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This is to certify that the

thesis entitled

RETURNABLE/REUSABLE LOGISTICAL PACKAGING: A
DECISION SUPPORT FRAMEWORK AND MODULAR
FURNITURE CASE STUDY

presented by

SCOTT ‘E. KIBLER'

has been accepted towards fulfillment
of the requirements for

MASTER degree in PACKAGING

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Date JUNE 26 . 1997

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RETURNABLE/REUSABLE LOGISTICAL PACKAGING:
A DECISION SUPPORT FRAMEWORK AND MODULAR FURNITURE CASE
STUDY
By

Scott E. Kibler

A THESIS
Submitted to
Michigan State University
in partial fulﬁllment of the requirements
for the degree of

MASTER OF SCIENCE

School of Packaging

1 997

ABSTRACT

RETURNABLE/REUSABLE LOGISTICAL PACKAGING:
A DECISION SUPPORT FRAMEWORK AND MODULAR FURNITURE CASE
STUDY

By

Scott E. Kibler

The purpose of this study is to develop a model to evaluate the total cost of
returnable/reusable packaging systems. Such a model did not previously exist. This
model is applied to a case study comparing returnable packaging systems for a modular
ofﬁce furniture company.

Elements to take into account when choosing a packaging system include product
characteristics, transportation system characteristics, logistical factors, logistical
eﬁiciency/product protection, alternative packaging designs, a ﬁrm’s logistical relationship
and packaging ownership, and operations. 1

Total cost using activity-based costing (ABC) should be the foundation for making
the decision to choose any packaging system, and Net Present Value (NPV) should be
used to determine whether a packaging investment is undertaken. ABC and NPV showed
that the greatest variation in cost drivers were associated with packaging materials,
loading/unloading of the transportation vehicle, and outbound/inbound freight. Blanket-
wrap was recommended for more distant deliveries, and transport carts for local

shipments.

DEDICATION

I dedicate this research to my lovely wife Pamela for whose patience, kindness and

support I will forever be grateful. I love you Pam.

iii

ACKNOWLEDGEMENTS

Almost seven years ago, I began a journey at Michigan State University; a journey
to ﬁnd out who I was, and who I’d like to become. During this time many things have
changed in my life, socially, scholastically, occupationally, economically, geographically
and religiously. Fortunately, I’ve had much help along the way, and I wanted to
acknowledge and thank some of these people.

First, I wish to thank the members of my thesis committee, Dr. Diana Twede, Dr.
Gary Burgess and Dr. David Closs. I’ve appreciated each and every one of your thoughts
and ideas for this paper. I’ve also admired your wisdom and patience.

Second, a gigantic thank you to all of the members of my immediate and new
family for sticking with me through this! A special thanks to my parents (Robin, Richard,
Sally and George), because without you this wouldn’t have been possible. I love all of
you. Thanks to my caring siblings Heather, Brad and Kristen for always being there. My
love goes out to Grandma and Grandpa Kibler, Grandma and Grandpa Bush, and all of my
aunts, uncles, nieces and cousins (especially T-bone, Zoe and Ashleigh). Nita, Steve,
Faye, and Joe, thanks for treating me as one of the family, I enjoy being a part of it. Most
importantly though, Pam, I love you and always will. Thanks for being so wonderful.

Finally, I thank the Lord for his graciousness, and blessing me with such a fulﬁlling

life. God, please continue watch over my family, friends and loved ones.

iv

TABLE OF CONTENTS

LIST OF TABLES ......................................................................... vii
CHAPTER 1
INTRODUCTION .......................................................................... 1
CHAPTER 2
LITERATURE REVIEW .................................................................. 3
Introduction ......................................................................... 3
Product Characteristics ............................................................ 4
Transportation System Characteristics .......................................... 7
Logistical Environment ............................................................ 10
Logistical Eﬁiciency, Product Protection and Alternative Packaging
Designs .............................................................................. 13
Logistical Relationship/Packaging Ownership ................................. 15
Operations ........................................................................... 17
Total Cost (Activity-based Costing) ............................................. 22
Returnable Change? ............................................................... 24
CHAPTER 3
RESEARCH METHOD ................................................................... 26
CHAPTER 4
RESULTS .................................................................................... 29
Introduction ......................................................................... 29
Product Characteristics ............................................................ 29
Transportation System Characteristics .......................................... 31
Logistical Environment ............................................................ 32
Logistical Efﬁciency, Product Protection and Alternative Packaging
Designs .............................................................................. 37
Logistical Relationship/Packaging Ownership ................................. 38
Operations ........................................................................... 39
Total Cost (Activity-based Costing) ............................................. 41
Cost Drivers ............................................................... 41
Blanket-wrap ............................................................... 43
Transport Carts ........................................................... 47
Amortization as Expense ................................................. 51
Net Present Value (NPIO ................................................. 52

CHAPTER 5

CONCLUSIONS ............................................................................ 61
Research Summary ................................................................. 61
Summary of Decision Framework ................................................ 61
The Final Choice .................................................................... 63
Proﬁtability through Retumable Packaging ..................................... 64
Other Factors to Remember When Deciding on a Retumable Packaging
System ................................................................................ 64
Recommendations for Future Research .......................................... 67

APPENDIX A ................................................................................ 69

BIBLIOGRAPHY ........................................................................... 7O

LIST OF TABLES

Table 1 - Expense Components for Over-the-road Motor Carriers: TL and LTL Cost... 9

Table 2 - Damage to Modular Furniture from 6/1/9A to 6/1/9B ............................... 35
Table 3 - Packaging Activities and Related Cost Drivers ...................................... 42
Table 4 - Blanket Wrap: Local .................................................................... 44
Table 5 - Blanket Wrap: Southern United States ............................................... 45
Table 6 - Blanket Wrap: Western United States ................................................ 46
Table 7 - Transport Carts: Local .................................................................. 48
Table 8 - Transport Carts: Southern United States ............................................. 49
Table 9 - Transport Carts: Western United States .............................................. 50

Table 10 - Cost Per Part: Own-ﬂeet with 100% Backhaul Charges (Zero Consolidation). 51

Table 11 - Annual Transportation Costs for Blanket-wrap and Transport Carts ............. 54
Table 12 - NPV Transport Carts: Local .......................................................... 56
Table 13 - NPV Transport Carts: Southern United States ..................................... 57
Table 14 - NPV Transport Carts: Western United States ....................................... 58
Table 15 - Main Cost Differences Between Blanket-wrap and Transport Carts .............. 59

vii

CHAPTER 1

INTRODUCTION

Retumable/reusable logistical packaging is a relatively new and intriguing ﬁeld to
most packaging operations. At this time, most of the published research has been limited
to the automotive industry. The automotive companies and their suppliers have been
using returnable steel racks and cages for decades, primarily for shipping large, bulky
items to assembly factories.

According to Rosenau, returnable logistical packaging can oﬁ’er signiﬁcant cost
savings over expendable packaging in some channels. Although returnable packaging
often requires a large initial investment, it can reduce packaging costs in the long run when
amortized over the life of the product, and can reduce disposal costs. Some of the less
tangible beneﬁts of a returnable container system include improved product protection,
improved plant housekeeping and better ergonomics (Rosenau et al. 1995).

Her research recommends that a company should consider reusable/returnable
packaging systems as corporate assets, rather than expensed items, since the purchase of
such systems is meant to return money to the company throughout time. She also
recommends using the concept of Net Present Value (NPV) to determine whether a
packaging investment shall be undertaken. Yet, Rosenau's research did not thoroughly
investigate what techniques a company might implement to save costs on the logistical
returnable packaging system. So, in order to gain a better understanding on what
procedures a company might use to reduce costs, this study will reﬁne Rosenau’s research

by applying an activity-based costing (ABC) method.

Further, Rosenau’s study did not provide a model to choose between alternative
returnable/reusable packaging systems. This thesis will present such a model.

In order to facilitate a better understanding of these guidelines, a case study
approach is used. The case involves a manufacturer of modular ofﬁce ﬁrrniture which is
considering a switch ﬁ'om one kind of returnable package to a different type.

In short, this research aims to provide answers to two primary questions: ﬁrst,
what factors should be considered when choosing between alternative returnable/reusable
packaging systems? And second, how can the true total costs associated with a returnable
packaging program best be measured?

The second chapter has been organized to provide the necessary background to
answer these questions. Chapter 3 then details the research method of the case study; and
Chapter 4 lists the results of the study. Lastly, Chapter 5 presents a summary of the

ﬁndings as well as the author’s recommendations.

CHAPTER 2

LITERATURE REVIEW

Introduction

This chapter provides a literature and information review of trade journals, books,

seminars and lectures on returnable packaging. The available knowledge can be organized

into eight critical steps which should be considered when deciding between alternative

types of returnable packages. These include:

product characteristics,

transportation system characteristics,

the logistical environment,

logistical efﬁciency, product protection requirements, and package designs,
a ﬁrm’s logistical relationship and packaging ownership,

operations considerations,

total cost,

and whether a packaging change should be made.

Total cost using activity-based costing should be the foundation for making the decision to

choose between returnable packaging systems. An overview of each of these eight steps

follow, and forms the basis for the decision framework presented in the Results and

Conclusion sections.

Product Characteristics

The ﬁrst factor which a ﬁrm should consider when making a choice of any type of
packaging system is the characteristics of the product. These include physical
characteristics and product value. Types of physical characteristics include size, fragility,
durability and environmental stability. The product’s characteristics, in part, determine the
amount of package protection required.

The overall size, shape and weight of a product will affect what types of reusable
packaging designs can be used. Products which are pliable and ﬂexible, or are capable of
coiling, oﬁ’er some of the best opportunities for minimizing overall packaging size. Items
which are light sometimes do not require as much cushioning as heavy items. On the
other hand, heavy items can sometimes be used as load bearing devices and oﬁ'er better
compression strength.

Secondly, the ﬁagility and durability of the product must be considered. One of
the main functions of a package is to protect the product. In order to protect the product
from breakage it is frequently necessary to know its fragility in each of the triaxial
orientations. There are two types of product classes with which failure can occur: brittle
and ductile (Burgess 1992). Each will be discussed.

