Supply chains in emerging markets present unique challenges for packaging. Companies are now beginning to adopt the best of the established techniques, and are developing some interesting new approaches of their own
The explosive growth of car and component manufacturing in the BRIC economies has left a trail of discarded paper and plastic packaging in its wake. Today, the industry is rushing to clean up its act, looking for the kinds of cost, quality and environmental benefits that smart, reusable packaging systems have already delivered in mature markets.
It should probably be no surprise that more sophisticated packaging has arrived late on the scene in emerging markets. Whether it has been driven by Western firms looking for cheaper sources of supply, or by new companies seeking to create product for huge (but hugely cost sensitive) local markets, the focus on minimising the cost of production has been paramount for many firms, according to Carrie Zhang from Delphi Automotive Systems (China).
“The cost of packaging alone used to be the dominating driver for packaging decisions in emerging markets,” she says. This, she suggests, frequently led to trade-offs, compromising component protection, ergonomics and environmental friendliness along the way.
According to Zhang, however, the increasing presence of global firms like Delphi in China is driving a change in attitudes. Since it established its first operation in China in 1993, Delphi’s total investment in the country has reached $500m. Today, the company manufactures more than 40 lines of component parts and products in China. Delphi China has established 14 legal entities, including a holding company, a technical service centre, and 11 manufacturing operations.
Part of the expertise Delphi and its competitors have brought to their China operations, says Zhang, is a new total cost approach to packaging design. “Typically international and global automotive leaders have been playing a very important role in setting automotive packaging best practices in emerging markets. They have been bringing over the advanced concepts, approaches and requirements from mature markets, educating and guiding emerging markets and helping to close the gaps with mature markets.”
As well as big companies, governments in emerging economies are playing an important role in the drive for improved packaging performance, says Zhang, for example, by “setting specific environmental requirements for industries to follow and achieve sustainability, which affects packaging decisions”.
Of course, pressure to improve is irrelevant without the know-how and infrastructure to deliver improvement. Here, suggests Zhang, the picture is more mixed. In China, Delphi and its suppliers are making significant strides in the kinds of processes and approaches that lead to better packaging: early consideration of packaging requirements during part design, for example, or the use of simulation and optimisation techniques to maximise part density.
Some characteristics of the Chinese market, however, may actually work against real improvements. For example, suggests Zhang, its low transport costs compared to mature economies may give companies the false impression that logistics performance is actually better than it really is.
“If the low cost of transport is driven by high cube utilisation, then definitely it helps to improve the packaging performance, as high density and stackability help to further enhance utilisation and lower transport costs,” says Zhang. “However, if the low cost of transport is driven by the price war among truckers, it might hide the urgency of packaging improvement, as the negative cost impact of poor packaging might not be as obvious as when transport costs are high.
“Nevertheless, if packaging performance improves, so will the total cost effectiveness.”
One important challenge for automotive companies seeking to improve their packaging performance in emerging markets is infrastructure. While companies would often like to make use of the most sophisticated packaging techniques and technologies, they certainly don’t want to build them themselves. Instead, as Zhang, suggests, they would like to be able to access the resources of specialists, as they can in the West. “We’ve been working on various packaging optimisation opportunities –I would see utilising more container pooling and sharing as a big one. This, however, depends on the network maturity and availability of packaging solutions providers in emerging markets, and how significantly the cost of container management–such as container tracking–could be lowered.”
For Indian carmaker Tata, manufacturer of the world’s least expensive car, cost in all aspects of the supply chain is also a critical consideration. Mohan Savarkar is deputy general manager for logistics and new projects at Tata’s car plants, based in Pune, India. “The importance of packaging, the value it can add to products or wastages it can prevent, is still growing conceptually,” he suggests. “The market is yet to appreciate the value attached to good packing.”
For Savarkar, smart packaging design has a critical role to play in the lean supply chains that Tata needs. The aim, he says is to “ensure that the last workman at a vendor’s line puts a part in a bin or trolley and the user at the lineside picks and fits it on a car”.
Tata is making considerable efforts to improve the performance of its packaging against this background. “Quality is the main driver,” says Savarkar. “But it is also a base requirement beyond which cost is the differentiator, such as packing density; volumetric efficiency in the truck; store and lineside; or number of movements.”
In India’s long and complex supply chains, he also notes that long-distance transport requires special care.
Among the important recent changes to Tata’s packaging approach are the use of pooled packaging resources and specialist staff to develop packaging designs. Materials are changing too, says Savarkar. “While some may consider wood as a renewable resource, we are consciously and increasingly moving towards plastic and metal for packing solutions, which offer shorter cycles of recycling and much longer usage life. This approach also helps us reduce costs.”
The Indian packaging sector is certainly moving in the right direction, says Savarkar, but it may still take some time before India’s carmakers have access to everything they need. “To some degree availability of packing material, different readymade sections, etc, is still to catch up with the developing needs,” he suggests, noting however that international packaging providers are entering India in large numbers, both to serve local markets and to benefit from the country’s lower labour, material and manufacturing costs. “All OEMs gain from this,” he says.
“The Indian packing industry may be behind in terms of technology or material science but is very competitive on costs. However, usage trends in the auto industry may be scattered as it may take longer– sometimes aligned to new projects–for quantum jumps in adopting new methods. At one time ‘packing’ was not even a cost element. Today, it is among the parameters and processes decided and signed off upfront.”
Solutions providers, of course, have not been slow to recognise the potential of emerging markets for their packaging products. According to Dan Roovers of packaging company Orbis, for example, “Our large North American customers have told us that we need to be a global supplier, which means we need to have a presence in Asia, South America and Europe.”
