Purchasing decisions based on price alone lead to increased daily
operational costs such as downtime and servicing fees, which over
time negatively impact the bottom line. However, when consumer
products goods companies focus on the total cost of ownership of
equipment during the procurement process, they receive a better
return on their investment, delivering increased value to shareholders.
TOTAL VALUE
There’s a battle raging inside many consumer packaged goods (CPG) companies — a
confrontation between CEOs, senior executives and corporate procurement on one side,
and industrial engineers and production staff on the other. What’s at stake? Nothing less
than the survival and profitability of these firms as they struggle with the question of how
to source packaging equipment and other machinery. CEOs and senior executives under
pressure to cut costs are increasingly prone to view even complex machinery and
manufacturing lines as “commodity purchases” available from the lowest bidder — even
as their own engineers struggle with the performance compromises that these low-cost
machines inflict on operations.
“There is always a constant battle from the standpoint that engineers and the people in
production have to make this stuff work, keep it working, and put product out the back
door in a cost-effective manner,” says Fred Hayes, director of technical services for the
Packaging Machinery Manufacturers Institute (PMMI).
A number of global CPG companies have set up sourcing centers in low-cost regions
such as China, initially to procure equipment for new plants serving those markets.
These centers have focused on satisfying China plant cost structures, safety standards,
documentation needs, and parts availability. But now, some CPG companies have leapt to
the conclusion that they can leverage these investments and bring low-cost machinery
back to the U.S. — despite the fact that the equipment’s manufacturers rarely have
distribution or support networks in North America. In doing so, corporate leaders are
ignoring the total cost of ownership (TCO) of the equipment, exchanging long-term
success for favorable short-term financial gains — and putting their employees at risk.
“The issues that they seem to be running into is that when they bring the product here
— besides being up to the quality standards and specifications — are these products
up to the safety standards of the United States?” asks Jack Aguero, vice president of
business development and marketing at Pro Mach Inc. in Loveland, Ohio. “If not, what’s
happening is the consumer products goods company has to bear the cost of modifying
the product, bringing it up to safety standards, and, by doing that, becoming liable and
relieving the original manufacturer of any liability because they’ve changed the product.”
He says these issues are compounded by the need to service the machinery, to maintain
an inventory of spare parts, and to translate or create manuals and documentation.
FIRST ENSURE SAFETY AND PRODUCTIVITY
“If you take the attitude that ‘All quotes are equal, and I’m going to the one at the lowest
price,’ my sense is that you’re probably going to get burned,” says Hayes. “Responsible
[equipment] end-users that care about worker safety are going to put worker safety high
up on the totem pole. Worker safety and productivity are important. Quite frankly, saving
$10,000 on a piece of machinery sounds like a lot of money, but when you look at a piece
of [properly applied] safeguarding on a machine that can keep it running four more hours
per week, you blow that away in a hurry when you start looking at productivity issues.”
Life Cycle
PMMI’s Hayes instructs CPG executives to get a better grasp of safety, productivity, and
overall performance issues by insisting that their machinery manufacturers share a
documented risk assessment of the equipment, one based on a common standard.
He points to ANSI/PMMI B155.1-2006, the American National Standard Safety
Requirements for Packaging Machinery and Packaging-Related Converting
Machinery, which requires risk assessment as part of meeting its certification:
“The standard guides packaging machinery suppliers and users through a risk
assessment process designed to ensure that reasonably foreseeable hazards
are identified, and corresponding risks are reduced to an acceptable level.”
of Equipment
Ownership
The ANSI/PMMI standard was written in 1972 (revised four times since)
and developed with end-user input from CPG companies including Kellogg,
Kraft Foods, Johnson & Johnson, and Procter & Gamble as well as Pactiv.
Those companies insisted that ANSI/PMMI requirements harmonize with
ISO standards, which assures buyers that equipment purchases will comply
with standards at home or abroad — an assurance that CEOs may not
receive from overseas machinery providers. Hayes also advises executives
to look beyond the ANSI/PMMI certification to see precisely how the risk
assessment was completed.
