Written by: MHM Staff
Returnable packaging is not appropriate for every product or logistical system. It requires a well-managed supply chain.
by Diana Twede, Ph.D., Michigan State University School of Packaging
One
of the most interesting trends in logistical packaging is the use of
returnable containers. Over time, returnables can cost substantially
less than expendable corrugated fiberboard boxes--saving both purchase
and disposal costs. On the other hand, theuse of returnable containers can significantly raise logistics costs because of the need to control the return cycle.
The
use of returnable packaging upsets the traditional cost allocation
balance. It requires a large investment in containers, additional
transport costs and an infrastructure for empty container sorting, as
well as systems for management and quality control.
The
obvious benefits are the elimination of disposal costs and the need to
repeatedly purchase packaging. There are also operational benefits.
Returnable packages can be designed to make products and packages
easier to pack, handle, stock, and unpack. They can facilitate the use
of automation. Sometimes they can even reduce logistical operation
costs since they are designed to optimize transport and storage cube.
A
system-wide packaging change, where a set of suppliers and/or customers
have jointly agreed to participate in the program, is more complex than
the "closed loop" type of delivery system.
These
supply chain applications require a great deal more management and
coordination. The empty packages may be interchangeable, and are often
distributed to be refilled in a separate logistical system from that
which delivered them. The number of empty packages supplied is based on
forecasted need rather than one full swapped for one empty.
By
minimizing the number of days in the inventory replenishment cycle,
supply chain trends such as just-in-time (JIT) delivery also minimize
the number of returnable containers required for a system. The JIT
trend is usually accompanied by strategies to consolidate the number of
suppliers and reduce their geographical distance from the customer.
These factors also favor the use of returnable packaging because they
increase control, reduce transport cost, and reduce the required safety
stock of containers.
The
continuing trend to tighten supply chains is favorable for returnable
packaging applications. A well-managed supply chain will look for the
lowest system cost, not just the cost for one channel member.
Consideration of returnable packaging requires such a systems approach.
Container management
Managing
a fleet of returnable containers is harder than it looks. Companies
which excel at inbound and outbound logistical arrangements have not
been nearly so successful when it comes to managing their container
fleets. Containers are routinely misdirected or lost, and they are
rarely tracked in system-wide information systems. Yet it is vital to
control such a large and constantly moving investment, to make it match
supply and demand. The number of containers needed can be increased by
several factors: longer stockholding by the receiver, reuse of the
packages by the receiver, the receiver passing packages to another
user, and failure to collect the empties and get them into a condition
for reuse.
Tracking
systems need to have real-time container counts from every point along
the channel--every staging, replenishment, and cleaning location--not
just shipping and receiving docks. This requires accurate counting,
reporting, and a shared computer database.
Most
logistics management information systems use automatic identification
to register movement of product and packages. Bar codes require a
direct line of sight and only one can be read at a time. Radio
frequency identification (RFID) overcomes this problem. A whole roomful
of RF tags can "call home" simultaneously. As the cost of RFID comes
down, returnable containers are expected to be a good application. The
tags are durable, small, and can operate in harsh environments.
Financial evaluation
Most
firms that choose to invest in their own returnable container system
base the decision on some kind of financial evaluation. They usually
compare the costs associated with returnable packaging to the expenses
for their existing disposable packaging.
This
may be done on an item-by-item basis or on the basis of an entire
supply chain. Evaluating each single part or supplier separately
results in more attention paid to details that are specific to the
part, supplier, or package. Specific container styles and systems can
be optimized, and a corresponding reduction in piece price can be
assigned.
With
this method, however, the larger investment is not considered as a
whole, nor are the system-wide cost implications. Returnable packaging
is considered an expense (and compared to expense avoidance) since the
threshold for investments in most companies are larger than the cost
for packaging to meet the needs of a single supplier.
After
years of converting one supplier after another on the basis of
expensing the savings, some assembly companies have made a huge
investment in an asset without ever having consciously made the
decision to make such a large investment and without reaping the
attendant tax credits. What is worse, the decision-makers never get the
satisfaction of knowing--or touting--the profitability of their
investment.
For
evaluating such an investment, Net Present Value (NPV) is the preferred
technique because it includes the time value of money and all cost
flows. It gives a profitability estimate. It is much better than the
payback period evaluation method used by most returnable packaging
decision-makers
The
payback period approach is attractive because it is intuitively
logical. When the day-to-day cost of using expendable boxes (purchase
and disposal) is compared to the cost of the returnable fleet and its
operations, after a certain period of time the investment has paid for
itself. However, this approach vastly underestimates the benefits (and
sometimes the costs) of a returnable packaging system. There is no
profitability estimate as there would be for other large investments,
nor is there an indication of how long the savings will occur nor how
valuable those savings will be in the future.
The
NPV approach, on the other hand, results in a profitability estimate.
It considers the initial investment, the cash flows in subsequent years
(including savings from not repeatedly purchasing and discarding
expendable packaging as well as new operational costs), the time value
of money for those years (including a stipulated interest rate), and
the length of the container life.
The
NPV profitability estimate has three distinct advantages over the
payback approach. First, it makes the decision-maker look good:
profitability is the goal of all business, and here is an opportunity
to show how logistical packaging can contribute to that goal.