Effectively, he says, a presence means local manufacturing capabilities at the very least. “Our strategy is to manufacture in continents where products are used. The logistics costs and duties for moulded plastic products are higher than the savings you could get by making them elsewhere.”
Paradoxically, this means that packaging suppliers sometimes have to accept higher manufacturing costs as the price of entry to critical markets, as the vagaries of the global economy affect material prices. “High density polyurethane resin is more expensive right now in China than it is in North America,” notes Roovers.
Orbis currently has 60 personnel operating in China, where it designs, manufactures and sells packaging for automotive companies. According to Li Ting, general manager of Orbis in Shanghai, the company has aggressive expansion plans.
Ting concurs with Delphi’s Zhang that, in China, it is the international joint-venture companies that are driving the demand for modern, returnable packaging solutions. “The international companies bring the returnable mindset to the JV, and we are certainly catering to them at the moment. As domestic companies grow they are becoming more familiar with the benefits, and are coming to us for help.”
The two types of customer in China have rather different requirements for their packaging, explains Ting. The supply chains of international firms commonly include long-distance, overseas transport, where protection requirements are “very stringent,” he says. For domestic producers, cost remains an overriding concern as “very large proportion of vehicles are sold for less than $10,000”.
Orbis has enjoyed considerable success offering its packaging design and engineering capabilities to firms in China. “We are pushing our engineering services here,” he says. “We go in before product launch to help [China-based manufacturers] to evaluate processes and packaging solutions, to develop a better way to package products. For new product launches we help them at the beginning to determine flow cost calculations and help them implement those flows.”
An increasingly intense focus on the environmental impact of their production and logistics processes is also bringing more Chinese firms to Orbis, says Ting. “There is a huge push for green [solutions] in China,” he says. “In practice, the green movement in China is probably larger than in the US. The country is driving down the use of plastic bags, for example, so the environment is very much a live issue.”
In response, Orbis offers its customers environmental impact calculations alongside the costs analyses when evaluating packaging options. “When we offer our report we say how many trees and how much water can be saved to help customers calculate their green points,” Ting says (see box on next page). Ting suggests, however, that the unique structure of the Chinese industry creates challenges for external suppliers. “There are not many joint ventures outside China, but here there are lots. We have to treat each JV as a separate company, and keep track of all of them across the industry.”
As they struggle to sell the advantages of their packaging solutions to domestic and international carmakers alike, suppliers like Orbis face one tremendous challenge. At the moment, one of their key productivity-improving levers simply doesn’t exist. “Transportation costs are often the most significant aspect of parts logistics,” explains Ting. “So optimising truck packaging density is one of the main advantages of solutions like ours. In China today there are no standards for truck bed sizes, so it is very difficult to truly optimise vehicle loading.”
Delphi’s Carrie Zhang concurs, citing the lack of packaging standardisation as the “most critical” barrier to improved logistics efficiencies in China. In India, Tata’s Savarkar echoes these sentiments. “Aligning truck dimensions, pallet sizes and the standardisation of containers,” is, he says, “on the priority list” for Indian carmakers.
The solution here, quite clearly, would be the establishment of the same kinds of standards that have enabled the widespread use of reusable, returnable and shareable containers in established markets. But which standards to choose? US and European markets have evolved their own, and there is little reason for emerging economies to ally their infrastructure with one or the other of two hugely significant markets.
In practice, there appears to be considerable momentum building behind an alternative standard, based not on truck bed sizes, but on the transport mode that still provides a critical link between the factories of China and the overseas markets for its manufactured goods: the shipping container. The new 1140x980mm standard allows 98% utilisation of a standard 20ft or 40ft shipping container.
“This new standard makes a lot of sense,” explains Ting. “Multi-mode transportation is already very common in China, as companies make use of rail and sea vessels as well as trucks.”
The standard also helps, he suggests, with the increasingly important international supply chains, as China’s manufacturers take on a role in the supply of parts in other international supply chains.
Shared, returnable packaging needs standards to be successful, but it needs the right infrastructure too. There are few savings to be had if once a container has delivered its parts, it has to travel hundreds or thousands of kilometres empty before being used again. As the packaging infrastructure in emerging markets evolves, many supply chains face exactly these problems: automotive suppliers can’t gain full advantage of outsourced packaging because suppliers are not located where they need them, while suppliers don’t want to build the required infrastructure to serve relatively small markets.
One way to avoid this challenge is to piggyback automotive component transport onto existing container supply chains. Some companies with mature transport infrastructure in developing markets see this as a very important opportunity. Signapore-based Goodpack, for example, currently moves 2m boxes between 5,000 different locations in 68 countries. Its intermediate bulk containers are designed to fit into standard shipping containers and feature a modular design allowing several containers to be linked to carry larger items–they are currently used mainly to transport natural and synthetic rubber products. Now Goodpack is well aware that many of the regions in which it operates are evolving from agriculture and raw materials production to the manufacture of increasingly complex goods, including automotive parts. “The automotive companies are running a lot of one-way transport at the moment,” explains Michael Liew, the company’s executive director. “Our existing supply chains offer them a much greener option in that the packaging is reused and eliminates the bulk of disposal found in one-way packaging.”
Ultimately, as they work to update their approach to packaging and to establish the technologies and infrastructure they need, supply chains in emerging markets such as India may have some key advantages compared to their developed world counterparts. “Frugality and continuous innovation are very natural to India,” says Mohan Savarkar. “These aspects may be useful to avoid the pitfalls of over-engineering.”