Indirect Spend Cost Increases Continue into 2021

Many of the elements driving these cost increases cannot be controlled. 

That does not mean your organization is limited in its ability to manage and mitigate some of these rising expenses. A strong relationship with your support partners helps. So, too, does an expert partner with awareness of industry trends and spend management tactics that realize efficiencies, even during volatile times. 

To support your indirect spend management efforts in Q4 and heading into 2021, let’s explore some of the factors driving cost increases in your operation.

Resin Increases, E-Commerce Demand Drives Cost Spike

Resin costs continue to fuel increases for companies that utilize stretch film, bubble wrap, flexible mailers and other polyethylene products. Each resin increase usually translates to a product cost increase of 6-7 percent.

Five consecutive months of resin cost increases have inflated prices 44 percent. That has translated to a 20-25 percent uptick on flexible packaging-related products costs, such as the Oct. 1 increase announced by all major manufacturers of stretch film. That is the second stretch film increase this year – and we anticipate there will be additional increases on other produces that rely on polyethylene. 

At the same time, demand is up in the plastic market compared to 2019. A growing e-commerce marketplace began booming when COVID-19 accelerated consumers’ online buying behaviors for a broader range of products, from groceries to home office products. 

More e-commerce businesses are utilizing plastic packaging, bubble bags and poly bags to ship their products, whereas a few years ago they put those items in small boxes. In the 2020 parcel shipping environment, it is more cost effective to use poly mailers, and that is impacting demand.

While demand is up, some of the major manufacturers implemented maintenance related shutdowns in Q2 and Q3, reducing supply in the process. Increased hurricane activity along the Gulf Coast is also forcing shutdowns for many resin operations and nearby poly-product manufacturing plants situated close to petroleum refineries in the region. Additional shutdowns will only create a tighter market.

Cardboard and Other Commodity Costs Require Awareness

Market conditions may not support a fourth quarter cost increase on corrugated and linerboard. Often the top producers of these materials float the prospect of a rate increase to gauge pushback. Expect talk of a 6-8 percent increase to emerge toward the middle or late part of the quarter. 

Due to activity that scaled back for many operations during the pandemic, the demand and inventory levers may not support that increase. Expect that increase to emerge in 2021.

As businesses continue to ramp up coming out of COVID-19, demand may increase on those cardboard products, as well as others that are already in short supply. Costs for Personal Protective Equipment (PPE), safety supplies and cleaning products will continue to escalate into 2021. That will cause pain for businesses from a pricing and availability standpoint. 

Cost increases on steel and related products will have a similar effect on MRO supplies. Expect price movement on nuts, bolts, fasteners, and other maintenance products in the early part of next year.

Lessons Learned for Future Performance

The challenges emerging in 2020 really validated the importance of strong relationships with your support partners. 

Do you always beat up your suppliers to get the best price?

If you do, the pandemic has taught us, you might suddenly find that you do not have a reliable supply base because you have not been loyal to a supplier. If you focus on buying what you need at the lowest cost and jump from vendor to vendor, when trouble arises you may not have a partner you can count on. 

Thanks to partnerships forged through Transportation Insight’s Group Purchasing Organization, we have the leverage to secure both the best product prices and the supplies you need to continue operating.

The pandemic has taught us that when businesses align with national supply partners, they have access to competitive prices and products delivered on a timely, reliable basis. 

This is especially important in the poly-packaging space. When times get tough and supply gets tight, suppliers will take care of the customers that have been good to them. They will have a difficult time supplying customers that are here today and gone tomorrow. 

Relying on long-term partnerships established in Transportation Insight’s Group Purchasing Organization, we are able to secure both good pricing and consistent supplies of products necessary to your operation. At the same time, we help you manage indirect spend areas that is driving up your overall operational costs that could be jeopardizing your profit. 

To learn more about how we help organizations manage their indirect spend and achieve double-digit savings watch our recent webinar.

Indirect: Expert Insight Helps Manage Fluctuating Supply Costs

With economic volatility expected to continue through the remainder of 2020, understanding how these added costs affect your indirect spend management can support your efforts to control line item expenses that don’t often receive close scrutiny until budget season.

Although corrugated linerboard prices are holding steady, anticipated cost increases in polyethylene products create new profitability challenges. In this environment, a partner with group purchasing power and expert industry insight delivers quantifiable value through strong contract pricing and keen awareness of the alternative solutions that improve cost management compared to traditional buying habits.