Second,
NPV lets you compare packages with different lifespans. For example, a
more expensive package that will last for a long time can be compared
to a less expensive one that will have to be replaced more often. The
less expensive package will have the shorter payback period, but the
one with the longer life represents a more profitable decision.
Of
course, this means the decision-maker has to estimate the container
life (using test results and/or previous experience), a decision that
makes some packagers uncomfortable. In the experience of the automobile
manufacturers, most returnable plastic shipping containers have a
longer life than originally anticipated. Many packages have been in use
for more than 10 years.
The
third advantage is that NPV's profitability estimate gives the firm a
good basis for comparing alternative investments. A notable example is
Harley Davidson's evaluation of returnable packages for finished
motorcycles. Using an NPV approach, and mathematically modeling the
number of packages needed, they found the packaging investment would be
far too large compared to its benefits. The same funds could be more
profitably employed in building additional production capacity.
It
should be noted that the various "return on investment" (ARR, IRR)
methods also consider the time value of money, but most result in a
rate of return rather than a profitability estimate. Although they can
be useful for determining whether an investment meets a hurdle rate,
they are not the most preferred method of financial evaluation because
they do not emphasize profit.
Initial investment
The
first cost to consider is the initial investment in containers, which
depends on a number of factors such as the length of the shipping
cycle. This includes the amount of time the container is at the
shipper's facility, in transit, at the receiver's facility, and in
return transit, including any sorting and cleaning operations in
between. An important element is the degree of control, since active
management and control can reduce the cycle time. The shorter the
cycle, the lower the investment.
An
important element of cycle time is the amount of variation. Cycles with
little variation are best because there does not need to be an extra
inventory of containers to cover peak periods. High cycle variability
has been key in some projects where returnable containers were deemed
not cost justified.
The
investment also depends on whether containers are standardized or
specialized. Standardized containers, which are interchangeable and may
be used by a number of shippers and receivers, minimize the number
needed by using a common safety stock to cover demand variations
between users. Standardization of containers can add further efficiency
when it goes across an industry. For example, the Automobile Industry
Action Group, the UK's Institute for Grocery Distribution, and the
Material Handling Institute's Produce Task Force on Returnable
Containers are organizations attempting to standardize returnable
containers for their industries so suppliers to firms in these
industries can plan for uniform sizes and shapes of packages.
The
size of the investment also depends on how many parts are shipped
during the cycle time periods and how many parts fit in a package,
which may be different from the number in a corrugated box because of
different interior dimensions.
Most
projects show the greatest financial benefit in the savings from
eliminating expendable packages, including purchase and disposal costs.
The benefit is less when there is some income from recycling expendable
materials such as corrugated board.
Operational costs
The
cash flows dealing with operational costs are more difficult to
estimate. Clearly there will be return transport costs directly related
to the distance. If the distance is too far, a returnable packaging
system may not be cost justifiable. Many automobile manufacturers
require returnable packaging only from their nearby suppliers and
package parts from overseas in expendable containers. In some cases,
especially when suppliers are far away, a consolidation center near the
assembly factory is required to consolidate inbound deliveries, and the
same facility can be used to sort empty packages for return .
The
cost can vary greatly depending on the terms of transport contracts
with carriers. When the same carrier is used for both legs of the
journey, the cost is rarely double the inbound cost.
Return
transport costs also depend on the configuration of the packages. Some
are designed to nest or collapse when empty, which can minimize
transport cost depending on whether or not the returning trailers or
boxcars are full. If containers are simply swapped on a one-for-one
basis, nestability is not an advantage and may even present a cube
utilization problem if the box interior is not square.
The
number of containers to be returned at one time is an important
consideration. If containers need to be returned at LTL
(less-than-truckload) rates, the transport cost can be very high. On
the other hand, it may not make sense to stockpile empty containers
until a full truckload can be shipped because this requires more
containers.
Similarly,
the inbound cost of transporting full containers may be different from
that for corrugated boxes because of differences in cube utilization
and/or stackability. For many users of returnable containers, inbound
transport costs are lower because the containers are more easily and
safely stacked in trailers.
All
operational costs that will change due to the switch from expendable to
returnable containers should be considered. Use activity based
costing--estimated or measured--to show the effect of changes in cost.
The activities include container sorting, marshalling, washing, and
repair. Also account for the extra space required.
Operational
benefits should also be considered. These may include the ability to
automatically sort inbound product once it is packed in uniform
containers, modular stacking, better housekeeping, less damage, and a
more uniform way of presenting items to the people who empty the
package.
So
the answer to the question, "Do returnable containers save money?" is
"It depends." It is important to do the math and consider system-wide
costs. A spreadsheet study sponsored by the corrugated fiberboard
industry found the following limited situations financially favor
returnable packaging:
� Periods of high corrugated fiberboard prices;
� Short return distances, low backhaul costs;
� Little or no washing;
� Long container life;
� Consistent demand;
� Comparable inbound/outbound payloads.
Most
firms do financially evaluate a returnable packaging system before they
invest. Many users, however, admit the decision to invest was not based
on an economic evaluation but is part of an operational strategy.
It
is rare for firms to perform an ongoing financial analysis as a
returnable packaging program progresses. This is probably a mistake
because future decisions can be more reliable if based on historical
data. As returnable packaging programs grow, there is much to be
learned from experience.