Informed CPG executives know that sharing risk-assessment documents and
walking through the ANSI/PMMI criteria — hazard identification (including
probability level and risk severity), remediation, and the resulting reduction
in risk — will quickly let CPG buyers know if the risk assessment was
thorough. “It’s an easy way for the end-user community to put in a simple
requirement, regardless of getting [equipment] from Europe, U.S., or China.
It’s the same measuring stick,” says Hayes. Sitting down with equipment
makers and understanding their processes will reveal factors that can threaten worker
safety, productivity and, ultimately, profitability: Has the equipment truly been safeguarded
against risk (i.e., safeguards not merely applied as a formality)? Have safeguards been
implemented in ways that support the productivity and longevity of the equipment
(removing poorly applied safeguards may change the legal liability for the equipment)?
TOTAL COST AND TOTAL VALUE
No one disputes that CPG CEOs are under intense pressure to deliver immediate value to
their shareholders. But they also must recognize that the procurement practices they
mandate and the suppliers with which they do business have significant impact on the
futures of their companies. The CEO of a CPG company needs to be certain that all of its
suppliers maintain the highest quality standards — and that none of these vendors
(ingredients, materials or equipment) puts the CPG company’s quality or reputation at
risk. As pet-food manufacturers have realized, all it takes is one bad supplier to put an
entire industry at risk. Similarly, the procurement of equipment can mean the difference
COST
Acquisition Cost
Sustaining Costs
Maintenance Costs
between operational success and failure with consequences ranging from extended
downtime to, at worst, fatal accidents. These issues demand that executives support a
total cost of ownership approach across their procurement departments, seeking
guidance from their engineering staff.
Better
Training,
Bigger
Profits
Hours of Training
Provided at
U.S. and Canadian
CPG Plants
Reported Median Sales per Employee
$400,000
(Median
gross profit
margin of
39%)
$227,000
(Median
gross profit
margin of
just 30%)
>20 Hours
<20 Hours
Hours of Annual
Training For Each
Employee
Source: Manufacturing
Performance Institute
PMMI advises CPG CEOs and executives to look at three fundamental components of
TCO for packaging equipment:
• Acquisition cost: purchase price, engineering, installation, initial training, and any
customization and start-up costs.
• Sustaining costs: operational costs such as labor, utilities, consumables and
equipment reliability. The latter is certain to impact operations performance.
• Maintenance and repair costs: spare parts, maintenance labor, service, life of
equipment and de-commissioning costs. To what extent can an overseas machinery
manufacturer, especially one without a local presence in the country of operation,
offer support to keep maintenance and repair costs in line? Will the overseas
manufacturer have technical staff on site to service equipment and will the right parts
be available?
The availability of established distribution and support networks will positively impact all
three facets of equipment TCO. And most of these supplier attributes are easy to recognize at the time of purchase — if companies only pay more attention to their engineers
and operations managers.
“There is a major advantage to buying North American equipment in terms of the
service, aftermarket support, and training, which are significantly better than what
CPG companies can get from a non-North American manufacturer,” says Maria Ferrante,
PMMI director of workforce development. “Generally [low price machinery vendors] don’t
have the personnel over here to support that equipment, so they’re bringing equipment
into the country and selling it without training, maintenance or operational support —
at low prices.
“What people have to look at is total cost of ownership of a piece of equipment; the
acquisition cost of a piece of equipment can be a relatively small percentage of the total
cost of the equipment over time. By training and supporting equipment adequately,
the total cost of a piece of equipment or the total cost of a line is significantly reduced
over time.”
Training is also important in determining TCO, and can represent a significant value-add
when offered by equipment manufacturers. Simply put, those CPG companies that train
more perform better, so why not account for it when buying equipment? For example,
CPG plants in the U.S. and Canada that provide each employee more than 20 hours of
annual training report median sales per employee of $400,000 and median gross profit
margin of 39%; those that train 20 hours or fewer report median sales per employee of
just $227,000 and median gross profit of just 30%, according to the Manufacturing
Performance Institute. PMMI “train the trainer” programs help North American
manufacturers and CPG companies coordinate their value-add training relationships.
