Board Converting Article – 2020

Customer Commentary: Price is Not the Only Factor

We are a small manufacturer of special boxes for the fast-food industry with multiple out of state locations. When our Phoenix,AZ production’s break-even caused cash-low concerns,it was decided to outsource,similar to Amazon, our entire manufacturing (but not sales) to the largest independent in the state.They dad a similar entrepreneurial culture,their own new corrugator and state-of-the-art machinery.The other strategy was selling the company.At the request of this valued supplier,Arizona Corrugated Container (ACC), part of the CalBox Group, we have omitted our identity, but not our following business philosophy
As a small business we have always encouraged entrepreneurial behavior.As an integral part of our culture,this attitude of independent thinking has served us well for many years. For a while our spending operated under this independent philosophy.It was decentralized and conducted at the local level with little emphasis on combining our buying power. Buyers were responsible for purchasing or packaging requirements, and received performance rating based upon the perception of how ell they managed price.They operated under the old mentality of getting three bids,take the lowest bid, and go back and tell all bidders they had to do better.It was a game that we had to play.
But who was the winner of this game: No one.As a result of these adversarial and strictly price-driven business practices, it was common to switch supply base in the interest of obtaining a better price point. This emphasis on price encouraged other behaviors to make sure no supplier felt too secure in owning the business.
Volume changes amongst suppliers would be used as purchasing power to reward thrifty bidders and punish those who didn’t sharpen their pencils enough.I also understood a small overall increase in sales price can offset a much larger reduction in volume.

Are Good Suppliers as Important as Customers?

One doesn’t have to be a business graduate to understand that such behaviors between seller and customer did not create efficiencies in either production or logistics.As a result, consistent quality and process improvement were non-existent.We never shared information because of our mistrust of each other, and because we knew there was no assurance that we would be doing business with one another that much longer
These circumstances made it impossible for the supplier to forward data of purchases, production schedules, various expenditures, and optimal use of forecasts. Loyalty between producer and consumer was non-existent. In fact, a lack of loyalty brought out the dark side of some. Gratuities were sometimes offered or willingly solicited.
However,several years ago, I changed the way purchasing was conducted. I’m sure the original content was to take our orders and use them as a weapon to obtain better pricing from suppliers.
Until the 1990s it wasn’t difficult to make reasonable profits in our industry.But,as was the case for many other businesses, things changed, and margins were squeezed. So,I set out to reduce our costs.At the time,the corrugated industry was asking for a 10% price increase, and we had 6 suppliers to inform.I was reducing the supply base to three or fewer.After a month of negotiation, we had effectively reduced our supply base to one.We saved a lot of money, and I was a hero.
However, that didn’t last long. By the end of the year, I was failing miserably. I could not be excited about all the money we were saving, after all,weren’t we always looking for a better price? I later discovered that my customers wanted a lot more. They were into a new quality process,and price was no longer the only factor.Deming,Crosby and others were bringing about new awareness concerning quality.Their buyers expected on-time delivery of corrugated products that were not warped or de-laminated, and a supplier who cared about the customer.I wasn’t sure my old price-driven purchasing effort drive only by profit, was going to be around much longer

Implementing a New Approach

It became clear that,if we were going to survive,we had to find a different way of doing business.We had to be prepared to embrace change and create paradigm shifts within our operations.We had to become market based communicators of this new approach to purchasing – not only internally, but externally as well.
With supply chain management, our attention needed to focus predominately on AIB quality certification, value-added service as reliable JIT delivery,and long-term commitment,rather than lowest price.We moved from transactional and adversarial behaviors to relational behaviors with ACC.We became proactive instead of reactive.
This was a big change.We, like our suppliers, were being held to new standards.These standards meant more focus and attention to detail.No longer was the attitude,“That’s close enough,”going to sustain us.
It also became clear that if we were going to meet customers’ needs, we would also have to form alliances with ACC.The rules of the game have changed.Today,buyer and seller must build a relationship with each other. Some of the keys to success in these alliances are trust,added value,commitment from top management,effective communication,team approach to problem-solving, elimination of hassles, honesty and fairness. In the alliances that we establish,these factors must exist. If they do not,there will be no relationship.

Having this type of relationship means that a supplier can be asked to work with other suppliers and customers to bringthe best value for each party.This is a process many aspire to, but few achieve.It’s hard work and time-consuming. It’s also a relationship in the buyer-seller alliance in which the goal is to maximize quality and minimize the cost through sharing of information,resources, and effort.
It is said that there are three phases of supply chain management.The first phase is price based.We believe that in this phase, you can reduce costs through an organized purchasing effort.Phase two and three varying degrees of trust and its associated benefits,that supplier and customer can bring their organizations a competitive advantage.
As the buyer-seller relationship matures,there will be additional benefits achieved.That can be obtained through total cost and price negotiations.
The benefits for our company are numerous.Quality of the product is at the top of that list.We now use a box that is 50% stronger than it was a few years ago, without adding material or cost.Also, boxes that are intended to be the same with now warp. Prior to our alliance, we had inconsistent quality in the industry.Today, it is the best.
What is that worth? I don’t have the answer. However, we learned how to standardized physical aspects of the paper and developed appropriate handling standards.Now,our customer claims due to poor packaging, are almost non-existent.Our customer retention, growth, and relationships have improved.Is this the result of better packaging? Not all of it, but some of it.
Out relationship withACC continues to mature.Value-based activities are occurring.Benefits such as inventory management, equipment expertise such as a new Apstar rotary die cutter just installed byACC,process movements,waste management, and SKU reduction are shared between both parties.
Lesson learned:Boxes aren’t necessarily always the same quality,price, and service.They are often just similar.
The Coronavirus Price Increases “Pile-On”by Mills
There has been announced a price increase for corrugated boxes. Ultimately, the market will determine whether the increases will be implemented fully.Independents are wary of increasingly concentrated pricing power,first for their own ability to profitably serve their customers,and second,on our industry’s user-base which is continually looking to reduct its packaging costs and use.
Of the increase announced, independent box makers, not having the luxury to pass-through higher material costs, will thus experience a significant cost-price squeeze.As customers,we are not welcoming a corrugated box price increase,especially in this recession.Yet, the mutually beneficial relationship will never be terminated because of price.A willing ness to resolve problems fairly and the best interest of both parties will carry us through.

For comments, contact -
John or Chris Widera,CalBox Group