The fragility of a brittle product is associated with the intensity of a shock which it
receives as measured by the peak deceleration and shock duration. This data can be
measured quite accurately by attaching a product to a triaxial accelerometer connected to
a computer wave-form analyzer. One procedure for drop testing a brittle product to
determine its ﬁagility (i.e. its critical velocity change and critical acceleration) is ASTM

standard D-3332 (ASTM 1994a). Products which fail in a brittle mode will only do so if

the critical velocity and critical acceleration found by drop testing are exceeded. An
example of a brittle product is glass.

In contrast, products which fail in a ductile mode deform considerably before
fracturing, leaving the part permanently malformed. Examples of this type of failure
include bends or dents to sheet metal and permanent shape changes to plastic parts. The
metal portions of the modular ﬁrrniture parts used for this study fail in a ductile mode.

The same characteristics hold true for products which are damaged in a ductile
mode as those which are damaged in a brittle mode. That is, critical deceleration, shock
duration and product drop orientation are all important aspects, but in ductile failure it is
usually important to inspect for cumulative damage.

()6; The third physical characteristic of a product to consider when designing a
reusable packaging system is the product’s stability when placed in the environment with
which it will come in contact. Some of these factors include temperature, moisture
absorption/desiccation, ultraviolet sensitivity and microbial activity. The packaging for
such products must protect from these adverse conditions.

Temperature can have profound effects on products in many ways. In general,
most chemical and microbial changes are accelerated by heat and retarded by cool. Low
temperatures tend to make plastics brittle which can aﬁ‘ect both the product and the
package. High temperatures may deform plastics, and can have a negative eﬁ'ect on items
which need to be refrigerated, like perishable foods.

Certain products are moisture sensitive also. Products may be damaged either as a

result of direct contact with water or through moisture absorption from humid air. These

products include paper products, wood products, electronic components, certain metals
(like steel which oxidizes), and foods.

In contrast, many foods such as him, vegetables, meats, liquids and drugs are
sensitive to moisture loss. Environments like deserts, high altitudes, and generally high
temperatures can tend to draw moisture out of a product. To prevent moisture loss,
moisture barrier packaging can be used.

Certain products are sensitive to the ultraviolet light which is produced by the sun.
Ultraviolet inhibitor can be added to some products to decrease adverse aﬁ‘ects, but
degradation can still occur. Many medicines, chemicals and plastics tend to degrade in
sunlight. This degradation can cause molecular structures to break down, and can make
certain materials fade in color or cause plastics to become brittle. Methods for dealing
with this include using packages made from opaque materials or translucent brown bottles.

Microbial activity, such as the multiplying effect of mold, yeast and bacteria, can
damage products in a matter of hours if the temperature and humidity are not suitable.
Mold will normally grow if the relative humidity exceeds 60%. Yeast and bacteria
normally require relative humidities in excess of 70% and 85% respectively. The use of
moisture absorbing materials and/or controlled atmospheric packaging can act as a good
barrier in such predicaments.

Beside the physical characteristics mentioned, a ﬁrm should also consider
monetary value. Products of high value naturally require a great deal of care and attention
to loss, theft and damage. It seems logical that the packaging to protect these products

would then also be important, and may justify a higher cost package. On the other hand,

inexpensive products which can be easily replaced (like plastic toys) may not require the

protection that expensive items do.

Transportation System Characteristics

Several aspects of a logistical network’s transportation system should be
considered when choosing between alternative returnable packaging systems. These
include the transportation mode, the distance the product is shipped, whether the product
is shipped by the truckload (TL) or less-than-truckload (LTL), and which supply chain
members are responsible for shipping the product. The transportation mode can greatly
affect the decision of what type of package to use because each mode contains different
environmental hazards, and the product must be protected from these conditions.

There are four main transportation modes by which a returnable package may be
shipped: motor carriage, rail, air and water. The determination of which of these modes
is appropriate depends on the actual product shipped, distance, terrain, desired speed,
quantity shipped, consistency regarding variability of delivery time, normal loss and
damage due to transportation mode, and availability. When choosing a mode, one of the
most critical factors is distance.

Distance is a major inﬂuence on transportation cost since it directly contributes to
variable costs, such as labor, fuel, and maintenance. Although economies of scale do exist
for longer hauls (that is, the longer the haul, the lower the cost per mile), a concept called
the tapering principle states that these costs decline at a decreasing rate (Bowersox and

Closs 1996).

The distance that the product is shipped is very important because returnable
packaging requires backhauling costs. Shorter distances mean lower backhauling costs
(Saphire 1994). Overall backhauling costs are determined by distance, cube utilization,
transportation mode, whether the product is shipped TL or LTL, and sometimes weight.

There are at least two ways to reduce backhauling costs. First, knocked-down,
stackable or nestable containers can be used. Second, supply chain members can work
together to develop a logistical structure in which the reusable systems are partially or
ﬁrlly loaded (possibly with company supplies) during the backhaul. This can dramatically
improve the overall supply chain transportation costs.

One of the most common forms of transportation is motor carriage. This is due to
the mode’s speed, availability, dependability and its ability to handle any transport
requirement (Bowersox and Closs 1996). Trucking is also very ﬂexible in that it can
travel between and within cities without many impediments unlike other modes of
transportation (Vickery 1996).

Retumable packaging can be shipped by either truckload (TL) or less-than-
truckload (LTL) quantities on motor carriage, but as one can see ﬁ'om Table 1 from a
report prepared for the U. S. Department of Transportation, Federal Highway
Commission, the cost of shipping LTL was at least twice that of TL (Jack Faucett
Associates 1991). Therefore, there is a distinct economic disadvantage when empty

containers must be returned LTL.

Table 1 - Expense Components for Over—the-road Motor Carriers: TL and LTL Cost
(1988 Cents/Mile)

 

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TL
5-axle48’ 52,500 30.0 20.0 19.1 3.0 8.5 22.0 102.6
5-axletwin 59,800 30.7 20.8 21.0 3.0 9.8 22.0 107.3
28’
7-axletrip. 83,400 31.9 24.8 25.5 4.3 12.7 27.3 126.6
28’
LTL
5-axle48’ 55,400 38.9 16.0 19.4 3.0 8.7 138.0 224.0
S-axletwin 63,200 39.7 16.6 21.3 3.0 10.1 149.3 240.1
28’
7-axletrip. 88,500 41.2 19.8 26.1 4.3 13.2 186.9 291.5
28’

Original Source: Jack Faucett Associates, The eﬂ’ect of size and weight limits on truck costs, a
working paper prepared for US. Dwartment of Transportation, Federal Highway
Administration, Washington DC, October 1991.

Another transportation system characteristic that a company should consider when
looking at alternative packaging designs is whether it will use a private, contract or
common carrier for shipping. Both the shipper and the consignee have the common
objective of moving goods ﬁ'om origin to destination within a prescribed time at the
lowest total cost (Bowersox and Closs 1996). So, if a company can provide this service
for itself at a lower total cost (including both ﬁxed and variable transportation costs,
material breakage, insurance, warranty, etc.) than either a contract or common carrier can,
a company should use its own ﬂeet. Saphire (1996) notes that companies who use
company-owned vehicles to transport products in returnable/reusable packaging, typically
do not charge for return shipping, especially if the trucks would otherwise return empty to
their point of origin after making a delivery. Nevertheless, in order to achieve an accurate

total cost, this return shipment cost should be included when using activity-based costing

10

and when using the model that is presented in this thesis. The fact that the return trip is
included in the total cost can greatly affect the ﬁnal packaging decision, since
transportation costs are frequently a large percentage of overall ABC costs.

Using a common carrier is an alternative to the use of a ﬁrm’s own ﬂeet. Common
carriers have the responsibility to offer service at nondiscriminatory prices to the public. It
is the basic foundation of the public transportation system. Common carriers provide
ﬂexibility for a ﬁrm to ship almost any good, anywhere domestically. The use of common
carrier also allows the shipper the ability to ship goods on a single shipment basis.

In contrast, contract carriers provide transportation for select customers, and the
companies involved are bound to a speciﬁed agreement at a previously negotiated price.
Unlike common carriage, contract carriers are not required to charge the same amount to
each shipper (Bowersox and Closs 1996). Often shippers can negotiate a low packaging

return transport cost by awarding a high-volume contract to a carrier.

. Logistical Environment

(The logistical factors to consider when choosing a reusable packaging system are
determined by what, how and where the product is shipped. Shock, vibration and
compression characteristics that come from handling, transporting and stacking
(respectively) help determine what kind of packaging system is appropriate for a product.

The ﬁrst logistical factor to consider when choosing between alternative returnable

packaging systems is the method of material handling. During material handling
procedures, certain products are more durable than others. These types of products can

handle impacts better than others. 1

11

/

I

i The method of material handling is greatly determined by a package’s gross weight
and the ﬁequency of which the lifting is accomplished. According to OSHA guidelines, it
is unacceptable for products over 50 pounds to be handled manually (American Industrial
Hygiene Association 1987). OSHA states that for “continuous high frequency lifting,
variable tasks,” like manual receiving operations, weights below 17 pounds are acceptable
and present low hazard. Weights between 17 and 50 pounds are acceptable only with
administrative or engineering controls, and packages weighing over 50 pounds are
unacceptable for manual lifting. For items over 50 pounds it is suggested that mechanical
assists such as hand trucks and forklifts are used.

Since items which are 50 pounds or less are most likely to be handled manually,
they are also most likely to be dropped and receive shocks due to impact. It should be
noted: the higher the weight of the package, the lower the drop height -- and vice versa
(Burgess 1992).)

( One should always try to minimize the amount of times a product is handled in
order to decrease damage) In this case study, the company is currently using a blanket-
wrapping procedure to package their goods. Material handling is frequently
accomplished by hand-loading.( An alternative to this method is the use of steel transport
carts with wheels. The carts would allow logistical members to move the products as
necessary and eliminate the need to load and unload products ﬁom skids manually. The
decrease in manual handling with the change to transport carts should reduce damage and

total costs. )

O

12

( Another possibility to reduce damage is to use cushioned dunnage. Cushioned
dunnage such as plastic foams and certain cellulose-based products can act as a protective
mechanism during material handling, transporting and stacking)

Once alternative packaging designs are considered (the next step in the model)
performance drop tests like ASTM standard D-4169 can be used to simulate the
environmental handling conditions (ASTM 1994b). The performance of a product in
these tests can help determine the appropriate packaging design.