Here’s a look at some of the manufacturing trends that are affecting the availability and cost of supplies you require to operate your business efficiently and effectively.

Manufacturing Activity Grew in June

Economic activity in the manufacturing sector grew in June, according to the Institute of Supply Management. The Purchasing Managers Index (PMI) increased 9.5 percent to 52.6, reflecting an expansion in the overall economy for the second straight month after April contraction ended 133 straight months of growth.

The New Orders Index jumped significantly to 56.4, up 26.4 percent from May. The Production Index registered 57.3 in June, an increase of 24.1 percent from May. 

Of the 18 industries that participated in the ISM monthly survey, 13 reported growth. 

With that growth has come increases in the ISM Price Index which rose to 51.3 in June, an increase of 10 percent over prior month.

  • Caustic soda, copper, crude oil, personal protection equipment supplies and steel all reported increases in price.
  • Methanol, packaging materials and plastic products all reported price declines.
  • Of 18 industries surveyed, three reported higher prices, 12 reported no price change, and only three reported lower prices.

Looking more broadly at the economic impacts of COVID-19 in the first half of 2020, the U.S. Real Gross Domestic Product decreased at an annual rate of 5 percent for the first quarter. That decrease reflects negative contributions from:

  • Personal consumption expenditures
  • Private inventory investment
  • Non-residential fixed investment
  • Exports

Those negative GDP contributions were partially offset by contributions from:

  • Residential fixed investment
  • Government spending
  • Imports

Meanwhile, U.S. unemployment dropped to 11.1 percent in June, reflecting an improvement of 3.2 million people removed from the jobless count. For manufacturing, ISM’s Employment Index registered 42.1, an improvement of 10 percent compared to May.

Linerboard Pricing Steady, Other Packaging Costs Volatile

Containerboard production continues to increase, supporting steady pricing throughout the first half of the year. In May, that increase was just 1 percent, month over month, but the uptick in production reflects a 6 percent increase year over year. 

Corrugated pricing for June is at $715 per ton. Industry analysts predict any anticipated cost reductions will fall short as demand has remained stronger than expected. Additional capacity of containerboard grades has been delayed. This means a previously projected decrease of $30 per ton is not expected to be realized in the market. 

Meanwhile, Old Corrugated Containers (OCC) pricing jumped dramatically during the global pandemic, up 196 percent in April compared to January 2020 levels.

Sales for both Linear Low Density Polyethylene (LLDPE) and Low Density Polyethylene (LDPE) are up through April compared to prior year. Domestic sales for LLDPE are up 2.3 percent, while LDPE sales are up 6.7 percent.

In response, producers have cut production to control inventory levels, as indicated by LDPE operating rates at 89.3 percent in April and LLDPE operating rates at 92 percent.

LLDPE large buyer contract prices bounced around during the first half of 2020, but have settled approximately 5 percent below the levels we saw at the end of 2019. Expect those contract prices to average 55 cents per pound in the third quarter of 2020.

At the same time, expect an increase of about 4 cents per pound for all grades of polyethylene resins. These increases are driven largely by efforts to control inventory levels, improvements in domestic demand and higher oil prices.

All major manufacturers have already sent increase notifications. Among these, stretch film producers announced a 6 percent increase in costs.

Control Indirect Supply Costs with an Expert Partner

Indirect supply management is a tool available to your team to find the essential items you need at reasonable prices. By working with a partner in this space, your company can consolidate its overall supply space and form strategic partnerships on items you regularly need.

Our partnerships are unique because we can put all your indirect supply needs together in a group purchasing model, which allows us to drive savings for you.

No matter how you are sourcing your products today, it can be improved through consolidation and smart partnerships. As you set your plans for the rest of 2020 and into 2021, now is the time to look at your accounts payable data and get a spend analysis to map out how you can get even greater efficiency around your indirect materials operation.

Transportation Insight is your partner in driving success now and into the future. Let’s start a conversation today about how we can drive savings for your company together.

Examine Indirect Spend to Drive COVID-19 Cost Savings

The spread of the COVID-19 virus disrupts transportation networks, products paths and consumer demands that drive your performance. The problems that threaten business viability merit priority response.

In the current Coronavirus climate, the supplies for your everyday functions also need attention. An expert partner who can take over management of complex indirect spend areas can provide critical cost savings, which you can rapidly deploy in other areas of your business.

A reliable sourcing resource can also leverage long-term relationships and collective buying power to help make sure you have the Maintenance, Repair and Operation (MRO) items, office products, and packaging materials required to support your operations.

