ASSESSING THE VIABILITY OF REUSABLE PACKAGING: A RELATIVE COST APPROACH

Journal of Business Logistics, 2005 by Mollenkopf, Diane, Closs, David, Twede, Diana, Lee, Sangjin, Burgess, Gary

INTRODUCTION

Global awareness regarding environmental responsibility has caused firms to investigate the environmental implications of logistics strategies. Van Hoek (1999) discusses multiple ways that firms can reduce their ecological "footprint" through improved management of logistics and supply chain operations. Reduced packaging waste is of the areas he cites. Since logistics is one of the major drivers of packaging requirements, firms can develop more environmentally responsible logistics operations to reduce packaging waste. As part of such an initiative, reusable shipping containers are increasingly being applied in production environments. When a firm's supply chain is well developed, the costs, benefits, and operational responsibility for reusable containers can be easily considered and evaluated (Twede 1995).

Not only can firms minimize their ecological footprint through reusable packaging, but many firms have also found that they can significantly reduce cost as well. Firms such as John Deere, Herman Miller, IBM, Ford, General Motors, Chrysler, and Toyota have all made significant investments in reusable packaging systems and have also reaped significant savings (e.g., Andel 1995; Auguston 1993; Pashall 1986; Trunk 1995; Witt 1986, 1993, 1994). On the other hand, not all companies find that reusable containers are cost effective (Kampschroer et al. 1996). However, anecdotal trade press reports of such successes (or not) generally include only the purchase cost savings amortized over the reusable containers' lives and do not include logistics costs which can be substantial. Previous literature regarding management of these reusable assets doesn't consider the implications on other supply chain processes such as customer and/or supplier management processes and relationships (Rogers et al. 2002).

While reusable shipping containers are increasingly used in production environments as firms seek to reduce cost and eliminate waste in their supply chains, the overall cost impact of such decisions remains unclear. As companies seek to compare the relative economic benefits of reusable shipping containers and expendable (recyclable) corrugated fiberboard packaging, a better understanding of the relative costs of such systems is needed. Several studies have investigated the economic justification of reusable containers (Block 1999; Cozart 1997; Findlay 1997; Kibler 1997; Parsons 2002; Turvey 1998). These studies compare the cost of reusable packaging systems to expendable systems for a particular product in a specific manufacturing and logistics system before a packaging decision is made. Each of these studies has developed a net present value investment and activity-based costing spreadsheet decision tool to evaluate specific situations. However, the results tend to be situation specific, and are not generalizable across other business situations or industrial settings.

The use of reusable containers does not always result in lower overall costs relative to expendable containers because firm sourcing strategies and operations differ. A number of other factors affect the system cost, including the type of packaging used, transportation characteristics, handling, labor, and disposal costs. Thus, the objectives of this research are:

1. To develop a relative cost model for assessing the packaging choice decision; and

2. To evaluate the relative influence of the various factors incorporated in the model.

To address the first objective, a generalizable model is developed to determine the combination of packaging and logistics costs to provide better understanding concerning the situations in which reusable shipping containers can positively impact a firm's performance. The second objective is addressed using static simulation and regression analysis to determine relative factor weights influencing the packaging use decision. Using sample data from a local firm, a static simulation is created to assess the packaging choice decision across multiple combinations of variables in the cost model. Using regression analysis, the results of the simulation are then used to address the sensitivity of the model to changes in any of the included variables. Simulation modeling provides a systems approach to understanding the interrelationships of the factors in the cost model (McClelland 1992) and provides the opportunity to conduct "what if analyses. Such an approach is particularly useful when trying to assess the effects of change across a number of variables (Rosenfield, Copacino, and Payne 1985). Regression analysis is then used to facilitate the "what if analyses, by assessing the relative importance of variables, and also to demonstrate the sensitivity of the model to changes in variable values. The result is a methodology for managers to determine the relative cost implications of packaging alternatives and guidelines regarding the major cost drivers in the packaging decision. This also provides guidance as to which cost elements should be researched with the greatest consideration for accuracy.