Both problem areas can be addressed in a targeted manner.
- The acute and great scarcity of raw materials should be emphasised here. This leads to partly erratic price movements, which often result in an almost incalculable increase in commodity prices.
- It is rarely possible to pass on the increased costs to customers in the short term, at least not at the same speed or to the same extent.
- As a result, the high raw material costs weigh on the profit margin. While turnover remains stable, the production volume decreases at the same time.
- There is often a lack of suitable tools to change the planning and adapt the production to the new circumstances. The available tools usually fail because they are too complex, which is due to the many different customer-specific products. (See also the following article “Reducing complexity: More efficiency through focus”)
- Another internal problem is the often inflexible contracts between customer and supplier that do not take market changes into account. As a result, it is not possible to react to unexpected developments in the market, for example by passing on additional costs.
- Many companies lack market knowledge in the sense of an overview of possible, alternative suppliers. If there is a market overview, there is often a lack of competences and processes to identify and evaluate the right alternative suppliers.
- A lack of risk assessment of the supply chain is also (still) one of the problems in many companies. The crisis of 2008/2009, for example, showed how valuable this can be.
- The fundamental internal deficits in many cases include a lack of agility in the corporate structures. The lack of agility acts as a brake that prevents a quick reaction to changes.
Pathways and opportunities
Professionalising purchasing can make the difference in solving both external and internal problems. Concrete steps and approaches that companies should consider include:
- Greater flexibility concerning the raw materials used, for example through the use of non-fossil raw materials.
- Identifying and evaluating potential alternative suppliers and building appropriate contacts and relationships. If the relevant market overview or competences for evaluation processes are lacking, the involvement of external expertise can help.
- The development of a supplier risk assessment that includes not only quality and creditworthiness, but also external factors such as political risks or sustainability risks.
- The establishment of an early warning system to identify risks, for example through the continuous monitoring of purchasing indices and macroeconomic developments.
- The identification of critical raw materials, where critical means that only a few suppliers are available for certain raw materials when market demand is high or the corresponding raw material market is comparatively highly volatile.
- The professionalisation of contract design in order to achieve flexibility in pricing and to be able to react variably to market events.
- The introduction of a commodity risk management system with appropriately competent staff. Alternatively, external experts, who are specifically geared to this topic, can also be involved here.
The next crisis is coming
Professionalising purchasing is a measure that can bear fruit not only in times of crisis and not only in the short or medium term, but also in the long term. Because even if the current turbulence calms down: The measure will pay off even in calm times. But above all: We are experiencing a turning point – and the next crisis is sure to come.
Identify supply chain risks and gain control.
So the packaging industry is in the middle of a raw material crisis, but companies can still be successful if they address raw material risks professionally & systematically.
B+P Consultants helps companies to consistently control & manage their biggest risks, as well as implement a raw material management system. Please feel free to contact me at any time if you would like to discuss this topic further, have any questions or if you are looking for a second opinion.