Here’s some of the latest marketplace activities that could affect costs in your indirect spend categories and challenge your ability to secure vital supplies.

MRO Items for Health, Safety in Short Supply

Most organizations that support MRO procurement are operating distribution centers and warehouses as usual, with added attention to necessary safety precautions at these work sites. Products are still moving out facility doors. However, distributors are placing priority on serving needs for specific “essential” industries, such as healthcare providers and first responders.

That’s a good business decision for these supplier partners, particularly as they face short supplies for personal protection equipment. Protective gloves, masks, coverall suits and similar products are all in back-order status.

Although healthcare facilities get priority service for these items, if you have needs, go ahead and place orders with your supply partners to make sure you are in the queue when supplies become available.

To expedite MRO service, many suppliers are shipping products directly to production facilities. This can expedite the process of getting needed products to end users. Make sure to explore direct shipping options from your supplier partners.

Social Distancing Affects Vendor Managed MRO Inventory Process

One of the biggest impacts of the novel Coronavirus in the MRO space is in the area of vendor managed inventory. State and federal directives are limiting contact restrict suppliers’ ability to complete on-site visits to monitor MRO supply needs.

Vendors provide an important resource in making sure you manage an optimal supply of MRO items. Too much product can consume valuable operational and storage space. Too few resources can threaten a shutdown at critical times.

To make sure their clients are able to continue monitoring their MRO needs, many suppliers are providing hand-held scanners and creating a customer-managed inventory environment. This keeps products moving, but it is important to monitor activity. Supply inventory can quickly get out of balance and create unnecessary costs.

Available Office and Facility Supplies Still Moving

Distribution of office and facility supply products continues as usual, but many of the same products in short supply on grocery store shelves are also limited in commercial and industrial settings. Paper products, disinfectant, hand sanitizer and similar products get priority delivery to healthcare operations, leaving a short supply which puts limits on available resources.

In some geographical regions, the desktop delivery option is discontinued, and the typical next day delivery guarantee is suspended. While there’s no sign of a supply crisis for the majority of these items, it may become harder to get some of the more common office and facility supply items as more states adapt to shelter-in-place environments..

When you are dealing with your supplier partners, a little bit of patience can go a long way. Like many of us, they are working in remote environments. In some cases, companies providing essential workplace supplies employ thousands of people unaccustomed to working outside of the office. As they shift remote, some systems aren’t engineered to handle additional workflow yet.

Rest assured, your supply partner is working to meet your needs. When you seek support, response may be delayed, but having patience with your trusted partner can reap benefits today and tomorrow.

If you encounter supply changes, we can leverage our power as a Group Purchasing Organization to tap additional supply resources. In the world of indirect sourcing, strategic partnerships not only support a network of options, but they also can help realize significant cost savings.

E-Commerce Drives Boom in Cardboard, Packaging

Many manufacturers and distributors of packaging are deemed essential because they are supporting medical supplies, pharmaceuticals, energy generation, and food and beverages. Increasingly, operations not supporting essential end uses are production reduction or shutdown.

Corrugate facilities are running at full capacity to meet a demand spike driven by online ordering. One key area to watch in this aspect of packaging is linerboard prices. Right now, those prices are stable after a slight decrease in January. Linerboard pricing will deserve a close eye over the next few months as old corrugated container (OCC) prices rise and forecast demand increases.

For flexible packaging products like polybags, stretch film, poly sheeting, etc., prices continue to decline due to a decrease in global oil prices. With many e-commerce shipments relying on these materials, it will still be important to monitor not just cost, but ability to access supply.

Rely on Strategic Sourcing, Relationships, Patience to Weather the Storm

When it comes to indirect materials that support operational process, many organizations make purchases on a tactical basis. Now, when uncertainty clouds the market place, a partner that deploys a strategic mindset to indirect spend can be a vital resource.

Transportation Insight has developed strategic partnerships with suppliers. In communicating with our supplier partners more and more, we’re learning that MRO, office supply and packaging providers are supporting the clients that work well with them. When you’ve built relationships over decades, as we have, achieving win-win scenarios for everyone involved becomes second nature.

Let us leverage the partnerships we’ve created to help you get indirect spend reductions, and, more importantly, access reliable supplier partners that you can depend on during times like these.

Right now, many organizations are thinking about short-term survival. As you prepare for business after the COVID-19 pandemic recedes, instead of revisiting old strategies, consider opportunities that deliver better service at improved cost.