“The training provided [by equipment manufacturers] should have both on-the-job and
on-the-line training in combination with classroom work depending on the fundamental
requirements,” says Ferrante. “An effective training program should be customized
for the environment and should include follow-up to ensure those who were trained
have job aids and documentation to fall back on, as well as someone to contact for
additional support.”
In addition to training employees who use and maintain equipment, equipment
documentation must be clear and reliable because it affects all three TCO
components — from ease of installation to operator usage and uptime to maintenance
and service.
“It’s really ideal if the equipment manufacturer is able to provide [documentation] in
the language(s) spoken in the plant,” says Ferrante. “If the language is not translating
correctly there can be major problems. Safety is a huge issue, especially when you’re
talking warning labels and documentation. For the equipment manufacturer it’s product
liability, but for the brand owner it includes worker compensation issues, worker safety,
and downtime issues. To ensure a safer work environment, it’s really important the
machinery is documented correctly. I know that PMMI members work with brand
owners to provide better documentation [in the language(s) spoken in the plant].”
CPG executives rushing to embrace the promise of cheaper equipment manufactured
overseas often overlook intangible components of TCO as well. Many North American
packaging equipment manufacturers have supplied the CPG industry for decades. They
bring a wealth of experience and data regarding brand owner operating procedures,
requirements and environments, as well as technical advantages built directly into the
equipment. For example, a common weld typically goes unnoticed when performed
by a 20-year-veteran machinist — but done incorrectly by an operator at a fledgling
manufacturer, it can be a cause of major problems (e.g., equipment breakdowns, safety
hazards, and a source of contaminants).
Consumer product goods company CEOs must also consider the track record of the new
equipment makers. How well will their new equipment withstand the rigors of daily use?
Does a new manufacturer have the experience to back claims of reliability — or is it
asking the CPG company to be its beta customer?
None of these TCO concerns are lost on industrial engineers, used to battles with their
procurement departments and their cost-conscious bosses. Yet at many CPG companies,
engineering and technical functions have been outsourced or their technical responsibilities
have been transferred to purchasing departments. Shifting responsibilities to those
without the experience necessary to rigorously assess the safety, productivity, and
longevity of equipment, limits the ability to determine the true TCO.
About PMMI
“What’s the cost of having 42 engineers in China engaged in this effort? What’s the
cost of finding that product, shipping it to the United States, reengineering it, taking over
the liability for that product, and taking over the servicing of that product long-term?”
says Pro Mach’s Aguero. “CPG companies are not looking at the total cost of ownership.
I feel very confident in saying that North American packaging equipment manufacturers
are very competitive if you look at total cost, not price.”
converting machinery in the United
The Packaging Machinery
Manufacturers Institute (PMMI)
is a trade association whose 514
general members manufacture
packaging and packaging-related
States and Canada. PMMI’s thirty-two
supplier members manufacture
commercially available packaging
machinery components. PMMI’s vision
is to be the leading global resource
for packaging. Its mission is to improve
Aguero also says that CPG companies pulling Chinese equipment into North America
should give U.S. manufacturers an equal opportunity to work through RFP requirements
and pricing to satisfy their needs, paying close attention to the total cost of ownership
of the equipment over its lifetime.
and promote members’ abilities to
meet the needs of their customers.
PMMI also produces
three tradeshows:
“If the mission is ‘I’m going to pay one-third less for all my machinery and go to China
and buy it’, CPG companies are going to suffer some long-term consequences,” says
PMMI’s Hayes. “Once you buy a piece of machinery, you don’t replace it easily.”
• PACK EXPO International,
For more information about the Total Cost of Ownership, or to locate a total solutions
packaging partner, contact Jorge Izquierdo, vice president of market development for
PMMI, at 703.243.8555. ■
Visit www.pmmi.org for more
• PACK EXPO Las Vegas and
• EXPO PACK México.
information.