Returnable/reusable logistical packaging: A capital budgeting investment decision framework

Journal of Business Logistics, 1996 by Rosenau, Wendee V, Twede, Diana, Mazzeo, Michael A, Singh, S Paul

Returnable logistical packaging systems can offer significant cost savings over traditional single use packaging in some marketing channels. Returnable packages can dramatically reduce routine package purchase and disposal costs, but they require a large initial investment. The cost of a single reusable pallet bin may be over $100 and steel racks can cost up to $3,000, versus less than $20 for a single use corrugated fiberboard container. The initial container system investment for an entire logistical system can be millions of dollars.

Therefore, returnable shipping containers should be considered a corporate asset rather than an expensed item. Thinking of packaging as a long-term asset is a new idea for most packaging and logistics professionals, since packaging has always been considered an expense. Even the suppliers of returnable containers usually emphasize the packages' payback period rather than their profit potential.

The objective of this research was to explore the financial evaluation methods used for returnable container systems and to propose a framework for considering the packaging investment decision. Quantifiable and nonquantifiable costs and benefits were explored. A case study analysis approach was used. The analysis involved ten leading vehicle assembly companies which have recently made considerable investments in returnable containers. The words, "returnable packaging" and "returnable containers" are used interchangeably throughout this paper.

RETURNABLE SHIPPING CONTAINER SYSTEM GROWTH

For decades, most shipping containers have been made from single use disposable corrugated fiberboard. But such "expendable" packages are not always the most cost-effective. Purchase and disposal costs can be high, especially for products regularly shipped in high volume. The purchase price of corrugated fiberboard packaging skyrocketed in 1994, up by 25% in just one year.

Disposal costs have risen dramatically since 1980. Furthermore, there is increasing state legislation, such as that in Wisconsin, to limit landfilling or burning of shipping containers. Logistical customers, and some of their suppliers, increasingly seek strategies to reduce high cost of package disposal.1

Disposal costs, transportation deregulation, and the trend to more integrated logistics management, have facilitated an increase in reverse logistics, including returnable shipping container systems.2

Since 1980, the power of carrier associations to make packaging requirements has declined and there are more "Just-in-Time" logistical systems. As a result, carriers now contract to provide timely delivery of small lot quantities compatible with customer requirements, de-emphasizing full trailerload (or railcar load) quantity shipments. As well as reducing inventory, this reduces the number of packages in the logistical cycle, reducing the potential investment in returnable packaging. Carrier contracts have also made it easier to negotiate low return transportation rates and dedicated delivery routes.

Therefore, an increasing number of shippers and their customers are considering the investment in returnable containers to replace their expendable packaging systems.

The growing applications have two things in common: a vertical marketing system and a relatively short (in time and distance) logistical cycle. A vertical marketing system is one where the shipper and consignee are linked by a common ownership, contracts, strategic alliances or administration. In a vertical marketing system, the participants acknowledge and desire interdependence, and strategies to increase systemwide profits take precedence over individual firm profits.3 Such a partnership is important because of the need to control the movement of returnable containers and the need to share the investment cost and benefits. All partners in a returnable packaging system must cooperate to maximize container use, and an explicit relationship is required for coordination and control. The partnership reduces the likelihood of lost containers, increases the incentive for prompt package return, and facilitates negotiation regarding sharing of the expense and savings, including which party "owns" the containers. Most of the growing applications are for the delivery of factors of production (parts, ingredients, components, etc.). When there is no partnership, returnable packages usually require a deposit system as an incentive for participation.

The shipment cycle should be short, in terms of time, in order to minimize costs. The size of the investment in the container "fleet" depends on the number of days in the cycle and the number needed per day. The distance should be short to minimize the return transportation costs.

Users find that an investment in returnable container systems can reduce purchase costs in the long run, improve cube utilization during transportation, and reduce packaging disposal costs while adding return transport, sorting, and tracking costs.4 However, the costs and savings do not accrue to the same party, which highlights the need for effective "gainsharing" among partners. The shipper saves the purchase costs, the consignee saves the disposal costs, and allocation of the transportation and sorting cost depends on the terms of freight delivery. The investment can be made by either party, subject to negotiation so that the investing firm can share the savings. There is a conviction that a mandated "take back" policy, like the German Topfer Law, would facilitate the use of returnable packaging because all costs and savings are the shipper's responsibility. The Topfer Law requires that manufacturers and distributors must take back "transport" packaging after it is used.5