Packaging Supply Prices Surge

Over the past year or so Linerboard – used in corrugated boxes, resin used in film products, and steel have all seen significant cost increases.  Of course the oil companies (Petroleum) and the global economy play a role in these increases – but so does Supply and Demand.

Demand has increased as suppliers have moved to reduce inventory levels – resulting in an upward pressure on finished goods pricing. Of course, some of  these increases are justified - based on reduced inventory levels and an upward trend in the cost of raw materials – but it does beg the question of

"How do you know when price changes are legitimate?"

Most buyers believe that their suppliers are looking out for their best interests. They have enjoyed relationships with their supplies for years – and, don’t get me wrong, this is often the case; however, the more we know about the market, the better off we are in the negotiating process. This seems more than just common sense – it seems like every business should have a sound understanding of their supplier’s markets.

Ask yourself these Questions:

1. How do you know if a price increase from a Packaging supplier is justified or not?
2. What methods do you have in place to protect your business from unjustified price increases?
3. If you have not experienced Packaging price increases this year, what does that mean?
4. Do you have someone in house who has the expertise and who has access to industry pricing indices so that your suppliers may be held accountable for their pricing practices?

As a leader in the Cost Containment industry we would like to offer our perspective:

1. The only way to know if a price increase is justified is to continually monitor what the Packaging industry is doing as a whole as well as on an individual category basis. Industry indices exist to provide guidance regarding raw material costs, inventory levels, and demand. Your specific categories, expenditure levels and pricing should be cross checked with the indices.
2. In order to ensure protection from unjustified price increases you might be able to tie your product pricing to recognized industry indices. Using this approach, all changes are based solely on changes in the index, and there is no room for "unnecessary margin bloatingt” or exorbitant unilateral price changes by any one supplier. With the right expertise and monitoring, buyers will also see index decreases, which should result in lower market prices.
3. Where a company has not experienced Packaging price increases this year, it is likely that a supplier had been enjoying substantial margins – enough to absorb industry increases and still maintain profitability. This is worrisome because eventually – and most likely sooner rather than later -  margins will shrink to the point that prices will go up – but not by a small amount!
4. Having a staff member with specific Packaging expertise and access to industry pricing indices was traditionally seen as a luxury and one that is only available for the largest of companies – but other options are available for the small and mid-sized organizations; however, without such knowledge, we just can never be sure if current prices are reasonable.

It is difficult to forecast the future costs of materials and some experts think costs have peaked for the time being, while others see another 6-12 months of cost escalation.

Which ever expert turns out to be correct, taking a proactive position in regard to price management will put any company in a better position to maximize their cost control and, at the same time minimize their exposure to unjustified cost increases.

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