What are customers thinking? The smart ones are being converted in the service versus commodity debate

Paperboard Packaging, Feb, 2005 by Tom Andel

To the uninitiated, the following story would sound like a betrayal. To many corrugated and folding carton converters, it's just the cost of doing business. You be the judge:

Phoenix Packaging is a small Phoenix-based corrugated and folding carton converter whose competitive advantage is custom design. Its president, Tom Skinner, says his company's competitive strength lies in out-designing its competitors. For one customer, Phoenix has provided 20 different computer-aided designs.

The company submitted them electronically.

That made it all the easier for the customer to send those files to a box maker in China.

That box maker now produces the boxes at a fraction of the cost that Phoenix could.

Betrayal? Not necessarily. For some box makers it's business as usual.

"The client was honest with me on the front end," Skinner says. "We billed the company when we did the design work, and then they said they needed prototypes."

Phoenix only offers this kind of license to its most loyal customers, he adds. It doesn't have the time to be as liberal with every one. Skinner wishes he could ignore China, but he can't. The country's impact on price is becoming the nature of the beast that is today's packaging market. It's a monster which is part commodity and part customization. Ignore either and suffer the consequences.

The Internet compounds the beast's power.

"Customers ask for all sorts of things and they put it out for Internet auction quite often," says Jan Steiner, president of Thoro Packaging, a folding carton converter based in Corona, Calif. "We get outstanding quality report cards from our customers, yet they'll sometimes choose to shift their business if there's a price reduction from someone else."

"We had an opportunity with a new customer," she adds. "They did their research and they were so excited to give us their first order. When we called the other day and said we didn't get the art, we found out they wanted to do business with another company that met our price."

New Buying Influences

That's just a small example of how much the buying influence on the customer side has changed. They're younger, and too often keep the bottom line at the top of their mind.

"Quite often the one making the decision is not the one who has to put up with a poor quality product," Skinner says. "The buyer is often displaced. He might be in an office in Maryland but the manufacturing plant might be in North Carolina. He wants to build his own track record, go back to his boss and say he saved $185,000 last year on packaging. That sounds great, but on the local level the plant may have had to add three employees to do more labor because the new vendor couldn't do everything that the old one did."

Skinner has seen the consequences of the bottom-line mentality first hand. He lost a furniture account to a lower-bidding competitor. The new vendor started producing the same style boxes Phoenix Packaging did, but because the new provider used lighter-weight liners, damage went through the roof.

"The customer had to go back and re-engineer their packaging with this vendor using heavy duty doublewall containers," Skinner recalls. "So from a cost standpoint they went right back to where they were. In the meantime they ticked off customers because they shipped out a lot of broken furniture."

There's not much you can do to conquer that centralized, purchasing mindset of flighty corporate customers. But you can build a multi-faceted sales force that knows how to relate to buyers at established accounts. According to Skinner, the purchase of packaging is driven by demographics as much as television ad sales are.

"I'm a baby boomer," he says. "I can't sell to the X and Y generations. I hire the sales people who can relate to those age groups. If I had a whole fleet of guys my age, we'd miss out on a lot of accounts because we wouldn't be able to communicate effectively."

Take the case of another Phoenix Packaging customer in the furniture industry. It was recently gobbled up by a conglomerate and became a small but profitable division. When the edict came down to cut packaging costs, the buyer, whom Skinner has known for 23 years, asked him to figure out how to meet the edict.

"He wouldn't put it out for bid," Skinner explains. "We were able to find ways to cut costs and save them enough money to make corporate happy and they left us alone."

Customers Getting It

There have been enough horror stories involving damaged product and added costs for leading companies on the customer side to get the message.

"I think the role of packaging needs to be more specialized and less of a commodity," says Thom MacLean, vice president of order fulfillment for Osborne International, Cleveland-based suppliers of industrial brushes. The company has operations in 12 countries and employs 2,000 worldwide. "In manufacturing today, with so many companies emphasizing lean concepts, packaging needs to fit a very specific purpose. Commodity solutions are cheaper but may not enhance the value of the product. Packaging suppliers also need to be more service oriented in helping manufacturing or distribution customers with creative solutions for getting products to market." Skinner understands his customers' aversion to holding inventory.