( The second logistical factor to consider is product/package vibration. This
vibration is caused by transporting the product through the logistical channel. Trucks,
railcars, ships, airplanes, etc., while in motion vibrate the load which they carry in all
directions) The intensity of this vibration can be measured by attaching a triaxial
accelerometer to the product or transportation device and monitoring, recording and
analyzing the acceleration over time. This data can then be fed into a computer which is
capable of simulating environmental vibrations on a vibration table for further testing of
product/package designs. Software programs used to simulate environmental vibration
are commercially available, and can be used for the random vibration testing required by
ASTM standard D—4728 (ASTM 1994c).

( The vibration caused in trucks is usually greatest in the rear of the trailer. Since
the intensity of the vibration in the rear of the truck is greatest, damage in the back can be
relatively large. Trailers with air-ride suspension can lower the intensity of this vibration.)

(The third logistical factor to consider is compression strength. The compression
strength of a package can be increased by several methods. First, by allowing the product

to support some or all of the load. This can only be done when the product will not be

13

greatly affected by supporting a stacked load. Second, adding headspace to the
product/package can allow the package to compress without bearing weight on the
product. And last, using strong packaging materials like wood and steel can increase
compression strenth For instance, wooden crates and metal boxes are frequently used in

military packaging for packaging designs.

Logistical Eﬁciency, Product Protection and Alternative Packaging Designs

The notions of logistical efﬁciency and product protection go hand in hand.
Maximizing product protection often means increasing the amount of packaging used,
which can lower cube utilization in a trailer. The use of more packaging also frequently
results in higher material costs. Yet sometimes these costs are rationalized to obtain the
lowest overall total cost. For example, if overall product damage decreases due to more
effective packaging, this can lower a ﬁrm’s total costs.

I When maximizing logistical eﬁciency and product protection, the actual package
design has tremendous importance. For instance, if a company can increase package
density through unique packaging design, thereby lowering freight costs, it can increase
the likelihood of an overall packaging change. So, when considering a packaging change,
several key factors which a well-designed logistical package should promote include: cost
eﬁ’ectiveness, product protection, communication, and design for efﬁcient material
handling and ergonomics>

Part density is one of the main inﬂuences in determining a packaging design since
the density of a pack directly affects the transportation cost per unit. The greater the cube

utilization, the lower the transportation cost per unit. Maximizing cube utilization, and

14

still protecting the product may, therefore, sometimes have economic trade-offs. Too
much packaging can lower cube utilization and increase packaging material costs and
labor, and too little packaging can increase damage and replacement costs.

Most products maximize cube utilization by using transport packaging which
effectively cubes out the transportation mode’s usable area. Yet, items which are heavy
weigh out a trailer before utilizing the maximum trailer space capacity. These heavier
items frequently contain a higher cost per unit for transportation.

C One of the key decisions that a designer must make is whether to use standardized
or customized packages for products. Standardized packaging can lower costs in at least
two ways. The ﬁrst is that packaging material costs are lower per part as the quantity
purchased increases. Second, standard containers can be designed to conform to the
interior dimensions of the transport vehicle, thereby maximizing possible density (Saphire
1996).\

\ Customized packaging generally requires new designs each time a new product is
introduced. This requires time and labor. Higher costs are also incurred due to shorter
production runs for packaging materials purchased. Yet, customized packaging is
sometimes preferred because it allows the designer the ﬂexibility to produce a package
which meets the criteria of that particular product.

Another design consideration that should be taken into account is ergonomic
design. When designing for ergonomic eﬂ’ectiveness, there should be at least three goals:
presentation of the part in an ergonomically ﬁiendly manner to the operator; the use of

small, modular, manually handled containers; and designing for eﬁ’ective stocking (Grifﬁn

1994).)

15

To present a part in an ergonomically ﬁiendly manner to the operator, the part
should be within reach without bending or twisting. The container should be located
within easy reach. Also, as the reach or distance to the container increases, the weight of
the unit or contents should be decreased. Diﬁicult wrist and grasping movements should
also be avoided. The use of small, modular, manually handled containers can assist in this
effort. Liﬁ tables, roller conveyors, and sub-lot dunnage can also help. Finally, designs
can be most effective if stocking requirements are taken into account. To help eliminate
waste, a company should minimize forklift requirements and facilitate kanban (Griffin
1994)

Since both ergonomic effectiveness and cube utilization are important criteria for
determining a packaging design, it follows that the material handling of packaging is
critical. Development of packaging which maximizes the number of units handled per unit

time is an eﬁ‘ective way to minimize overall costs.

Logistical Relationship/Packaging Ownership

C Several factors must be considered when determining which supply chain member
should own the returnable/reusable packaging. This decision is very important because
the members who are responsible for these containers need to have them available and in
usable condition when needed, otherwise some or all of the members in the supply chain
may suffer. The ﬁnal decision for ownership may result in any of the following: direct
ownership by the shipper or consignee, partnership, or third party ownership. |'

CA shipper or consignee may own the containers outright) In this scenario the

responsibility for tracking, inventory and maintenance is delegated to that ﬁrm.

l6

LSometimes this can be an advantage, because the company can put in place a container
control system which is reliable and built speciﬁcally for their company. On the other
hand, direct ownership can be a drawback as well because many companies do not have
the expertise or desire to track and repair such systemsqln these cases it is recommended
that other parties become involved.

C, An increasing number of supply chains are working together to create a unique
partnership called a vertical marketing system. This is one where the shipper and
consignee are linked by a common ownership, contracts, strategic alliances or
administration. In a vertical marketing system, the participants acknowledge and desire
interdependence, and use strategies that increase system-wide proﬁts over individual ﬁrm
proﬁts (Bowersox and Cooper 1992). This partnership is important for returnable
packaging because the need to control the movement of the containers is vital for the
system to work properly. Ifa partnership is formed, it is still necessary to identify who
will track and repair the containers. These tasks may be delegated to more than one ﬁrm,
but the details should be coordinated before the returnable program is implemented.

A third party logistics supplier may also own customized containers. Under this
scenario, the third party owner frequently provides value-added services to its customers
by tracking and controlling the containers. Customized containers should be owned
directly or via partnership between existing supply chain members (Bierwagen 1996). >

(The use of returnable/reusable containers will help certain members beneﬁt ﬁ'om
the reduction of such costs as trash disposal and expendable packaging) In contrast,

particular increased expenses may also be incurred, like the cost for return transportation.

17

Which companies beneﬁt from cost savings and which incur increased expenditures,

depends on the supply chain and the returnable packaging system design.

Operations

(\ The determination of how to track and control the returnable/reusable logistical
system is a major decision and causes problems for many companies. There are three
items to consider for controlling reusable systems. First, the packaging must be in the
right place at the right time in order for the system to function properly. Ifthe packaging
system is not controlled, contingency packaging must be available (like expendable
corrugated ﬁberboard packaging), which can result in increased costs. Second, system-
wide information on returnable system usage and availability must be available to all
members who need this data. And third, the tracking and controlling system should be
ﬂexible, so that it can be expanded for new products and additional geographic coverage
(Bierwagen 1996)..»

To control and manage a returnable packaging system, it is necessary to determine
the number of containers necessary in the system. This depends on both the level of
customer service and the required “ﬂoat” due to production and transportation.

LReturnable packaging is most appropriate for consistent volume logistical systems
with a short cycle time. The number of packages needed, and the investment required,
depends on how quickly the packages can be returned. Variation in volume per cycle
increases the number of packages required to match the longest cycle (Thompson 1996). >

The cycle time can be shortened by improving the efﬁciency of returns. To

improve efﬁciency and cycle time, container tracking becomes a critical element for a

18

returnable system. With the advent of information technology, it is possible to track
returnable/reusable logistical packaging by any of several methods. These include manual
tracking, visual control, computer control, external pull system control, ﬁnancial
transaction control, and simple inventory control. In many cases a combination of two or
more of these tracking systems may be used together; they are not mutually exclusive
(Trudeau 1995). A brief overview of each follows.

Manual tracking is used in simple container shipping systems to record in/out and
container inventory balance by shipper and receiver. In this case, EDI (electronic data
interchange) is not used, so customer follow—up for attention to receivables and timely
return of packaging is generally required. This system can promote trust if records are
believable and containers are dedicated using a closed loop system. The advantage of
using manual checking is that it requires a low initial investment to implement. On the
other hand, it is labor intensive and if problems arise between supply chain members,
negligence is diﬁcult to prove without rather complete shipping records.

The Japanese concept of kanban utilizes small lot sizes and frequent part
replenishment. This can be aided by the use of visual controls which include signs, signals
and sounds. One type of sign is labeling on containers to clearly identify the part,
container, routing information or container address, job sequence number or any other
pertinent information. Container color also aids in identiﬁcation.

Internally a ﬁrm may use visual controls like display boards to show delivery
routes, times, and pull cards. They help identify all work elements in the container

movement process and provide the proper layout for material storage and line-side

l9

deliveries. This type of control method works best with a synchronous, lean operation.
Visual control may also be used externally.

Advantages of visual controls include a relatively low-cost initial investment
because expensive tracking systems are not utilized. It also allows the shipper to verify
return of the containers. Impedirnents exist because the entire organization must have a
common understanding of the system, and communication must exist between all
disciplines. Further, since expensive computer tracking systems are not used, there are no
permanent records available to assist in container control problem resolutions.

The use of computer controls to track packaging continues to grow and offers the
best opportunity for growth and economic long-term savings. These systems provide
capability to link multiple shipping and receiving plants to one common system. A
complete multi-plant system could have interfaces with other material and logistics
systems such as shipments and shipment receipts, part and package requirements,
container allocations, transit times, location code information, railcar location information,
and supplier change notices. The information system could also provide automatic
calculation of containers that are updated by movement of associated parts.

Computer system tracking control works well for complex supplier - customer
shipping relationships. With computer tracking, the supply chain can achieve tangible cost
avoidance beneﬁts such as reductions in secondary freight movement to relieve container
shortages, reductions in purchases of new containers, and decreases in production
downtime due to container shortages. In contrast, the system also requires discipline and

training, physical inventories of containers, and constant attention to proper business

20

practices to maintain accurate and timely data. Further, the system can become obsolete
in a few years after implementation due to changing business practices.

The external pull system for tracking containers is controlled by a trigger
mechanism allowing for material ship ﬁ'equencies on a daily basis to replace material
consumed at the point of use. The schedules of daily production to be replenished are
based on the standard pack quantity. Small lot sizes in returnable, manually handled
containers with visual controls and closed loop transportation are the keys to this
arrangement. In this system, the supplier must verify that the container returns are of
proper quantity and type.

