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Solving the price-per-piece dilemma

Solving the price-per-piece dilemma

This packaging distributor learned how to get customers to stop focusing on piece price and start looking at total cost of operations.

In a typical pick-and-pack distribution operation, freight and labor costs comprise approximately 94 percent of the variable costs. Packaging products such as case sealing tape, strapping materials, shrink and stretch wrap and similar supplies make up the remaining 6 percent of the cost. Yet when looking for ways to lower costs, distribution centers typically turn to their packaging distributors and try to pressure them to lower their prices on packaging supplies.

Arnold’s Factory Supplies is a packaging distributor in Baltimore. A few years ago, fed up with fighting the price-per-piece battle with customers, the company decided to take a different approach. It started offering free surveys to analyze its customers’ pick-and-pack operations and suggest cost reduction opportunities.

“The easy thing to do is call your vendor up and ask for a price break. It’s not so easy to analyze freight costs and labor activity. So we started doing it and it has really benefited us,” says Mick Arnold, president of the 71-year-old, family-owned distribution company.

For its work demonstrating how it can help customers lower their costs and streamline their packaging and shipping operations, Arnold’s Factory Supplies earned the 2004 Distributor Value-Added Partner of the Year award from the Industrial Supply Manufacturers Association.

Focus on costs
Arnold’s conducts surveys for a wide variety of companies, including cosmetic, pharmaceutical, truck and automobile parts and ornamental ironworks distributors. It typically focuses on distributors with annual revenues that exceed $50 million a year.

“We have to make sure we can generate enough profitability from margin on materials or automation fees to fund the time it takes to conduct the survey,” says Arnold.

The eight-step survey takes about 20 man-hours to complete and some have taken as much as 100 hours from start to finish. It examines storage efficiency, material handling, productivity, labor allocation, software capability and applications, material costs and freight costs.

“We try to identify if there are any bottlenecks in the operation,” says Arnold. “Is picking keeping up with packing, is packing keeping up with manifesting? We’ll go in and identify constraints and then try to figure out what we can do to alleviate the constraints.”

A rep begins by asking a series of questions to gather benchmark data. He looks at the number of orders per day, lines per day, freight ratios to total revenue, head count, average dollars per hour and average annual cost per worker per year.

“The purpose is to get companies to focus on their real cost drivers, as opposed to the cost of packaging and shipping materials,” says Arnold.

Typical labor reductions result from using automation; freight reductions come from changing to lighter dunnage materials and strapping packages together when they ship to the same location.

A survey that Arnold’s Factory Supplies conducted for a cosmetics distributor demonstrates how its efforts can generate dramatic cost reductions. Here are some of the changes that Arnold’s implemented:

Increased automation. About 80 percent of the cosmetics distributor’s orders took two or more boxes to ship. If an order required six boxes, for example, as the first box moved from the picking area, a worker removed it from the line and set it aside for staging. When the sixth box finally arrived, the employee used a hand truck to transport all six boxes to the manifest area where the boxes were filled with dunnage (packing material), sealed and labeled.

Arnold’s recommended extending the conveyor line from the picking department all the way through to shipping. “Instead of stopping the conveyor line and having everything hand-carried to a consolidation area, we powered it all the way through shipping and into the UPS room,” Arnold says.

Since 20 percent of the orders required only one box to fill, those orders now flow seamlessly from picking to shipping with no manual intervention.

Consolidated box sizes. The company used a variety of box sizes to ship products to customers. For orders requiring two or more boxes to ship, switching to a uniform box size enabled the company to strap two or more boxes together and ship them as a single package. With the smaller box, two boxes strapped together still came in under UPS dimensional weight requirements, lowering freight costs.

For example, if the company received an order requiring two boxes to ship, it used to fill a large box and a small box and ship them via UPS. If the weight of the large box came to 21.5 pounds, UPS rounded it to 22 pounds. If the small box weighed 2.5 pounds, UPS rounded it to 3 pounds. Using two medium-sized boxes, the company could split the order between the two boxes, strap them together and ship them as one 24-pound package. Instead of paying a $20 shipping charge, the company paid slightly more than $16. Click here to see the documentation that demonstrates freight savings across a variety of UPS zones.

Over the course of 12 months, this one simple change generated huge cost savings.

“By changing the box sizes, which enabled them to strap the products together and ship them as a single package via UPS, it saved them a quarter of a million dollars,” Arnold says.

Substitute fill material. The cosmetics distributor previously used styrene “peanuts” as fill material to protect products during shipping. The material is messy and slow to load into boxes from a gravity-fed hopper, and also creates storage problems. Peanuts arrived in truckloads of 240 bags at a time, which required a great deal of time to unload, move into storage, retrieve from the warehouse when needed and load into hoppers. Arnold’s suggested switching to inflatable packing, which is more user-friendly, requires less storage space and can be dispensed at a much higher speed.

Automated sealing machines. After orders were picked, boxed and filled with dunnage material, employees previously used handheld pistol-grip tape dispensers to seal the boxes. Arnold’s recommended installing a closure machine, which adjusts for various box sizes automatically and closes and seals boxes at a rate of about 15 cartons per minute. Much faster than a manual process, it also applies an exact amount of tape to the box, so there’s less waste.

After completing the survey for the cosmetics distributor, Arnold’s Factory Supplies generated total freight savings of nearly $250,000. The automation enabled the company to re-deploy employees, resulting in labor cost savings of nearly $27,000 a year. Even with the cost to extend a conveyor line and install new automated equipment, the company realized a return-on-investment in about three months.

Arnold says switching from a transactional style of selling to a value-added service approach has paid big dividends for his company.

“This one survey took the better part of a year from initial data collection to final implementation. They’re one of our best customers to this day,” he says.