Understanding the Total Applied Cost of Label Procurement

The traditional approach to purchasing product labels is to obtain price quotations from an approved vendor list, and then select the supplier with the lowest cost per thousand. Other factors such as timing and experience with the vendor might come into play, but generally the key determining factor is price per thousand.  It’s simple, straight forward and easily justified. On the surface, cost-per-thousand label procurement appears fair to both the brand owner and the brand’s vendors. The brand owner gets the lowest price, and the process encourages vendors to continually focus on reducing costs while maintaining quality standards.

But the operative words are “on the surface.” In truth, the cost of a label goes well beyond cost-per-thousand to include many related factors; from order processing and inventory control to logistics and everything in between. The dollar savings from value-added services like package engineering consultation and specific industry experience are difficult to capture in a spreadsheet.

Business Challenges

Maintaining and growing market share is increasingly difficult in the face of intense global competition that compels companies to continually drive down costs while rushing high-quality, customized products to market.  Regulatory requirements, market specifications, new substrates, digital, sustainability, security, anti-tampering, and different languages that require varying amounts of space are just some of the labeling challenges faced by many product manufacturers.

In short, labeling is becoming more complicated on several fronts. The associated costs go well beyond cost-per-thousand. As a result, the most progressive companies are adopting a total applied cost approach that includes re-engineering their current processes.

Key Steps in a Total Applied Cost Approach

  • Adopting a Holistic View – Brand owners need to pay more than lip service to the total applied cost concept. Gaining the benefits requires digging into costs ranging from order entry through distribution to determine real costs. It also requires knowing the associated costs of using a specific type of label for an application.

The key is to not look at any single cost element in isolation, but to look at all the associated costs and how one element impacts the next in the label procurement supply chain. Market realities are driving brand owners toward taking a more holistic view of applied label costs and punishing those who cling to outdated approaches. Simply put, losing track of the bigger cost picture is a penny-wise and pound-foolish scenario that can negatively impact a brand owner’s profitability.

For example, does a less expensive label construction increase the amount of storage, inventory and obsolescence, slow down line speed or have a greater rejected label percentage versus a more expensive yet more flexible and efficient label construction?  Other factors such as necessary staffing levels, application equipment and labeling efficiencies also require consideration.

In some cases, having the correct label format is far more valuable than saving a few cents on the label itself. For example, a label set, even if it is more costly than the sum of the individual labels used on a package, has hidden value because it is impossible to shut down a line due to one missing label. It also acts as a quality check; if there are no labels left on the sheet, the package is labeled correctly. The additional savings of one purchase order, one invoice, one packaging list, one quality check, and one incoming inspection process are common sense but difficult to capture on a spreadsheet in a traditional “bid and choose the lowest cost” purchasing format.

  • Becoming Demand Driven – Label supply chains were traditionally transaction-based and focused on custom runs balanced with print-to-stock. Until recently, true demand-based systems weren’t a priority. But all that is changing rapidly as brand owners increasingly require just-in-time delivery to avoid incurring inventory charges and obsolescence costs.

If the new first rule of supply-chain management is to focus on total costs, the second rule is to postpone label manufacturing until the last possible moment. In other words, demand-based systems promote the concept of “never purchase today what you can purchase tomorrow.” Delaying production enables the customer to better anticipate real demand, which minimizes both inventory and obsolescence costs.

Demand-driven production also better addresses fast-changing markets and reduces costs over the entire lifecycle of the consumer product. Here are some questions to help evaluate whether your label program has the right supply-chain footprint and whether it is functioning at a high level:

  • Are you constantly challenged by too much inventory of some labels, and not enough of others?
  • Do you wish you had better supply chain visibility of your orders, fulfillment status and inventory levels?
  • Would shorter lead times and reduced forecast variability improve your customer service?
  • Would demand-based label production move your products to market faster and less expensively?
  • Is it possible to “squeeze” more savings from your supply-chain costs with better management?

But is it worth the effort to become more demand driven? You bet. Keep in mind that just one additional demand -based inventory turn per year of a stocked item can save 12.5 percent in the total cost of that label.

The good news is that digital print technology combined strategically with other print platforms and automated ordering and fulfillment systems, can effectively deliver demand-based label production to meet virtually any market requirements.

Key Components of a Total Applied Cost Approach

Examining the full cost of different labeling approaches often demonstrates that there is more “below the surface” contributing to total cost than many brand owners realize. Total Applied Cost includes the full cost to get a label from the conceptual stage to the brand owner’s customer and everything in between.

Here is an explanation of the factors that affect total cost – some obvious and others which are less visible:

  • Label Cost – The base cost of the label itself.
  • Transaction Cost – The costs of preparing the purchase order, process invoices, and other related transactional costs.
  • Transportation Cost – The cost of transporting the labels to the designated packaging facility, as well as the additional time involved which could shorten production cycles and make the brand owner more market responsive.
  • Line Down-time Cost – The hourly down-time cost of label-related failure that causes the packaging production line to shut down.
  • Rejected Label Cost – The cost incurred during the inspection process for substandard quality labels.
  • End-use Failure Cost – The cost of labels that fail before consumption of the product and could potentially lead to regulatory compliance failure that results in costs associated with returns, inspections, etc.
  • Demand Printing Cost – The cost of a label printer, ribbon or toner, operator, and blank label inventory for emergency needs.
  • Label Application Cost – The cost of applying the label to the container/package or directly to the product either by hand or by machine.
  • Obsolete Inventory Cost – The cost of inventory not consumed due to design/content changes or shelf life.
  • Excess Inventory Cost – The cost of finished but unused inventory not considered obsolete.

Additional Considerations

The production line is where the rubber meets the road on quality.  There is no truer statement than “you can’t ‘inspect in’ quality.”  Line speed and throughput require labels that:

  • Meet requirements
  • Run well on your equipment
  • Perform to your expectations

Label failure at this critical point in production is one of the costliest spots and can greatly hinder production goals. A qualified dock-to-stock label supplier can take this cost out of the equation.

When engineering the label construction, Goldilocks is a good model. Like the porridge and the beds, your label material needs to be just right. The temperature ranges your product will encounter and the environmental conditions need to be carefully considered and the appropriate material and coatings must be selected. Choosing a label construction that works for tough automotive “under the hood” requirements would be costly and unnecessary overkill for a health and beauty label. If the situation were reversed, the label cost would be reduced but the end use failures would more than offset perceived initial savings. Your label shouldn’t be over or under-engineered. It should be just right.

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