Logistics Issues in Returnable Packaging

by Diana Twede, Ph.D., Michigan State University School of Packaging

One of the most interesting trends in logistical packaging is the use of returnable containers. Over time, returnables can cost substantially less than expendable corrugated fiberboard boxes--saving both purchase and disposal costs. On the other hand, the use of returnable containers can significantly raise logistics costs because of the need to control the return cycle.

The use of returnable packaging upsets the traditional cost allocation balance. It requires a large investment in containers, additional transport costs and an infrastructure for empty container sorting, as well as systems for management and quality control.

The obvious benefits are the elimination of disposal costs and the need to repeatedly purchase packaging. There are also operational benefits. Returnable packages can be designed to make products and packages easier to pack, handle, stock, and unpack. They can facilitate the use of automation. Sometimes they can even reduce logistical operation costs since they are designed to optimize transport and storage cube.

A system-wide packaging change, where a set of suppliers and/or customers have jointly agreed to participate in the program, is more complex than the "closed loop" type of delivery system.

These supply chain applications require a great deal more management and coordination. The empty packages may be interchangeable, and are often distributed to be refilled in a separate logistical system from that which delivered them. The number of empty packages supplied is based on forecasted need rather than one full swapped for one empty.

By minimizing the number of days in the inventory replenishment cycle, supply chain trends such as just-in-time (JIT) delivery also minimize the number of returnable containers required for a system. The JIT trend is usually accompanied by strategies to consolidate the number of suppliers and reduce their geographical distance from the customer. These factors also favor the use of returnable packaging because they increase control, reduce transport cost, and reduce the required safety stock of containers.

The continuing trend to tighten supply chains is favorable for returnable packaging applications. A well-managed supply chain will look for the lowest system cost, not just the cost for one channel member. Consideration of returnable packaging requires such a systems approach.

Container management

Managing a fleet of returnable containers is harder than it looks. Companies which excel at inbound and outbound logistical arrangements have not been nearly so successful when it comes to managing their container fleets. Containers are routinely misdirected or lost, and they are rarely tracked in system-wide information systems. Yet it is vital to control such a large and constantly moving investment, to make it match supply and demand. The number of containers needed can be increased by several factors: longer stockholding by the receiver, reuse of the packages by the receiver, the receiver passing packages to another user, and failure to collect the empties and get them into a condition for reuse.

Tracking systems need to have real-time container counts from every point along the channel--every staging, replenishment, and cleaning location--not just shipping and receiving docks. This requires accurate counting, reporting, and a shared computer database.

Most logistics management information systems use automatic identification to register movement of product and packages. Bar codes require a direct line of sight and only one can be read at a time. Radio frequency identification (RFID) overcomes this problem. A whole roomful of RF tags can "call home" simultaneously. As the cost of RFID comes down, returnable containers are expected to be a good application. The tags are durable, small, and can operate in harsh environments.

Financial evaluation

Most firms that choose to invest in their own returnable container system base the decision on some kind of financial evaluation. They usually compare the costs associated with returnable packaging to the expenses for their existing disposable packaging.

This may be done on an item-by-item basis or on the basis of an entire supply chain. Evaluating each single part or supplier separately results in more attention paid to details that are specific to the part, supplier, or package. Specific container styles and systems can be optimized, and a corresponding reduction in piece price can be assigned.

With this method, however, the larger investment is not considered as a whole, nor are the system-wide cost implications. Returnable packaging is considered an expense (and compared to expense avoidance) since the threshold for investments in most companies are larger than the cost for packaging to meet the needs of a single supplier.

After years of converting one supplier after another on the basis of expensing the savings, some assembly companies have made a huge investment in an asset without ever having consciously made the decision to make such a large investment and without reaping the attendant tax credits. What is worse, the decision-makers never get the satisfaction of knowing--or touting--the profitability of their investment.

For evaluating such an investment, Net Present Value (NPV) is the preferred technique because it includes the time value of money and all cost flows. It gives a profitability estimate. It is much better than the payback period evaluation method used by most returnable packaging decision-makers

The payback period approach is attractive because it is intuitively logical. When the day-to-day cost of using expendable boxes (purchase and disposal) is compared to the cost of the returnable fleet and its operations, after a certain period of time the investment has paid for itself. However, this approach vastly underestimates the benefits (and sometimes the costs) of a returnable packaging system. There is no profitability estimate as there would be for other large investments, nor is there an indication of how long the savings will occur nor how valuable those savings will be in the future.

The NPV approach, on the other hand, results in a profitability estimate. It considers the initial investment, the cash flows in subsequent years (including savings from not repeatedly purchasing and discarding expendable packaging as well as new operational costs), the time value of money for those years (including a stipulated interest rate), and the length of the container life.

The NPV profitability estimate has three distinct advantages over the payback approach. First, it makes the decision-maker look good: profitability is the goal of all business, and here is an opportunity to show how logistical packaging can contribute to that goal.