Let us show you a more strategic way of addressing your indirect spend management. To understand how much you can start saving today, schedule an indirect spend assessment. We often achieve double-digit savings for our clients, and we may be able to help you drive cost out of your supply chain.

7 Pitfalls Imperil Indirect Spend Management

Indirect Spend analysis requires different processes and technology knowledge from those of direct procurement. There are more stakeholders, segment complexities, and varying levels of expertise at the suppliers. Some items are commodities, and others are specialized for a business unit and rely upon a continually changing and improving set of technologies.

Efforts to improve Indirect Spend management relies on a complete understanding of the wide variability in factors that affect the cost of an item, the cost of procurement and issues that arise for vendor and buyer .

7 Variables Complicating Indirect Spend Management

  1. Low Average Spend: The product volume is generally on the smaller side because of the wide assortment of product and service categories and a large number of suppliers. In this case, the procurement group is unable to coerce better pricing or terms during negotiations with suppliers.
  2. Frequent low-volume purchases: Often, the frequency of purchases of small individual values, makes indirect sourcing difficult and resource-intensive.
  3. Maverick/Uncontrolled/ Non-negotiated Spend: Maverick Spend is the purchase of legitimate goods but using unauthorized buying arrangements or unapproved suppliers. Companies understand the value of robust management of direct spend, but may not recognize the benefits of managing Indirect Spend. The fact is that cost savings for indirect procurement does not originate from a specific bill of materials, as with direct procurement. Often, companies underestimate the Indirect Spend totals and the potential cost savings. Indirect Spend purchases usually are not covered by a contract negotiated in collaboration with a professional procurement group. Items purchased outside of an agreement could be a one-time purchase of office supplies, or travel expenditures, or expenditure on critical ad-hoc technical troubleshooting services. These costs add up over hundreds of items, categories, suppliers, and transactions.
  4. Driven More by Internal Stakeholders: Indirect procurement professionals may not have any mandate over an internal stakeholder’s budget. Unlike with direct spend, the procurement group has less say concerning Indirect Spend. Internal stakeholders hold on tightly to their approved budget and spending authority. Also, many of the expenditures require in-depth industry knowledge and experience to specify a product or service. These factors and this complexity make it more difficult for the procurement function to control indirect spending. The company’s procurement team must act as an internal advisor, influencing decision-makers about optimizing spend and getting more from suppliers.
  5. Hard to Evaluate: There exists hundreds of categories, adjacent categories, item suppliers and distributors, and each mandates an exceptional understanding to procure cost-effectively and also with an eye on long-term value to the company. Each of the tens of thousands of suppliers invests in a sales team assigned to each buyer. Motivation for those sales teams may not always be in the buyers’ best interest.
  6. Measuring Suppliers: It can be more challenging to measure the quality of indirect goods and services. There might be metrics for individual vendor performance, but there are few industry standards against which to benchmark those metrics. In some cases, delivery of indirect products and services is not in a company’s ERP system, so tracking contract renewal and evaluating vendors can be spotty. 
  7. Requires Diverse Experience: Purchases are as diverse as safety products, marketing software, maintenance items, and electricity supply. This breadth of categories requires a procurement group with expertise and a willingness to learn the full range of products and services.


Indirect Spend Management Requires Broad Capabilities

Organizations working to manage Indirect Spend must maintain a variety of skill sets within the operational areas tasked with overseeing these critical budget areas. 

Facing these diverse needs, companies are often challenged to maintain the level of expertise that a trusted procurement partner can often provide:

  • Professional purchasing experience or training
  • Broad category expertise
  • Project and change management
  • Influencing, engaging and advising budget-owners (stakeholders) across the company
  • Specification, facilitation, negotiation, and supplier management
  • Data analysis, creating business insight from raw data
  • Technological know-how
  • Recognizing supply risk from issues like constraints on industry capacity, regulation, or rapidly rising demand
  • Acknowledging the market’s preference for sustainability and the ability to cost-effectively comply
  • Understanding of current market conditions and market pricing trends

Strategic Sourcing Supports Procurement Decisions

Buyers are not all the same. Many procurement decisions have an economic buyer, the person who makes the money decision, and a needs buyer, the person with a job-to-be-done.

Guidance from a procurement group can help meet the requirements of both of these buyer-types. Proper specification of the product or service delivers what conforms to the need, while aggregating volumes and dutiful negotiations keep prices low.

By employing a Strategic Sourcing mindset, these procurement experts look across all activity to address planning, supplier qualification, item specifications, technology advances, training, support, outsourcing, contract negotiation and periodic contract review. Strategic Sourcing identifies the lowest total cost − not just the lowest purchase price. It embraces the procurement lifecycle, from specification to payment.