Several advantages and disadvantages exist when using the external pull system for
container tracking. Advantages of the external pull system include cost reductions by
eliminating waste, lowering lead-times, and better quality in the manufacturing process.
Disadvantages include the requirement of good strategies for smooth and level scheduling,
standard containerization, and level material and resource usage including facilities, people
and equipment.

Container control by ﬁnancial transaction can be implemented in one of two ways.
First, outside part suppliers may utilize another company’s shipping containers (i.e.
automotive part suppliers use the assembler’s containers). With this procedure, the value
of the container is established at the beginning, and consignment made to the part supplier.
At the termination of the program, a reconciliation to account for all containers takes
place, and the supplier assumes ﬁnancial responsibility for all missing containers. This is

similar to a deposit system.

21

On the other hand, the part supplier may own the containers, and the container
value is billed every time the assembler receives a shipment. In this case, the assembler
would be invoiced for missing containers.

The advantages of container control by ﬁnancial transaction include that the owner
of the container is protected against business risk of loss, provided the consignee has
agreed to the arrangement. In contrast, it is possible that the consignee could return the
containers without shipper identiﬁcation, causing an incorrect owing balance, so care must
be taken to ensure proper classiﬁcation. Another disadvantage of the ﬁnancial transaction
method for container control is the cost of bookkeeping, especially for systems which
require deposits or debits.

Finally, simple inventory control based on trust can be used. In this system,
containers are shipped and returned, again and again. Periodically both the shipper and
receiver agree to inventory containers to determine if the allocation is still intact. Then, if
adjustments need to be made, the container pool operator may do so. This system
requires low initial costs, yet the carelessness of a particular supply chain member is often
diﬁcult to prove.

( Many ﬁrms are ﬁnding that controlling, tracking and transporting returnable
packaging systems is more diﬁicult and time-consuming than expected. Because of this,
third party logistics providers offer these services. Such companies generally have
disciplined procedures and guidelines to control container inventories and help decide the

most efﬁcient manner throughout the supply chain (Rink 1996). >

22

Total Cost (Activity-based Costing)

( It is important to measure returnable packaging costs before a decision to purchase
is made. These costs involve much more than the purchase of the returnable systems
themselves. Some of these costs include the cost to track containers, repair costs, costs
due to material handling, storage costs for containers, distribution costs, insurance costs,
machinery expenditures to make the system usable, and personnel training. The costs,
whether higher or lower, must be measured in order to achieve an accurate depiction of
the anticipated project. 1

Considerable research has been done recently on management techniques which
companies can use to improve ﬁnancial standings. With the advent of continuous
improvement, total quality management, business process reengineering, and just-in-time
(JIT), many companies are searching for systems which effectively report ﬁnancial data, so
that it may be used to make more effective ﬁnancial and operations decisions. One
method which many companies are experimenting with is activity-based costing (ABC).

( Essentially, ABC is data which can be used to “control costs by identifying the
relationships between expenditures and the activities which cause them” (W iersema 1995).
This type of data is important because traditional cost systems describe only what is spent,
not how it is spent (Cokins, Stratton, and Helbling 1992). ABC describes how a company
is actually spending its money. .r’

1;"— The traditional cost accounting systems allocate direct and indirect costs on a
proportionate basis using volume-based cost drivers such as direct labor hours, machine
hours or material dollars) These traditional methods can be acceptable when a plant

produces just a few undifferentiated products; but nowadays, overhead can be as much as

23

70% of costs. According to Sharman, whereas the cost of goods sold use to be 35%
direct labor; it is now often less than 10% (Southerst 1994). So what happens when these
overhead expenses account for so much of the total cost?(Traditional accounting spreads
out these costs, and there is no way of knowing how the costs are actually spent. More
importantly though, there is no measure to compare costs on a daily, weekly, monthly and
yearly basis. In short, these volume-based cost drivers will distort costs whenever
products consume resources in disproportionate amounts.

\/ ABC differs from traditional cost accounting by tracing costs to products
according to the activities performed on them. Because of this, ABC has gained
acceptance by many different size companies which have found that it is an eﬁ’ective
technique for accurately assigning costs within the logistics system, as well as throughout
the entire company (Pohlen and La Londe 1994).

( The ABC process rectiﬁes the dilemma of assigning costs by: identifying cost
drivers, or the structural detemrinants of the company's logistics activities, and their
behavior; measuring cost drivers in sufﬁcient detail so as to understand cause and eﬁ‘ect
activities (rather than accounting classiﬁcations); measuring the interaction of cost drivers
(e.g., determining whether they reinforce or counteract each other); identifying the speciﬁc
service levels that matter to customers and measuring their value; recognizing the correct
trade-oﬂ’s among the logistics and service criteria; and evaluating these, both as a whole
and incrementally, to contain costs without undermining needed diﬁ‘erentiation in the
distribution ﬁrnction (Pohlen and La Londe 1994). \

The total cost of a returnable packaging program can be determined using activity-

based costing. IfABC is not used, many costs associated with a reusable packaging

24

program may be missed or attributed to activities in error. These costs include, but are
not limited to such activities as administrative support, packaging labor and assembly,
packaging materials, transportation and handling, logistical system support, and the costs
associated with material waste and recycling( Other hidden costs which may be more
diﬁcult to measure include repair costs, costs for cleaning the packaging, and costs

associated with customer or supply chain member dissatisfaction due to a packaging

change)

Retumable Change?

(K The last step in the decision framework is to decide among alternative packages.
Activity-based costing provides the necessary tool to make this decision by breaking down
actual costs. _It allows one to take into account such necessary factors as the
transportation system characteristics, logistical eﬁiciency, as well as product protection
and alternative packaging designs, logistical relationships and packaging ownership, and
all aspects of operations. Most importantly though, it determines the total cost without
aimlessly spreading the cost of overhead among groups whose activities should not be
reﬂected by it. W

(The recommended method for measuring these costs to compare alternatives is
using the technique of Net Present Value (NPV). This technique sums the cash ﬂows over
the life of the project and discounts them by the current cost of capital, which in part
accounts for the time of the ﬂows. The investment cost is then subtracted out. The result
is a measure of the absolute value of an investment in terms of today’s dollars. If the NPV

result is positive, it is a proﬁtable project. It will generate cash ﬂows that recover the

25

initial investment and the opportunity cost of not being able to use the ﬁrnds for other
investments. Ifthe NPV is less than zero it will not be proﬁtable, and the project should
be rejected (Rosenau 1996). 3

Do not use an excessively high discount rate when determining the appropriate
current cost of capital for the NPV analysis. Use of an overly high discount rate penalizes
a long-lived investment just as much as the use of an arbitrarily short evaluation horizon.
Because the discount rate compounds geometrically each time period, cash ﬂows received
ﬁve or more years in the future will be penalized severely in the analysis. Estimate the
cost of equity capital in either of two ways: use the historical nominal return on corporate
stocks of between 12% and 13% per year, or use the real rate of return (net of inﬂation)
of about 8% to 9% and add the expected ﬁrture inﬂation rate over the life of the project
(Kaplan and Atkinson 1989).

( With the use of ABC and NPV, one can now make a rational decision as to

whether a returnable packaging change should be made. The packaging alternative which

maximizes proﬁts and performance at the least total cost should be chosen.)

CHAPTER 3

RESEARCH METHOD

The purpose of this study is to develop a model which can be used to evaluate the
total cost of returnable/reusable packaging systems since such a model does not currently
exist. A single case study involving an oﬁice ﬁrrniture company is used to explore the
process of evaluating alternative returnable packaging systems to apply to this model.

Single case studies can be very useﬁrl in helping shape a well thought-out theory.
“The case study allows an investigation to retain the holistic and meaningful characteristics
of real-life events — such as individual life cycles, organizational and managerial processes,
and the maturation of industries” (Yin 1994, 3). Critics who say that single case
studies offer a poor basis for generalizing are wrong. Survey research relies on statistical
generalization, whereas the case study relies on analytical generalization. It is these
analytical results which can then be applied to some broader theory.

This thesis uses a case study approach for developing its packaging decision
ﬁ'amework. During development of the framework, several steps were taken. First,
extensive research on returnable packaging was administered. This included readings ﬁ'om
professional journals and trade magazines, classroom lectures, attendance at conventions
and exhibitions, as well as occupational work in the returnable packaging ﬁeld. This
background provided information to formulate the Literature Review section of this paper.

Second, a single case study was undertaken. With the cooperation of the
packaging group at a major modular oﬁice ﬁrr'niture manufacturing company, this case

study involved comparing current direct-ship blanket-wrap packaging methods used for

26

27

modular furniture packaging and distribution, to other possible returnable/reusable
logistical packaging systems. The alternative system that the company was considering
was a returnable transport cart system. The case study involved the transportation of
truckload quantities only. A packaging prototype had already been developed which was
used as the basis for cost analysis, damage prevention and logistical feasibility.

The company was considering using the returnable transport carts for only those
products which are shipped directly to job sites; in other words, for shipments which will
not be placed in a warehouse. Before this study was undertaken, the ﬁrm had been using a
blanket-wrapping procedure to protect the products during shipment. This eliminated
much of the packaging so that the installers could minimize disposal. The use of blanket-
wrap also decreased packaging, and improved trailer cube utilization.

The representatives ﬁom the ﬁrm believed a change to transport carts would
decrease direct and indirect labor. Further, since handling would be reduced due to the
change from manually loading the panels onto a trailer, to placing them on a cart and
loading them directly onto and out of the trailer, they believed that damage should also be
reduced. Yet, the employees acknowledged the fact that cube utilization would be
signiﬁcantly lower. This thesis aims to measure these effects and then evaluate them. In
order to do this, an evaluation of the amount of damage received from the current blanket-
wrapping procedures as well as a cost analysis of this damage had to be investigated.
Further, a look at the handling cost verses beneﬁt relationship when considering a switch
to the new packaging had to be considered using ABC.

This case is interesting because direct material reduction alone cannot be used to

justify the use of transport carts. This is because the company is already blanket-wrapping

28

the products (and the blankets are reused) so a change to using transport carts will not
decrease the amount of packaging used. The challenge, therefore, is to show whether
there are indeed direct and indirect labor savings, as well as reduced damage. This is the
main idea behind using activity-based costing. It allows one to see the whole picture in
order to make a more informed, rational decision by revealing the links between
performing particular activities, and the demands that those activities make on an

organization's resources.

