I recently read a great business school case study by Terry Tremwel (Walton College of Business, University of Arkansas), Dan Lynch (Eli Broad Graduate School of Management, Michigan State University), and Jim Crowell (Walton College of Business, University of Arkansas) called “Phoenician Phoods, Breakfast Cereal Manufacturer and Distributor.” The case focuses on a business executive at a fictitious food company that has to make a tough decision involving SKU rationalization, packaging, case pack size, transportation costs, manufacturing optimization, and new product rollouts.
I’m not going to present the case, which I recommend that you read, but here are some factoids from it to illustrate the importance of packaging in putting together a unified business and supply chain strategy.
- Packaging affects a company’s sales. In 2007 and 2008, dry cereal manufacturers that reduced the amount of cereal sold per package to keep prices between $2 and $4 gained market share at the expense of manufacturers that raised prices and kept the packages the same size. Because the volume of air in packages is regulated, package sizes had to be reduced in order to decrease the amount of cereal sold per package.
- Research shows that cereal case size influences the profitability of stock keeping units (SKUs). Products that are “A” or “B” SKUs in terms of sales benefit from larger case sizes, while “C” and “D” SKUs benefit from smaller case packs. A case size that better corresponds to the rate of sales will achieve a better in-stock position and thus higher sales.
- Properly sized cases also leads to a reduction in store labor associated with fewer trips to the backroom.
- A more profitable SKU is more apt to keep its facings and stay on the shelf.
- But this is a “nested-doll” problem. Dry cereal is a light product that sells at a good velocity. So, most of the shipments will likely be full truckload. The trucks will cube out before they weigh out. The size of the package and the number of products in a case affects the case dimensions. The pallet used will be one that conforms to Grocery Manufacturing Association guidelines (40 inches wide by 48 inches long by 50 inches high) to allow for efficient truck loading and reduced transportation spend. The packages should be sized so that the cases stack in a way that meets these pallet guidelines.
- The packaging and palletizing and wrapping should allow these pallets to be stacked two high without crushing the goods on the bottom pallet.
- There is a “product swell” tradeoff that can be made to help with this nesting problem. In order to conform to government requirements, the boxes when sealed must have not less than 80 percent of the package contents be product. A box size that helps you build to the right pallet dimensions may have to make use of “product swell” – add extra cereal to each box – to be in compliance.
- A product in a new package is a new SKU. A retailer is unlikely to give a consumer goods (CG) company more shelf space. So, introducing new SKUs means retiring old ones. Planning and executing for a product’s end of life is something many CG companies struggle to do well.
The core supply chain management issues involve choosing the right product, case, and pallet sizes in a manner that will help increase product sales while lowering inventory, transportation, and packaging costs. As you can see, there are many complex tradeoffs.