"The Most Important Thing is Standardization"
3/2/2023 Innovative Processes Interview

"The Most Important Thing is Standardization"

In an exclusive interview with FACHPACK360°, Karsten Beutner, CEO of Berndt+Partner Consultants, calls on packaging manufacturers to introduce raw material risk management, professionalize purchasing, and come up with new ideas for pricing with respect to customers.

Karsten Beutner is partner at the Business Consulting Berndt & Partner. Karsten Beutner is partner at the Business Consulting Berndt & Partner.

Mr. Beutner, pandemic, inflation and war have caused major upheavals in the global economy. The supply chain issue in particular was on everyone's lips. To what extent was the packaging industry affected by this?

When looking at this, one to differentiate between plastics and other packaging materials. In the case of the latter, the supply chain issue is not so dramatic, since most raw materials and packaging are traded on a European basis. Take corrugated board production. The radius of action is a maximum of 200 kilometers. Anything beyond that is uneconomical.

And when it comes to plastics?

Here, the main issue is raw materials. One reason for the problems was and is not only the lack of raw materials, but also the availability and prices of containers, which had risen by a factor of 10 during the peak phase. 

With dramatic consequences for the industry!

Yes, because the share of raw material costs in the packaging industry is 50 -– 70 percent. So, if raw material prices rise by 10 percent, then 5 to 7 percent will come directly out of your own margin if the costs cannot be passed through. This is an enormous amount, since most of the packaging industry operates with EBIT margins of around 10 percent. In addition, the shortage of raw materials also leads to higher makeready times, as production needs to be constantly adapted to the available materials. The logical consequence is that output falls while fixed costs remain the same, and this also has a negative impact on margins.

Does this also have an impact on customer relations? After all, many packaging manufacturers have committed themselves to delivering fixed quantities with clearly defined quality criteria.

Above all, the quality argument is important. With almost all brand manufacturers, the packaging and its composition are clearly specified. If individual components are replaced, the entire approval process has to be repeated -– this often takes many months.

What do you advise your customers to do to minimize these risks?

To standardize their raw material portfolio as much as possible. This is the only way they can increase their productivity and reduce complexity in production. But in doing so, we often encounter resistance. In the opinion of many decision makers that their packaging solutions are extremely individual and consultation-intensive and therefore cannot be standardized. This is a fallacy, because in times of digitalization, most materials can long since be purchased via digital tenders or platforms. 

In addition to standardization, you call for professional commodity risk management. What does that look like?

Companies must answer one central question: what are my critical raw materials? As a rule, they are materials that are contained in large quantities in individual products or that are used for many products. But this is also the case when the prices and availability of raw materials are subject to major fluctuations. And then it's a matter of drawing the right conclusions. 

These are?

The most important thing is standardization. Companies must significantly reduce the number of raw materials and the complexity of products. They also need to diversify their sources of supply more and purchase their raw materials with great foresight. 

That is the daily business of purchasing, after all. 

That's right, but many companies still need to professionalize their purchasing. In many cases, demand planning is not done well, and important price indices are not taken into account at all or only carelessly. Purchases are made according to the motto "it costs what it costs". And that can have disastrous consequences.

Another problem is the market power of the branded goods companies. How can packaging manufacturers respond to this?

The packaging industry is in a sandwich position. Both suppliers and customers are often multibillion-dollar corporations, while they themselves are mostly medium-sized companies with 30-80 million euros in sales. They are then confronted with the fact that raw material suppliers increase their prices sharply and at short notice, but they cannot pass on the higher costs to their customers at the same speed. The logical consequence this is as well: either you lose the business, or you accept that the cost increase, at least temporarily, impacts your own margin. 

How can packaging manufacturers counteract this?

Price escalator clauses are a classic instrument. However, these are often designed in such a way that they take effect too late, and the packaging industry still bears most of the risk. The fairest way would be to agree on prices that are based on known and independent price indices. These exist for almost all areas, starting with raw materials and ending with packaging materials. But that alone is not enough. Aspects such as personnel, energy, machine, or logistics costs must also be included. And then there must be clear agreements on how large the swing must be and how long it must last in order for prices to be corrected upwards or downwards. This is already being done in isolated cases, but overall, there is still a long way to go.