CHAPTER 4

RESULTS

Introduction
This research proposes an eight step model to be used for deciding whether a
change in returnable/reusable packaging should be made. This chapter will discuss the

results using the eight step approach. Appendix A presents the model.

Product Characteristics

The ﬁrst variable in the decision framework is the product’s characteristics,
including size, fragility/durability, environmental stability, and value. In this study of a
modular omce furniture company, the parts are large and heavy, so the system or package
must be capable of protecting such products. Sharp corners and protrusions may also
require special care to avoid damage.

Both blanket-wrap and transport carts are capable of protecting the product, but a
comparison of actual ﬁeld test damage data ﬁ'om this company (which uses blanket-wrap)
to another (which uses transport carts) shows that damage could be lower using the carts,
thus decreasing the cost for damage. Unfortunately, this decrease cannot currently be
accurately measured because it would require the company to perform extensive testing
and/or compile actual damage data associated with the use of transport carts. This was a
cost which the company did not want to incur at the time of this research. However,

research from a similar company shows that damage could decrease to almost zero with a

29

30

switch to transport carts. This data will be shown in the Total Cost section at the end of
the Results chapter.

When considering product ﬁ'agility/durability, for the most part, this product will
fail in a ductile mode because it is mostly metal. This thesis does not examine the effects
of fragility and durability through performance testing, rather uses the damage data gained
from actual ﬁeld tests to examine the differences in loss between the proposed packaging
designs. These results will be presented in the section on the Logistical Environment.

The environmental stability of this furniture product is very good as long as it is
not stored or shipped in adverse conditions. In this case, the environmental conditions are
well controlled during distribution, and the only possible adverse aﬁ’ects would be
temperature. Since this product is not affected by normal temperatures, either packaging
system would be acceptable.

This product is of relatively high value so damage can be very costly. Replacement
costs for material alone for this product is $100 to $500, therefore the ﬁnancial method of
activity-based costing should help in determining whether the initial higher investment cost
of the transport carts would reduce the cost of damage and warranty replacement
compared to using blanket-wrap. Damage to these types of products generally occur ﬁom
scraping, abrasion, denting and fabric tearing. Since the cost is relatively high to replace
such items ﬁ'om this type of damage, a somewhat high-priced returnable/reusable
packaging system may be justiﬁed to protect these products to avert damage and warranty
replacement.

In summary, as far as physical properties are concerned either blanket-wrap or

transport carts should be acceptable returnable packaging solutions, but there is the belief

31

that the carts may reduce damage. Since the value of the product is high, transport carts
may be the best option. The section of this chapter dealing with activity-based costing will

provide a more in-depth analysis of damage costs.

Transportation System Characteristics

The transportation system characteristics are the next variable. This includes the
transportation mode, the distance the product is shipped, whether it is shipped by TL or
LTL, and whether the product is stripped via private ﬂeet, contract carrier or common
carrier.

In this case, products are always directly shipped to the customer via motor carrier
in truckload quantities so they are not handled in a carriers’ consolidation center. This
decreases total costs. Motor carriage is always selected for this product because of its
ﬂexibility domestically. The delivery and return shipment of the packaging is always
completed on the same trailer. This is very diﬁ’erent from other companies who use more
than one truck for shipment. Two-way trailers place the responsibility on one carrier, and
frequently one driver. This makes it easier to determine fault when damage occurs. On
the other hand, the trailer may not depart until empty packaging is reloaded onto the
trailer. This can, theoretically, require much time and labor, and increase costs.

Activity-based costing provides a means to determine which distances would be
appropriate for shipment using either packaging system. This will be important because it
may not be as proﬁtable for the company to use transport carts for longer distances.
Longer distances will increase the cycle time, requiring a larger package inventory as well

as higher return transport cost.

32

This case study determined that if a returnable transport cart program was
implemented, the ﬁrm should use its own ﬂeet to ship products so that they could exert
better control over the system. With blanket-wrap, this packaging control is not as
important because extra blankets for buﬁ’er stock can be kept in inventory at a very low-
cost compared to transport costs. Conversely, due to the higher cost of the transport
carts and the fact that they require more space, greater control will be important.

After using the transport carts for some period of time, the ﬁrm may consider
using a contract carrier. Special arrangements may be made with the contract carrier to
provide truckload consolidation during the backhaul.

Activity-based costing will play a vital role in determining which packaging
solution is best for this company in terms of transportation costs. The activity-based
costing section of this chapter explores these costs more thoroughly including costs due to

backhauling.

Logistical Environment
The logistical factors to consider when choosing a returnable packaging system are
determined by what, how and where the product is shipped. The logistical factors for a
package and its product are those physical factors which the product and its package
encounter during the system’s life cycle: shock, vibration and compression.
Modular ofﬁce ﬁrmiture panels are manufactured, packaged, staged, loaded onto a
trailer, shipped by the truckload to a job site, unloaded manually, staged again, then

installed. During this shipment to the ﬁnal destination there are many handling procedures

33

including manual handling, semi-assisted handling, and machine-assisted handling. The
panels may be shipped anywhere domestically, but they are not stored.

A closer look at the current handling procedures is critical to identify opportunities
for material handling changes to reduce potential physical product impacts. Currently,
once a ﬁnished part is assembled, it is wrapped in a large plastic bag and lifted by two
people at the end of the production line and loaded onto a wooden skid. This step marks
the ﬁrst impact due to handling. Once the skid is loaded with ﬁnished products, it is then
covered with a blanket to protect against abrasion, and ready for staging.

During staging, a forklift driver will transfer the skid to temporary racks located
within the manufacturing facility until the rest of the order is ready to be loaded onto the
truck. This is the second potential impact. The third potential impact occurs after the
forklift driver delivers the products to a trailer, where each is taken off the skid and
manually loaded into an upright position. The weight of one product is between 35 and
85 pounds. Most of the products are between 65 and 75 pounds. OSHA guidelines state
that it is unacceptable for products over 50 pounds to be handled manually. Since the
product is heavy and manual ﬁtting is cumbersome, damage can be potentially large if the
loader is not very careﬁrl when placing the product onto the trailer ﬂoor. Shock due to
these impacts can cause dents in the metal frames.

Since the products are delivered by the truck directly to the facility where the
products will be used, intermediate handling and warehousing is not used. Compared to
LTL, this eliminates several handling procedures in the logistical channel, which decreases

the amount of impacts and decreases damage.

34

Once at the job site, the products are manually ﬁtted one at a time, and generally
placed onto a wooden skid which a forklift driver will move to a short-term storage area.
These steps account for the fourth and ﬁfth potential impact.

Finally, when the furniture installers are ready, two people will handle the product
for one last time to set up an ofﬁce. This is the sixth potential impact. Other impacts may
occur, but this is the general pattern.

It is easy to see imagine that the manual handling of these large, bulky items could
cause damage. With the approval of the manufacturer, the researcher examined company
records to investigate how severe damage was with this current method. (The following
data has been multiplied by a constant factor to mask true company data). According to
records, this company sold 173,412 panels in the second quarter of ﬁscal years 199X and
199Y. The thesis research of one ﬁrll year of shipments shows that 58% of the costs
attributed to damage happened during direct shipment of blanket-wrapped products. (The
other 42% occurred using corrugated packaging which is generally not shipped directly to
the end user). Interestingly, only 36% of all shipments used blanket-wrap. That means
that 58% of the damage occurred to only 36% of the shipments. In total, the company

received a damage rate of 0.088%. This data is shown in Table 2.

35

Table 2 - Damage to Modular Furniture from 6/1/9A to 6/1/9B

Packaging Method
Blanket-wrap
Expendable Option A
Expendable Option B

Total

Blanket-wrap
Expendable Option A
Expendable Option B

Total

Blanket-wrap
Expendable Option A
Expendable Option B

Total

Material Replacement
Cost

$26,992. 17

$1 5,293 .3 1

$4430.88

$46,716.36

% of Cost Damaged
58%

33%

9%

1 00%

Furniture Part Volume
322,099
3 10,493
270,271

902,863

Quantity Damaged
296
402
10 1

799

% Shipped by Packaging
Method

36%

34%

30%

1 00%

36

By comparison, an ofﬁce furniture distributor (Company P) who has used
transport carts for direct-shipment of modular furniture parts for years, claims that they
consistently receive less than 1% damage to products. Further, they state that lot damage
is frequently 0%, compared to 0.088% for the company of study. This is quite possible
since a switch to carts would signiﬁcantly reduce handling, by decreasing the number of
possible potential impacts to two: once when the product is loaded onto the cart, and
once when it is taken oﬁ’ the cart for office assembly.

Transport carts allow the material handler to move the product throughout the
distribution system on one common, easy to move material handling device. The use of
carts decreases manual material handling. Table 2 suggests that this could decrease up to
58% of the companies’ costs due to damage.

The second and third types of environmental factors to consider are compression
and vibration. Compression results will probably be similar with either packaging method
since these products are not stacked during transportation, and all products will be
shipped in truckload quantities. Air-ride suspension trailers are recommended for both
types of packaging system designs to minimize vibration damage. Damage due to
vibration will not be a large concern either because the products are protected with a
plastic bag and cushioning to avoid scraping, and there are no criticd spring-mass systems
involved.

In summary, the greatest logistical environment concern is manual handling.
Manual handling causes the greatest opportunity for damage due to impact. The shift to
transport carts could allow the manufacturer to reduce damages signiﬁcantly, compared to

the current blanket-wrapping method, because it reduces manual handling. The

37

measurement of how much lower would require actual test or ﬁeld data, not compiled in

this study.

Logistical Efﬁciency, Product Protection and Alternative Packaging Designs

Logistical efﬁciency and product protection ﬁ'equently go hand in hand. In this
case logistical efﬁciency is decreased with a switch to transport carts as the large, bulky
carts lower cube utilization from 425 to 330 panels per truckload. Although the cube
utilization would be lower with the transport carts during shipment, they would be made
to knock-down and nest for storage during periods of nonuse.

On the other hand, the transport carts provide positive ergonomics factors. For
example, the carts allow workers to push the furniture around on wheels, rather than
manually lifting the product. This leads to lower direct labor and decreased injuries. This
direct labor cost savings provides a signiﬁcant cost savings to the company as shown later
in this chapter. The cost savings associated with decreased human injuries will not be
measured because this data will not be available until an actual program has been active
for sometime.