Strategic sourcing often creates a close, partner-like relationship with a supplier to meet the needs of all buyers, and in turn, improve service to end customers. For more information on employing a strategic sourcing mindset to control Indirect Spend costs through improved procurement practices, download Transportation Insight free guide, “Uncover Indirect Spend: Control Cost with Strategic Sourcing.”

Exploring the Importance and Challenges of Secondary Packaging

Secondary packaging is the practice of using a branded, often personalized packaging option for the item a customer orders. From there, that container is boxed for shipping in a more typical package. This lets you create the personal, specialized package without exposing your goods to damage or as much risk of theft during shipping. This type of strategy could be critical in laying the groundwork for more personalized e-commerce experiences, but secondary packaging also comes with significant process challenges that must be overcome.

Responding to E-Commerce Growth Through Personalization

A study from Wise Guy Reports predicted the global e-commerce market would expand at a compound annual growth rate greater than 10 percent from 2018 through 2021. To a great extent, this growth is being driven by a blend of increased demand and greater sophistication in using technology to improve logistics processes within the sector.

As e-commerce continues to grow, brands are constantly exploring ways to create competitive advantages. Promoting stronger customer experiences is critical here, and personalization is emerging as a key option. A Segment study found that approximately 71 percent of consumers get frustrated by impersonal shopping experiences. Another 40 percent of consumers said they’ve purchased something more expensive than their original intent due to a personalized experience. Ultimately, 44 percent of those involved in the study said they are likely to become repeat buyers if their interactions with the brand are personalized.

While a lot of this data points to digital marketing initiatives, that isn’t the only way to capitalize on the demand for personalized experiences. For example, shipping experts and logistics partners can work with you to implement secondary packaging strategies alongside other advanced supply chain strategies to help you take advantage of the opportunities created by personalization.

Offering End-to-End Personalization

Data lays the groundwork for personalization. Gathering customer data, organizing it, integrating it across lines of business, and delivering it to end users in an actionable way is key to providing personal experiences. If customers are logged in on your website, you can feature products based on their shopping history. If they are completing an order, you can save payment details and shipping information to ensure a smooth checkout. After the purchase, you can offer follow-up emails with promotional offers and content that supports a better user experience, such as assembly videos for furniture purchased online.

All of these personalized touch points can bolster the customer experience, but it’s important to move personalization beyond the digital realm. If a person buys a good in a store, you may provide a variety of amenities that create a more personal, branded experience. Something as simple as a high-quality box with eye-catching visual design and intelligent interior packaging can make a huge difference. Providing user guides, information on related products, or similar materials can provide a personal touch, guiding shoppers to more interactions with your brand. Secondary packaging lets you extend this opportunity through the shipping process.

The difference between a personal, customer-focused experience with secondary packaging and a standard shipping situation can be encapsulated in a simple idea. Imagine what happens when a customer opens the box. In a standard environment, they’d sort through packaging materials finding their items and materials. With secondary packaging, they open the box to a cultivated experience with a designed box and supplementary materials that add excitement to getting the item that was purchased.

Creating a Framework for Secondary Packaging

While secondary packaging is promising from a customer experience perspective, it does create complexity. You’ll need to:

  • Design packaging that will be attractive to the customers you are targeting.
  • Pack materials in safe, attractive ways that guide users through the process of exploring their new item.
  • Adjust inventory management to ensure you always have supply for secondary packaging elements, including boxes, inserts, and user materials.
  • Manage safe, secure, and accurate preparation for shipping.
  • Ensure your final packaging complies with requirements from your shipping partners or carriers.

Data visibility is critical in all of these processes as managers across lines of business need to understand sales and shipping expectations to maintain supplies and manage specific customer orders. An effective secondary packaging strategy often forces organizations to treat each package as a unique shipment, not simply a box that needs a unique address label.

Getting Started with Secondary Packaging

Making the deep process changes needed to support secondary packaging begins with a deep understanding of every facet of your supply chain. Enterprise logistics partners bring expertise and technology to help you understand everything from your carrier relationships to your packaging supply chain with greater precision. From there, a partner can empower you to make strategic operational changes that let you integrate secondary packaging into your parcel management processes as seamlessly as possible. Transportation Insight is leading the way toward logistics innovation through our unique approach to partnering with clients. Contact us today to learn how we can help you drive personal e-commerce experiences.