In the process of reinventing its supply chain, the CPG manufacturer saves millions by integrating contract packaging with its warehousing and distribution operations.
When a manufacturer outsources an activity that's not within its so-called core competency, it usually sends the work out to some place away from its plant. With contract packaging, however, CPG manufacturers are beginning to reel that vital function back into their production facilities. Nevertheless, the job is still handled by outsiders: third-party logistics services providers with the needed expertise, who set up shop on site and employ much of the labor force.
That's precisely what CPG giant Kimberly-Clark Corporation has done with its specialty packaging needs. As a part of its Network of the Future initiative, an ongoing program to totally reinvent its supply chain, Kimberly-Clark has stopped sending its many product lines to outside co-packers in favor of having that custom work done inside its DCs. The decision has saved millions of dollars in transportation costs, damage, inventory and labor, according to Mike Kalinowski, the manufacturer's manager of supply chain analysis.
In addition to the savings, the impetus for the new approach was driven in part by demands from retailers, who often want quicker order delivery and can be quite demanding in their efforts to serve their customers with a greater number of SKUs. At Kimberly-Clark alone, stock-keeping units have doubled in the last 10 years, by some accounts.
The change has resulted in much higher overall quality and control, Kalinowski says. Business processes are data-driven, so having a smaller number of outside partners and sites to manage has definitely been an added plus.
In a nutshell, here was the challenge faced by the maker of Kleenex, Kotex, Viva, Cottonelle, Fiesta, Depend and other brands: K-C, as a rule, would handle packaging of most of its lines except when promotions, displays or other exceptions arose. Items that required so-called specialty packaging were then transported from the distribution center to the co-packer, where the product was finalized, then shipped back to inventory at the Kimberly-Clark DC. From there it was then loaded for delivery to retailers. The process was needlessly costly in terms of transportation, fuel and labor.
As the Network of the Future program progressed, some 80-plus warehouses in the U.S. were consolidated into 25, which moved some operations even further from the co-packers K-C used.
It was decided to integrate contract packaging into distribution operations at 10 "mega-distributions centers" in the U.S. and Canada. The new model called for 3PLs to provide packaging, warehousing and distribution all under one roof. The "service-in-the-DC" model, as someone dubbed it, ideally would result in lean packaging with savings throughout the packaging stream.
That's exactly what happened, according to Mike Marlowe, customer solutions vice president of Kane Is Able, a 3PL that manages three such facilities for Kimberly-Clark.
Combining the operations have resulted in shared labor resources. All managers and skilled labor are employed by Kane Is Able, he says; otherwise, unskilled workers are hired on a temporary basis.
Other benefits to flow from the relationship: The capital cost of the equipment has been transferred from the manufacturer to Kane. The volume of product leaving the DCs is expected to grow possibly as much as 25 percent by the seventh year of the project. And, Marlowe says, product orders are delivered 85 percent of the time in one day or less, compared to 60 percent under the former method.
Among the three facilities managed by Kane Is Able is one in Romeoville, Ill, which totals 1.5 million square feet in size. In one of the buildings there, Marlowe says, Kane's contract packaging operation produces an estimated 210,000 pallets a year, filling approximately 7,000 trucks.
Calculating that it would cost about $300 per truck to send 7,000 trucks to a co-packing facility and back, Marlowe figures Kane saves K-C about $2.1m a year at the Illinois operation alone. Kane Is Able also manages K-C warehouses in Pittston, Pa., and in New Century, Kan.
Altogether, he says, the three operations account for a savings of approximately $3m. That does not include the environmental benefit from reduction in CO2 emissions.
Lower inventory carrying costs is clearly one of the major benefits to flow from the new model, according to Todd Armstrong, director of distribution operations at Kimberly-Clark. In addition to taking a lot of miles out of the process, his company has saved anywhere from four to seven days as well, Armstrong says. Not only is the distribution cycle lengthened when you use an outside packager but visibility is lessened or lost completely. That negatively impacts production and sales forecasting accuracy. Obviously, that uncertainty has to be dealt with, so manufacturers often make more product, which leads to the need for more space and more hands to fill it.
"The more points you can remove from your network, the more control you get, the more money you can save, and there's less likelihood of damage to product," Armstrong says.
Display packaging is another service that Kane Is Able provides. Few, if any, displays are built at stores anymore. Service providers like Kane build and ship them, so store employees essentially remove a sleeve once the item is placed on the floor.
Getting involved with the design phase is the logical next step for 3PLs that provide contract packaging, Marlowe says. "They need to be much more deeply integrated into CPG companies, meaning at the design level, where corrugate displays are being designed, and where packaging of the final product is being designed as well. I think 3PLs and their engineers need to be embedded in that process. That would ultimately reduce even more costs in labor and materials in the process."