When comparing standardized or customized packaging designs, the blankets are
standard moving van equipment and their cost is relatively low, $9.35 per blanket.

The transport carts would be produced to maximize trailer capacity, and they
would be designed to knock-down and nest during backhauling to save costs. Since there
is no standard transport cart which is manufactured that meets this criteria, the carts
would be customized. Each cart costs approximately $420 and holds approximately 10

panels. This cost is based on the purchase of 200 carts which would satisfy shipment once

38

every seven days (the cycle time) for large truckload shipments. It is important to note
that longer distances may require more carts, therefore higher costs. Only the cost for 200
carts is included in this analysis.

Backhaul costs become larger with greater distance. Activity-based analysis
allocates the cost of backhauling as an expense which is charged to the goods in the truck
at the time of delivery. Freight consolidation will be a key to saving costs during the
backhaul.

To minimize costs, a company’s logistics plan must be well thought-out. The plan
must contain supply chain movement to consolidate shipments. For instance, in the case
of blanket-wrap, very little truck space is used by the packaging after the product is
delivered to the customer. Consolidated backhaul, such as loading the truck with
manufacturing supplies or other goods, divides the backhaul expense between both
activities (blanket-wrap and supplies), generally using a simple weighted average. 80, if
only 2% of the truck volume contained blankets, and 98% contained supplies, activity-
based costing methods charge only 2% of the backhauling costs to the blanket-wrapped
goods. The same could be done for the transport carts. (This example assumes that

volume is the determinant for trailer capacity, not weight).

Logistical Relationship/Packaging Ownership
The choice of who will own the reusable packaging is an easy one in this case since
the members of the supply chain are working together to produce a proﬁt. Obviously the

ﬁrm will purchase the carts if a packaging change is made, but once the carts arrive at the

39

installation point, a contract installer (or dealer) is in charge of erecting the ofﬁce. At this
point the installer would be in control of the carts.

To control the system, it is recommended that the ﬁrm uses a simple bookkeeping
system with minimal computer equipment for tracking. This is possible because this
supply chain is a vertical marketing system (VMS). A VMS is a supply chain in which
members have either common ownership and/or are bound by a written contract. The
manufacturer ﬁrm is also the shipping ﬁrm, but contract installers erect the parts into
omces. A written binding agreement between the manufacturer and the installer will have
to be signed which states that the installer is responsible for returning the carts back to the
manufacturer in proper working condition.

This system is recommended because it is easy to control and does not require a
deposit from the installer. A deposit/rebate system could cause problems with certain '
installers who are not willing to incur the debit when receiving the carts.

In short, it is important to control expensive packaging systems like transport carts
throughout the supply chain for obvious cost reasons. Controlling the system is an

operations decision, the next phase in the eight step model.

Operations
There are three items to consider for controlling reusable systems. First, the
packaging system must be in the right place at the right time in order for it to function
properly. Ifit is not, contingency packaging must be available (like an expendable
corrugated ﬁberboard package). This results in increased costs. Second, system-wide

information on returnable system usage and availability must be available to all members

40

who need this data. And third, the tracking and controlling system should be ﬂexible, so
that it can be expanded to new products and additional geographic coverage.

Cost will play a major factor when determining which system is acceptable for
controlling the reusable system. Currently, the manufacturer uses a simple visual system.
Data entry is minimal, with inventory of blankets taken once every six months. The
control system seems acceptable to the producer because the cost of losing one blanket is
less than $10. In contrast, the material cost for a transport cart is more than forty times
that amount; therefore more care will have to be taken to ensure that these carts are not
lost or stolen. In either case, the fact that the manufacturing ﬁrm owns their own shipping
trucks allows better control over the packaging.

A simple computer system is recommended with a stationary bar code scanning
system located at the manufacturing facility to track the carts. The bar code system
eliminates the cumbersome task of manual recording, and reduces error tremendously
(LaMoreaux 1995).

Outbound carts would be scanned as they are rolled onto the trailer. Once they
arrive at the destination site, the ﬂeet driver would visually check and record to make sure
that all carts are accounted for and assigned to the dealer consignee. The installers would
unload the carts and place the carts back on the trailer when ﬁnished. The truck driver
must wait until this is done. Then, once the installer is ﬁnished loading the empty carts,
the driver will count the carts to ensure that all carts are present. At this point, the carts
would be ready to be shipped back to the manufacturing facility, scanned upon arrival, and

placed in a designated storage area.

41

Total Cost (Activity-based Costing)

Now that a brief analysis has taken place for the ﬁrst six steps of the eight step
model, a thorough investigation of activity-based costing will take place. Unfortunately,
at this manufacturer, like most in the United States, costs are not applied according to the
activities which cause them; rather, costs are applied by function. This thesis aims to
break the cost components down into activities so that a true picture of spending can be
realized, and management can see where costs have the potential to decrease. According

to this approach, all activities which are not value-added should be eliminated.

Cost Drivers

The primary focus of activity-based costing (ABC) is to identify the cost drivers or
structural determinants of the company’s logistics activities. These cost drivers and their
associated activities were ascertained with the help of key professionals in the ﬁrm ﬁom
such groups as packaging, purchasing, transportation and operations. This section will
present cost matrixes which dissect the logistical system into activities and measure these
activities using cost drivers. This allows a true cost comparison of the two proposed
packaging systems. (It should be noted that these costs have been manipulated by a
constant quantity to mask the true costs per the furniture company’s request).

Table 3 lists the activities which this thesis will focus on to develop a cost
comparison of the two packaging types. Each activity has an associated cost driver which
will be used to measure the true cost for that activity. Packaging material administrative

support can be measured by using total hours of support. Packaging assembly labor can

42

be measured by the number of hours directly associated with packaging labor; while
packaging material usage can be measured by actual material cost.

As far as transportation and material handling is concerned, outbound and inbound
freight can be measured by the number of miles shipped. Outbound and inbound truck
loading/unloading can be measured by the number of panels loaded or unloaded. Further,
logistical system support can be measured by the number of hours of support.

At the end of its life, the packaging must be recycled or disposed. The activity of
packaging disposal can be measured by cubic volume of packaging material waste. The

costs associated with recycling packaging materials can also measured by cubic volume.

Table 3 - Packaging Activities and Related Cost Drivers

Packaging Activity Cost Driver (Unit)

Packaging Material Administrative Support Hours Of Support

Packaging Assembly Labor Hours Of Packaging Assembly Labor
Packaging Materials Dollars Of Material Cost

Outbound Freight (Truckload) Number Of Miles

Inbound Freight (Truckload) Number Of Miles

Loading Truck Number Of Panels Loaded

Installer Unload Truck Number Of Panels Unleaded

Logistical System Support Hours Of Support

Installer Packaging Disposal Cubic Volume Of Packaging Material Waste
Installer Recycle Packaging Cubic Volume Of Packaging Material Recyclable

Now, a summary and brief explanation of each of these costs using activity-based

costing will take place. Data was obtained by the ﬁrm’s personnel. The following tables

43

compare the total cost of using either blanket-wrap or transport carts and are based on
local delivery (delivery within 15 miles), delivery to the Southern part of the United

States, and delivery to the Western portion of the United States.

Blanket-wrap

When comparing the two methods, the use of blanket-wrap as a packaging
medium maximizes trailer cube utilization by 28.8% in part volume. Tables 3, 4 and 5 list
the costs associated with the blanket-wrapping procedure and were determined by using
ABC. It is important to note that the following activities’ costs remain constant for each
destination (local, Southern and Western): packaging material administrative support,
packaging assembly labor, loading truck, logistical system support, installer unload truck,
installer packaging disposal, and installer recycle packaging.

Transportation costs vary depending on where the product is delivered - whether
it is delivered locally, to the Southern portion of the United States, or Western part of the
US. Domestically, outbound freight from Michigan to the east coast or certain
Midwestern states is costly. Inbound freight to Michigan out of the east coast is
inexpensive, whereas Midwestern states cost more. According to company employees,
regardless of destination, when using common carrier, outbound freight is generally more
expensive per mile than inbound freight. Also, overall costs associated with freight
increase with increasing distance. In this case, the company ﬁ'equently uses its own ﬂeet
to ship goods, so outbound and inbound prices remain constant for a given distance, yet
costs are determined using the average of common carrier and the companies’ own ﬂeet

rates.

Packaging using blanket-wrap includes other surcharges charged by the contract

loading and unloading companies. A 25% premium is charged for delicate handling.

Table 4 - Blanket-wrap: Local

Activity Total Expense (8) Quantity of Parts Rate/Part (8)
Packaging Material 1890.00 26,012 0.07
Administrative Support

Packaging Assembly 16,153.00 26,012 0.62
Labor

Packaging Materials 24,483.00 26,012 0.94
Loading Truck 5736.00 26,012 0.22
Logistical System 3150.00 26,012 0.12
Support

Outbound Freight 4284.00 26,012 0.16
Installer Unload Truck 11,472.00 26,012 0.44
Installer Packaging 10,296.00 26,012 0.42
Disposal

Installer Recycle 1821.00 26,012 0.07
Packaging

Inbound Freight 4284.00 26,012 0.16

Cost Per Part 3.22

45

Table 5 - Blanket-wrap: Southern United States

Activity Total Expense (S) Quantity of Parts Rate/Part (8)
Packaging Material 1890.00 26,012 0.07
Administrative Support

Packaging Assembly 16,153.00 26,012 0.62
Labor

Packaging Materials 24,483.00 26,012 0.94
Loading anck 5736.00 26,012 0.22
Logistical System 3150.00 26,012 0.12
Support

Outbound Freight 117,810.00 26,012 4.53
Installer Unload Truck 1 1,472.00 26,012 0.44
Installer Packaging 10,926.00 26,012 0.42
Disposal

Installer Recycle 1821.00 26,012 0.07
Packaging

Inbound Freight 117,810.00 26,012 4.53
Cost Per Part 1 1.96

Using Own Fleet

Activity

Packaging Material
Administrative Support

Packaging Assembly
Labor

Packaging Materials
Loading Truck

Logistical System
Support

Outbound Freight
Installer Unload Truck

Installer Packaging
Disposal

Installer Recycle
Packaging

Inbound Freight

Cost Per Part
Using Own Fleet

Table 6 - Blanket-wrap: Western United States

Total Expense (8)

1890.00

16,153.00

24,483.00
5736.00

3150.00

224,910.00
1 1,472.00

10,926.00

1821.00

224,910.00

Quantity of Parts

26,012

26,012

26,012
26,012

26,012

26,012
26,012

26,012

26,012

26,012

Rate/Part (S)

0.07

0.62

0.94
0.22

0.12

8.65
0.44

0.42

0.07

8.65

20.12

47

Transport Carts

A comparison of the total costs for using blanket-wrap packaging verses transport
carts shows that the cost of transport carts is higher for all destinations if the expense of
the carts and necessary changes to the manufacturing process are amortized as an expense
over only one year. The assumptions used to make this conclusion include that packaging
material administrative support, packaging assembly labor, logistical system support,
customer waste disposal, and customer recycling rates remain the same for both blanket-
wrap and transport carts.

