Groupon says its focus is on the bottom line, rather than top-line growth.
Cost-efficient packing materials, processes and machinery help retailers save on shipping.
When a retailer ships millions of packages a month, saving even fractions of a penny per package can add up quickly. That's how Staples Inc., which ships up to 1 million packages a day, was able to justify spending at least $10 million to outfit all of its roughly 60 U.S. fulfillment centers with machines that build boxes on demand to fit the exact size of an outgoing order, Don Ralph, the retailer's senior vice president of supply chain, says.
The office supplies retailer tested five of the machines from vendor Packsize International LLC in the fall of 2011 in one of its warehouses in Orlando, Fla. After 10 months the machines proved successful enough for Staples to roll them out to the rest of its warehouses nationwide, Ralph says. That process is now about a quarter complete.
Where deployed, the custom-built boxes have reduced the amount of material needed to fill empty space in its packages by more than 60% and cut the total amount of cardboard used for boxes by 20%, Ralph says. "We ship up to 1 million boxes a day, so you can think of that multiplied over a year—and that doesn't even include the transport savings," he says.
This year, UPS Inc. and FedEx Corp. each raised their shipping rates by an average of 4.9% for packages up to 150 pounds, with higher rate increases for lighter packages than for heavier ones. Because most online retailers ship packages of 30 pounds or less, their average rate increases will be about 7% or 8%, Ken Wood, president of shipping advisory firm LJM Consulting, says. Add to that growing expectations from consumers that shipping should be free on some, if not all, orders and online retailers today have many reasons to look for ways to cut costs on everything package-related.
To do so, some are swapping heavier, bulkier boxes for lighter bags and cutting down on excess materials, while some of the largest retailers, like Staples, are outfitting their warehouses with machinery that builds custom-fit boxes as needed. Others use standard-sized boxes but let software programs determine precisely which will best fit an order, rather than leaving it up to a staffer's discretion. Whatever their shipping needs, e-retailers are finding ways to pinch pennies on packaging.
Paper or plastic?
Cardboard boxes cost about $1,155 per metric ton and polyethylene, the primary material in plastic bags, costs about $1,424 per metric ton, Caitlin Moldvay, a senior analyst at market research firm IBISWorld Inc., says. Retailers using more than they need of either material drive up their costs twofold—by paying more upfront for packaging, then likewise for shipping the excess packaging.
Over the past decade, and especially in the last few years, Moldvay has noticed three main packaging trends emerge. One is retailers reducing shipping costs with more efficient packaging and sending smaller, tightly fit parcels, she says. That lowers both the weight, and thus carriers' shipping charges, and the cost of materials.
She's also seen an increase in the use of bags made of laminated foil, film or plastic, which are generally cheaper than more rigid options—boxes—because they weigh less, she says. Global manufacturing revenue from flexible packaging was $12.5 billion in 2011, a $1.4 billion increase since 2002, demonstrating the rising demand for bags, she says.
In line with those trends is a third, more general movement among e-retailers towards simplifying packaging by using less materials and making it easier for customers to open packages. Amazon.com Inc. started this trend in 2008, she says, when it began offering some products in what it calls "frustration-free packaging."
In that program, Amazon aims to eliminate excess materials that make packages hard to open, like plastic cases and wire ties around items in boxes, to allow consumers to get in without knives or box cutters. A Fisher-Price toy, for example, ships in a simple brown box rather than the colorful display case it would have on a store shelf. That also reduces weight and shipping costs. Of the millions of products Amazon offers, it lists 18,422 online that are available to ship with frustration-free packaging.
Boxes on demand
By reducing excess materials, Amazon's packages are lighter, reducing its shipping costs. Staples, with its custom-built boxes, has the same goal. Ralph says implementing the on-demand box system from Packsize is helping Staples directly reduce materials and shipping costs. Given Staples' sales volume—Staples had 2011 web sales of $10.6 billion, according to Internet Retailer estimates—he expects the multimillion-dollar technology investment will pay for itself within three years.
Here's how the process works: The Packsize system draws data on a product's weight and dimensions from Staples' order management system and product catalog. When an order comes in, the software determines the exact cubic size needed to pack it most efficiently—even accounting for how to pack items together so that, for example, a coffee cup doesn't end up crushed beneath a pile of heavy books, Ralph says.
Packsize then builds a box. Employees feed in rolls of cardboard at one end of the machinery and assemble the box at the other. In warehouses with the machines, Staples builds about 350 different box sizes that are on average 25% smaller by volume than pre-sized boxes, he says. Packsize says it takes 8 to 15 seconds to produce a custom box.
Ralph says the machinery frees up valuable warehouse space. "Less space for supplies needed for the facility allows us to stock more merchandise, more merchandise for customers equals more selection for customers, more profits, etcetera," he says.
"When you have standard box sizes, you have to store them—they take up space even if they come knocked down flat," he says. "And the more sizes you use, the more infrastructure you need, and infrastructure costs money whether it's space in a trailer, truck or fulfillment center."