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FLEXO Magazine : February 2014
of future profitable growth,” states Ernst & Young. Knowledge of FMCG product programs that are years away is crucial, as is becoming a collaborative part of those plans instead of a potential partner. SUPPLY CHAIN BALANCING & OFFSHORING An efficient packaging supply chain is complex. Because packaging itself is low value, it can only be shipped so far before it becomes unprofitable. Ideally then there would be plants all over, but that presents other budgetary and logistical problems. “Practically, there will always be tradeoffs between transport costs, plant capacity utilization, number of plants, inventory, customer service levels and good manu- facturing practice requirements,” writes Ernst & Young. This balancing act varies from company to company and depends on the packaging type and sector of the end market being served. And it is a continuous one: Once a status quo is achieved, do not be afraid to challenge it. QUESTIONS TO ASK: • Is the commercial and operational rationale for offshore production clear and what are the sensitivities to the assumptions? • What is the optimum plant network and capacity plan for the business? • How is consumer behavior changing in traditional low cost countries? To even further add to the perpetual balancing act, the restrictions that used to shackle the transporting of packaging have been loosened (See Charts 7 & 8). Chiefly, energy and raw material price increases and flexible packaging’s trans- portability have made it easier for low cost country packaging producers to export to more developed markets; and FMCG manufacturers have set up production in low cost countries. To remain competitive, packaging producers used three distinct models to have offshore production: • The low cost country packaging operation is not aimed at selling into the local market but aims to take advan- tage of lower input costs and transport finished or semi finished goods back to the home market Potential problem: Introducing complexity and increas- ing the length of the supply chain, leading to unfore- seen costs, supply continuity issues and additional inventory • The offshore packaging operation supplies a key con- sumer product account with a presence in that market— this can be either for export or to service a growing local market Potential problem: Introducing a large dependency on a single customer or requiring a large capital invest- ment • A hybrid of the two previous options, where the offshore packaging operation is set up for short term exports and long term domestic supply of the local offshore mar- ket—this requires flexibility and long term views on the local offshore market both from an input cost and output market growth perspective Potential problem: Necessitating long term planning if cost savings are not sustained or the local market growth model does not materialize Regardless of the chosen model, start up issues caused by inexperienced local labor is a concern. Further, the speed at which low cost markets develop could destroy any bene- fit through increasing operational costs or increasing local competition. n Charts 7 & 8: Raw material pricing can fluctuate from country to country and region to region. 64 FLEXO FEBRUARY 2014 www.flexography.org