Lesson- 26 Basics of Economics
Packaging plays a vital role in product distribution. It is the major factor in ensuring that the quality that is obtained at the end of the production line finishes up in the hands of the ultimate customer. Cost effectiveness is the sole criterion for success in today’s competitive business environment. Therefore efficient and cost effective packaging is an essential element in the marketing of a product. Packaging emphasized the delivery of the product in a sound condition at minimum overall cost. Thus the cost factor has a direct impact and the components of overall cost need to be clarified. It is needless to stress that costs associated with the packaging are incurred right through any operation and the basic material or container costs should never be considered in isolation. The factors contributing to the overall cost of packaging a particular product are
1) Package cost
2) Storage and handling cost of packaging materials
3) Quality control cost
4) Packaging line operations costs
5) Storage costs of filled package
6) Cost due to package/product loss/spoilage
It has been proposed that in the selection of packaging materials where cost is often a determining factor, several units of measurement may be considered. Many packaging materials are purchased and paid for on a per kilogram basis. Since the yield factor (square inches per square meter per kilogram) may determine the number of packages that can be prepared from a given weight of packaging material, it too must be considered. The concept of cost per unit area is universally accepted and packaging experts employ this mode of cost operation.
In deciding the package cost, one must consider the effect of the potential loss customer goodwill. If alternative systems are developed for the packaging of the product, one must decide whether to maintain the same packaging cost and reduce the loss rate or to reduce the packaging cost and keep the loss rate constant, also taking into consideration the effect on the customer. Two issues have become apparent when we refer to competitive packaging materials. Firstly, materials must have certain characteristics to perform the functions which are required in their use as a packaging material. Some materials are better placed than others and there is normally a comparison of their properties to decide which will perform best under any given circumstances. No material is perfect and in most cases there is a trade-off of properties to reach a final decision. It is interesting to note that most packaging materials can, through highly scientific means and advanced technological developments, overcome some of their inherent weaknesses to place them in a better competitive position i.e. their toughest opposition.
This invariably costs money, which leads to the second point, namely that of the economics of packaging material. Upgrading the product technologically may be a technically feasible proposition but the strong question remains is it commercially feasible. And in this respect the commercial realities of a product carry more weight than anything else. The crux of the matter is that customers will only convert to an alternative packaging medium if the conversion results in better bottom line performance.
This is a very stable industry, which has grown steadily over many years. It is prone to violent swings in the economic cycle, mainly because the major off-take is pitched at the non-durable segment of the market with a heavy emphasis on beverages – alcoholic and non-alcoholic as well as food.
Packaging, in product distribution is a techno-economic function aimed at maximizing sales, while minimizing the total overall cost of distribution. It can be regarded as a benefit to be optimized rather than merely a cost to be minimized. Packaging must be considered in relation to four major factors in industry today: materials utilization, machinery and line efficiency, movement in distribution and management of people.
26.2 Elements of total cost
These are seven elements of packaging costs:
Packaging Machinery costs
Packing Process costs
In computing economics, the packaging professional should address direct costs such as materials, labour and utilities associated with the packaging. Allocation of indirect costs such as administration, sales, plant over-heads or return on investment are better left to the financial professionals, since each organization has its specific set of rules for accounting.
The development costs are involved in the development of a package and normally carry through issuance of the final specification. Examples would include concept research, design, models, tooling, samples, sample evaluation, testing, test marketing, specifications, preparation, quality control, start-up etc. There will be occasions when the development costs of a package are so expensive that it might require several years to amortize the initial costs, although 1 to 2 years is a normal payback period. While one-time costs are generally regarded as costs that are paid “one-time” and are not repeated during the life of a packaging specification. They include both the above development costs as well as costs for tooling, dies, special moulds, and gravure cylinders. And finally the material costs. We usually think of this when packaging economics is discussed. It is really only part of the costs, and even material costs have their own factors, some of which are frequently ignored, with later embarrassment.
Material costs would include:
Basic unit price
Packaging materials storage and handling
Shrinkage of packaging materials
Sampling and inspection costs
An effective materials pricing policy would include knowledge of:
how the material is produced
where it is produced
alternate methods of price quotation
specification / quality assurance control
A packer need not own all the equipment in his packing lines since lease and rental arrangements are available on many kinds of machines, such as can closers, cluster packers, vacuum cappers, and in general machines which are part of packaging systems. Supplier service and maintenance contracts are available to go with the machinery. The allocation of rental and service charges to total packaging costs is quite easy.
All labour costs (direct and indirect), overhead and incidental materials must be calculated in devising a truly valid process. Plant overhead, floor space, energy and inspection costs must be calculated. In order to save utility charges, some companies elect to install their own energy plants. Fixed overhead should be known and computed into the cost of every package produced. The total monthly costs, divided by units packed, will identify a cost per unit for such materials. With a couple of months’ records on such items the packaging technologist can readily estimate the cost impact on any proposed new package. All expenses concerned with physical moving finished packaged goods from the packaging plant to the customer are distribution costs. These costs include packing materials, palletizing, warehousing, loading and shipment. Certain products need special warehousing conditions.