Changes in costs if a switch was made to transport carts would include the
obsolescence of certain expendable packaging honeycomb materials (a cost of $6138 per
quarter), and elimination of the need to replace blankets ($5600 per quarter). Both of
these materials are reused, but are replaced frequently because of using common carrier
sometimes. The tables also assume added packaging costs for the transport carts due to
the purchase of a bar code scanner, a computer, a keyboard, and metal identiﬁcation tags
($1050 per quarter for 1 year); a one time ﬁxed cost to alter the assembly lines to make
them functional with the carts ($700 per quarter for one year); $840 per quarter for the
life of the project for storage of the carts during nonuse periods (because one stationary
trailer costs $280 per month); and the purchase of 200 racks as an expense over 1 year
($21,000 per quarter).

Further, it was estimated that the manufacturer would decrease its costs for
handling the transport carts by 75% because of eliminating some handling procedures

(including forklift labor). These costs are reﬂected in Tables 7, 8 and 9. Similarly,

48

handling costs for the installer unloading the carts were also decreased by 50% due to the

ergonomic advantages of using carts.

Table 7 - Transport Carts: Local

Activity Total Expense (8) Quantity of Parts Rate/Part (S)
Packaging Material 1890.00 26,012 0.07
Administrative Support

Packaging Assembly 16,153.00 26,012 0.62
Labor

Packaging Materials 36,336.00 26,012 1.40
Loading Truck 1434.00 26,012 0.06
Logistical System 3150.00 26,012 0.12
Support

Outbound Freight 4413.00 26,012 0.17
Installer Unload anck 5736.00 26,012 0.22
Installer Packaging 10,926.00 26,012 0.42
Disposal

Installer Recycle 1821.00 26,012 0.07
Packaging

InboundFreight 4413.00 26,012 0.17

Cost Per Part 3.32

49

Table 8 - Transport Carts: Southern United States

Activity

Packaging Material
Administrative Support

Packaging Assembly
Labor

Packaging Materials
Loading Truck

Logistical System
Support

Outbound Freight
Installer Unload Truck

Installer Packaging
Disposal

Installer Recycle
Packaging

Inbound Freight

Cost Per Part

Total Expense (3)

1890.00

16,153.00

36,336.00
1434.00

3150.00

121,383.00
5736.00

10,926.00

1821.00

121,383.00

Quantity of Parts

26,012

26,012

26,012
26,012

26,012

26,012
26,012

26,012

26,012

26,012

Rate/Part (S)

0.07

0.62

1.40
0.06

0.12

4.66
0.22

0.42

0.07

4.66

12.30

Activity

Packaging Material
Administrative Support

Packaging Assembly
Labor

Packaging Materials
Loading Truck

Logistical System
Support

Outbound Freight
Installer Unload anck

Installer Packaging
Disposal

Installer Recycle
Packaging

Inbound Freight

Cost Per Part

Total Expense (8)

1890.00

16,153.00

36,336.00
1434.00

3150.00

232,504.00
5736.00

10,926.00

1821.00

232,504.00

50

QuantityofParts

26,012

26,012

26,012
26,012

26,012

26,012
26,012

26,012

26,012

26,012

Table 9 - Transport Carts: Western United States

Rate/Part (S)

0.05

0.44

1.00
0.04

0.09

6.38
0.16

0.30

0.05

6.38

14.89

51

Amortization as Expense

This ﬁrm’s policy requires a one year payback in order to incur an expense like the
new transport carts. Payback period is the amount of time necessary to break-even on an
investment. The accept or reject criteria involves whether or not the payback of the
project is less than or equal to the ﬁrm’s maximum desired payback period. The main
problem with using payback period to accept or reject a project is that it ignores the
timing of cash ﬂows and disregards cash ﬂows after the payback period (Rosenau 1996).

Table 10 shows that the cost of transport carts is higher than that of blanket-wrap
for shipment to all three areas considered. Ifthe payback period method was used to
determine whether a packaging switch should be made, as the company requires, there
would be no change because there is not a savings in the ﬁrst year. (Table 10 assumes

zero consolidation during the backhaul).

Table 10 - Summary of Blanket-wrap Verses Transport Carts

Cost Per Part: Own-fleet with 100% Backhaul Charges (Zero Consolidation)

Blanket-wrap (S) Transport Carts (S)
Local 2.36 2.37
Southern United States 8.59 8.79
Western United States 14.46 14.89

This payback period is not recommended due to its limitations, and in this case,
shortsightedness. A better method to evaluate whether a returnable packaging project

should be undertaken is Net Present Value (NPV).

52

Net Present Value WPV)

The Net Present Value (NPV) calculation sums the cash ﬂows over the life of the
project and discounts them by the current cost of capital, which in part accounts for the
time of the ﬂows. The investment cost is then subtracted out. The result is a measure of
the absolute value of an investment in terms of today’s dollars. Ifthe NPV result is
positive, it is a proﬁtable project. It will generate cash ﬂows that recover the initial
investment and the opportunity cost of not being able to use the funds for other
investments. Ifthe NPV is less than zero it will not be proﬁtable, and the project should
be rejected (Rosenau 1996).

To use the NPV calculation for this case study, cash ﬂows over the life of the
project cannot be calculated because actual cash ﬂows do not occur, rather, cost savings
are measured, and substituted for cash ﬂows. The net eﬁ‘ect is the same.

To calculate the NPV of the transport cart project, several factors must be
compared between the current packaging method of using blanket-wrap, and the proposed
method of using carts. Several cost savings must be measured. These costs can generally
be taken from the ABC data which was presented earlier. For this study, the activity costs
which change due to a returnable packaging switch include packaging materials (the actual
packaging system, technology, machinery, and storage requirements); material handling
costs (loading and unloading trucks); and transportation costs (outbound and inbound
freight). The other activity costs: packaging material administrative support, packaging
assembly labor, logistical system support, installer waste disposal, and installer packaging
recycling, remain constant for either method to any region of the U. 8., so these are not

placed in the NPV equation (refer to Table 15).

53

The packaging material cost savings are signiﬁcant in this case. The cost to
purchase 200 carts is $84,000. In this same year, a one time expense of $4200 for
technology changes (including a bar code scanner, computer, keyboard and metal
identiﬁcation tags) will also be incurred. Conveyor changes are necessary to make the
assembly production line compatible with the carts. This machinery cost also occurs in
year zero, and the total cost increase is estimated at $2800. In total, $91,000 in expenses
($84,000 + $4200 + $2800) will be accumulated in year zero. For tax purposes, the sum
will be depreciated over the life of the project which is estimated at seven years.

Another packaging cost which will be incurred due to a change to transport carts is
$3360 per year for storage requirements. This cost will continue through the life of the
project and cannot be depreciated.

The packaging cost savings due to using transport carts instead of blanket-wrap
include $24,550 per year due to a decrease in expendable packaging requirements, and
$22,400 per year because blankets do not have to be repurchased. Together, these total a
$46,950 savings per year.

In addition to changes in packaging costs, material handling costs (loading and
unloading of trailers) will decrease with a change to transport carts. According to the
Tables 4, 5, 6, 7, 8, and 9, there would be a decrease of $4302 per quarter for loading, and
$5736 per quarter for unloading trailers if the proposed project was undertaken. This
amounts to $40,152 per year ((84302 x 4) + ($5736 x 4)) in savings throughout the life of
the project.

Finally, transportation costs would also change if the new project was undertaken.

These costs vary depending on the shipping region, because overall transportation costs

54

increase as shipping distances increase. In this case, outbound and inbound freight are the
same for a given packaging system and a given delivery region. To determine the total
annual transportation costs, multiply the rate per part by the annual quantity of parts
shipped.

The annual total to locally ship outbound freight using blanket-wrap is $17,130
($01646 per part (approximated to $0.16 in Table 7) x 26,012 parts per quarter x 4
quarters per year). The local expense for inbound freight is also $17,130 per year for
blanket-wrap. The annual transportation expenses for both blanket-wrap and transport
carts are listed in Table 11. Note that the transportation cost of using transport carts is
higher than using blanket-wrap: $1042 higher to ship locally; $28,582 greater for
Southern shipments; and $60,748 larger for Western deliveries. This is associated with

the decrease in trailer density.

Table 11 - Annual Transportation Costs for Blanket-wrap and Transport Carts

Region Outbound (S) Inbound (S) Sum of Outbound
and Inbound (S)

Blanket-wrap

Local 17,130.00 17,130.00 34,260.00

Southern U.S. 471,240.00 471,240.00 942,480.00

Western U.S. 899,640.00 899,640.00 1,799,280.00
Transport Carts

Local 17,651.00 17,651.00 35,302.00

Southern U.S. 485,531.00 485,531.00 971,062.00

Western U.S. 930,014.00 930,014.00 1,860,028.00

55

Tables 12, 13 and 14 present the data used to determine the NPV of the transport
cart projects to diﬁ‘erent regions of the United States. Negative numbers indicate
expenses and positive numbers indicate cost savings. The tax credit is determined
assuming straight line depreciation and uses a 35% marginal tax rate for depreciable assets
(the transport carts, technology and machinery for a total of $91,000). The real cost of
capital (discount rate) is assumed to be 10% with inﬂation of 2.5% annually, and the life
of the project is seven years. The use of a diﬂ‘erent discount rate would change the results

of this calculation. In each case, sales were considered constant throughout the period.

56

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60

When considering the returnable packages as capital assets using the NPV analysis,
the purchase of transport carts is a sound decision for local delivery because the NPV in
Table 12 is positive. In contrast, the NPV is negative for both Southern and Western
shipments (Tables 13 and 14), so it is not recommended that transport carts are used for
these regions, rather, continue using the blanket-wrapping method.