Second, NPV lets you compare packages with different lifespans. For example, a more expensive package that will last for a long time can be compared to a less expensive one that will have to be replaced more often. The less expensive package will have the shorter payback period, but the one with the longer life represents a more profitable decision.

Of course, this means the decision-maker has to estimate the container life (using test results and/or previous experience), a decision that makes some packagers uncomfortable. In the experience of the automobile manufacturers, most returnable plastic shipping containers have a longer life than originally anticipated. Many packages have been in use for more than 10 years.

The third advantage is that NPV's profitability estimate gives the firm a good basis for comparing alternative investments. A notable example is Harley Davidson's evaluation of returnable packages for finished motorcycles. Using an NPV approach, and mathematically modeling the number of packages needed, they found the packaging investment would be far too large compared to its benefits. The same funds could be more profitably employed in building additional production capacity.

It should be noted that the various "return on investment" (ARR, IRR) methods also consider the time value of money, but most result in a rate of return rather than a profitability estimate. Although they can be useful for determining whether an investment meets a hurdle rate, they are not the most preferred method of financial evaluation because they do not emphasize profit.

Initial investment

The first cost to consider is the initial investment in containers, which depends on a number of factors such as the length of the shipping cycle. This includes the amount of time the container is at the shipper's facility, in transit, at the receiver's facility, and in return transit, including any sorting and cleaning operations in between. An important element is the degree of control, since active management and control can reduce the cycle time. The shorter the cycle, the lower the investment.

An important element of cycle time is the amount of variation. Cycles with little variation are best because there does not need to be an extra inventory of containers to cover peak periods. High cycle variability has been key in some projects where returnable containers were deemed not cost justified.

The investment also depends on whether containers are standardized or specialized. Standardized containers, which are interchangeable and may be used by a number of shippers and receivers, minimize the number needed by using a common safety stock to cover demand variations between users. Standardization of containers can add further efficiency when it goes across an industry. For example, the Automobile Industry Action Group, the UK's Institute for Grocery Distribution, and the Material Handling Institute's Produce Task Force on Returnable Containers are organizations attempting to standardize returnable containers for their industries so suppliers to firms in these industries can plan for uniform sizes and shapes of packages.

The size of the investment also depends on how many parts are shipped during the cycle time periods and how many parts fit in a package, which may be different from the number in a corrugated box because of different interior dimensions.

Most projects show the greatest financial benefit in the savings from eliminating expendable packages, including purchase and disposal costs. The benefit is less when there is some income from recycling expendable materials such as corrugated board.

Operational costs

The cash flows dealing with operational costs are more difficult to estimate. Clearly there will be return transport costs directly related to the distance. If the distance is too far, a returnable packaging system may not be cost justifiable. Many automobile manufacturers require returnable packaging only from their nearby suppliers and package parts from overseas in expendable containers. In some cases, especially when suppliers are far away, a consolidation center near the assembly factory is required to consolidate inbound deliveries, and the same facility can be used to sort empty packages for return .

The cost can vary greatly depending on the terms of transport contracts with carriers. When the same carrier is used for both legs of the journey, the cost is rarely double the inbound cost.

Return transport costs also depend on the configuration of the packages. Some are designed to nest or collapse when empty, which can minimize transport cost depending on whether or not the returning trailers or boxcars are full. If containers are simply swapped on a one-for-one basis, nestability is not an advantage and may even present a cube utilization problem if the box interior is not square.

The number of containers to be returned at one time is an important consideration. If containers need to be returned at LTL (less-than-truckload) rates, the transport cost can be very high. On the other hand, it may not make sense to stockpile empty containers until a full truckload can be shipped because this requires more containers.

Similarly, the inbound cost of transporting full containers may be different from that for corrugated boxes because of differences in cube utilization and/or stackability. For many users of returnable containers, inbound transport costs are lower because the containers are more easily and safely stacked in trailers.

All operational costs that will change due to the switch from expendable to returnable containers should be considered. Use activity based costing--estimated or measured--to show the effect of changes in cost. The activities include container sorting, marshalling, washing, and repair. Also account for the extra space required.

Operational benefits should also be considered. These may include the ability to automatically sort inbound product once it is packed in uniform containers, modular stacking, better housekeeping, less damage, and a more uniform way of presenting items to the people who empty the package.

So the answer to the question, "Do returnable containers save money?" is "It depends." It is important to do the math and consider system-wide costs. A spreadsheet study sponsored by the corrugated fiberboard industry found the following limited situations financially favor returnable packaging:

• Periods of high corrugated fiberboard prices;

• Short return distances, low backhaul costs;

• Little or no washing;

• Long container life;

• Consistent demand;

• Comparable inbound/outbound payloads.

Most firms do financially evaluate a returnable packaging system before they invest. Many users, however, admit the decision to invest was not based on an economic evaluation but is part of an operational strategy.

It is rare for firms to perform an ongoing financial analysis as a returnable packaging program progresses. This is probably a mistake because future decisions can be more reliable if based on historical data. As returnable packaging programs grow, there is much to be learned from experience.

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