If the ﬁrm decided to use only one type of returnable packaging system, then the
three NPV’s could be added together to evaluate one strategy (assuming that the volume
is the same in each of the three regions). In this case, the summation of the NPV’s is

negative, so it would be recommended to stay with the current blanket-wrapping method.

CHAPTER 5

CONCLUSIONS

Research Summary

The research presented in this case study answers two basic questions. First, what
factors should be considered when choosing between alternative returnable/reusable
packaging systems? And second, how can the true total costs associated with a returnable
packaging program best be measured?

The factors which should be considered when choosing between alternative
returnable packaging systems include product characteristics, the supply chain’s
transportation system characteristics, logistical factors, logistical eﬁciency and product
protection requirements, alternative reusable packaging designs, a ﬁrm’s logistical
relationship and packaging ownership, and operations considerations. In order to
ascertain the true total costs associated with a reusable packaging program, activity-based
costing methods should be implemented and the technique of Net Present Value (NPV)

should be used.

Summary of Decision Framework
The model presented in Appendix A aids in making a rational decision as to
whether a returnable packaging change should be made. The following paragraphs detail
how the model was used for this case study.
First, the product characteristics, transportation system characteristics and the

logistical environment are taken into consideration. The product is one which is capable

61

62

of supporting some of the load during distribution and is not very fragile. The
transportation system employed is truckload shipments delivered directly to job site. And,
the logistical environment is one in which the product is stored inside in dry and mild
conditions where material handling is the prime factor which can cause damage.

Second, the logistical efﬁciency, product protection and alternative packaging
designs are examined. A summary of the two alternatives shows that the blanket-
wrapping method provides better shipping density and requires less storage space, but
decreases product protection.

Next, the supply chain relationships and who will own the packaging system(s)
must be considered. In this case the only supply chain member who will use the packaging
until it arrives at the end user’s site is the manufacturer. The contractual dealer who is in
charge of erecting the ofﬁces changes depending on the region, therefore the
manufacturing ﬁrm should own their own packaging.

Operations considerations are compared. Since this ﬁrm is considering a switch to
a limited number of transport carts, and they use their own trucks for transportation, it is
recommended that the ﬁrm control and track the carts themselves. In the case of blanket-
wrap, the ﬁrm currently purchases and controls their own blankets, but they do not track
them.

Finally, the overall cost implications of the alternatives are compared. The
activity-based costing (ABC) analysis in Chapter 4 showed that are ten main packaging
activity drivers for this ﬁrm: packaging material administrative support, packaging
assembly labor, packaging materials, outbound freight, inbound freight, loading the truck,

having the installer unload the truck, logistical system support, installer disposal of

63

packaging waste, and the installer’s cost attributed to the recycling of packaging.
Associated cost drivers were listed for both in Table 3. The cost drivers which varied the
most between the two packaging alternatives are those associated with the following
activities: packaging materials, loading and unloading of the transportation vehicle, and
outbound and inbound ﬁ'eight.

If two different types of returnable packaging systems are acceptable, the Net
Present Value (NPV) results presented in Chapter 4 indicate that the company should
purchase transport carts and use them for local shipments. It should continue to use the

blanket-wrap for shipments to the Southern and Western portions of the United States.

The Final Choice

In this case, the ﬁrm is considering a switch from packaging with blanket-wrap to
transport carts. Chapters 2,3 and 4 list some of the advantages and disadvantages of both
systems. According to the model, the ﬁnal decision relies heavily on overall costs. One
can see ﬁom Table 10 that if a one year payback period is used, as the company suggests,
no packaging change would be recommended because there are no cost savings in the ﬁrst
year.

In contrast, when the NPV technique is used, a returnable packaging switch to
transport carts is recommended for local delivery of panels, but not for shipments to the
Southern or Western portions of the United States. The transport carts would create
tremendous savings for the company for local deliveries.

In this case, a decision to purchase the transport carts and use them for local

shipments in lieu of the blanket-wrap is recommended.

64

Proﬁtability through Retumable Packaging

Retumable/reusable logistical packaging offers excellent opportunities for cost
savings for companies who are willing to make the sometimes large initial investment
required to begin the program. In this case study of a modular ofﬁce ﬁrmiture company,
the initial investment was $91,000 for carts, computer-related technology and machinery.
Although this initial cost is large, the Net Present Value — the proﬁt - associated with such
an investment for local deliveries only is $22,204 over seven years (the approximated
useful life of the packaging).

In short, there are many opportunities for cost savings through the use of
returnable packaging, but the key is ﬁ'equently the creativity of individuals who manage
the project. These people can have a tremendous impact on overall cost savings by the

use of activity-based costing methods, freight consolidation, and creative container and

dunnage design.

Other Factors to Remember When Deciding on a Retumable Packaging System

There are several other factors to keep in mind when using the decision framework
and NPV analysis presented in this study. First, in many cases storage is necessary for
containers which are not in use. There are obviously costs associated with this storage.
This expense was included in the switch to transport carts with the lease of one stationary
trailer.

Second, packaging changes often alter shipping density and cube utilization. The
determination of how many containers are needed in a system due to the ﬂoat depends on

how much control a company has over its packaging inventory, the distance the packaging

 

65

systems are shipped, and the amount of time required to return the packaging. The
greater the control over one’s system, the lower the amount of excess containers which
are needed in the system. Likewise, the shorter the distance and less time that the
packaging is in shipment, the fewer the number of packages which are needed in the
system. This can dramatically affect the cost of the investment. Buffer returnable or
expendable packaging inventory costs money which has an opportunity cost associated
with it. On the other hand, if a system runs short on containers and no packaging is
available to ship parts or products, severe costs like line shut-downs can be devastating.
Contingency packaging or safety stock is, therefore, recommended. With blanket-wrap as
the packaging medium, extra blankets could be available rather than contingency
packaging.

Third, freight consolidation, particularly during the backhaul, can make any
returnable packaging investment a better one. It is strongly recommended that companies
work diligently to consolidate freight and decrease overall costs, regardless of what
packaging materials are used. Nestable and knock-down containers can also decrease
return costs.

Fourth, although this case study attempts to include many costs in the activity-
based costing ﬁ’ameworlg since it focuses only on two types of packaging mediums
(blanket-wrap and transport carts) some costs associated with other returnable packaging
designs which were not mentioned should be considered. Some of these hidden costs
include cleaning, sorting, repairing, insurance changes, costs due to tracking new ABC
data for the proposed packaging system, and costs associated with customer or supply

chain member dissatisfaction due to the change.

66

Fifth, since this thesis only focuses on blanket-wrap and transport carts, it should
be noted that the method can be used for expendable packaging as well. Diﬂ‘erent
activities and costs may be associated with expendable packaging than those presented
those presented in this study.

Sixth, tracking the packaging is very important to control the system, but other
types of tracking should also be practiced. Damage tracking can lead to cost savings if
corrective action is taken. Tracking human injury and can aid in ergonomic packaging
improvements and improve worker safety.

Seventh, when alternative packaging designs are considered, employees who are
responsible for deciding on the packaging design should be aware that many returnable
packaging manufacturers oﬁ‘er standard sizes that they produce in large quantities, and sell
these packages at a discounted rate. These standard size containers can ﬁ'equently be used
by companies who require unique returnable containers, by designing custom interior
dunnage to ﬁt speciﬁc parts. There are three beneﬁts to this. First, the parts will be well
protected due to speciﬁc dunnage. Second, these standard size containers are generally
sized to maximize cube utilization in a standard size trailer. Third, once a particular
project is ﬁnished and new size parts are designed for a diﬂ‘erent activity (i.e. when the
automotive industry makes model and part changes) the standard size containers can
frequently be reused by recycling or scrapping the old interior dunnage and developing
new.

Eighth, the sensitivity of transport distance and its associated costs on the ﬁnal
packaging decision using the Net Present Value technique must be stressed. Longer

distances lead to higher costs, which can dramatically affect the ﬁnal decision since

67

transportation costs can be a large portion of overall returnable packaging costs using
activity-based costing. Note: some ﬁrms do not include the costs for the return transport
because the truck must return anyway. This research recommends that the return cost is
included because it is a cost incurred by the supply chain.

Finally, the sensitivity of the Net Present Value calculation to any cost unknowns
is huge. For example, if the discount rate (current cost of capital) is altered, this can
change the outcome completely. It is recommended that costs used in the NPV analysis
are measured thoroughly and as accurately as possible with appropriate cost drivers.

To minimize cost unknowns, it is suggested that a four step approach is used to
ﬁnd actual data associated with ABC methods (Harrington 1995). First, gather
information on a ﬁrm’s current operation by diagrarnrning the entire processes of a ﬁrrn’s
manufacturing and logistics network. Second, understand the activities and the resources
they consume. Third, determine which activities add value, and which do not. Last,
develop a plan for improvement. In this case, the plan for program enhancement was a
returnable/reusable packaging change for local deliveries of panels delivered directly to the

job site.

Recommendations for Future Research
Research regarding returnable packaging is fairly limited at this time. For example,
this is the ﬁrst published decision framework for companies to use to decide between
alternative reusable packaging designs. Because of this, ﬁrture research into this area is

suggested.

68

Possible research topics include the following.
Further analysis is needed on how to choose appropriate packaging cost drivers for
activities, and their reactions on the proﬁtability or losses of a company. This research
recommends several important cost drivers like hours of administrative support and
logistical system support for packaging, hours of packaging assembly labor, dollars of
material cost, number of products loaded and unloaded from a trailer, number of miles
logged during transportation, and cubic volume of packaging material waste and
recyclable packaging materials, but ﬁrrther studies to determine how best to acquire
this data is needed.
Tests should be administered to compare product damage rates for both transport
carts and blanket-wrapping methods of modular ofﬁce furniture to corroborate the
ﬁndings of this study.
The concept of NPV and returnable packaging designs is greatly inﬂuenced by the
estimated useful life of the design. More research on how to determine the useﬁrl life
of a newly designed returnable package is needed.
The technique for deciding between different types of returnable logistical packaging
systems presented in this thesis is similar to life cycle analysis. Further research on the
similarities and diﬁ‘erences between life cycle analysis and the ﬁndings of this study are
recommended.
In addition to returnable packaging, expendable packaging designs can also be
compared using the methods presented in this thesis. Further case studies should be

administered to verify this model for expendable packaging.

APPENDIX A

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BIBLIOGRAPHY

 

70

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