Paper & Packaging Report
Paper and packaging companies consistently show worse performance in one critical dimension vs. comparable industrial goods and services companies: commercial excellence. By commercial excellence, we mean the design and delivery of commercial best practices that maximize profitable revenue. These could include programs to consistently improve salesforce effectiveness, the view into market opportunity and customer segmentation, route-to-market design, customer experience, commercial operations and enablement, and pricing (see Figure 1).
While historically many companies have focused on optimizing their production costs because of capacity constraints, leading companies now realize that deploying a tailored set of business-to-business commercial excellence best practices can present an opportunity to grow and gain a competitive edge.
In fact, companies that prioritize commercial excellence can increase their EBITDA by 25% to 40%.
Achieving commercial excellence starts with understanding profitability with customers and products as well as where there is opportunity to grow. After gaining greater transparency on growth opportunities, forward-thinking companies have zoned in on optimizing price and discount levels, enabled by sales and operations processes. There are many elements of commercial excellence, but top firms have found that tackling these first has had the greatest impact.
Paper and packaging performs below the industry average on most commercial excellence elements
Questions leading paper and packaging companies are asking
Do we have a robust view of customer, product, geography, and channel profitability? Many paper and packaging companies currently lack a robust view of profitability. Sales teams know directionally which business segments are attractive, but they do not have a clear understanding of true net margins on a granular level. These margins are often obscured by complexity or lack of data.
Transparency by itself, however, does not solve everything. Instead, it brings clarity into where value is created or destroyed in a company and enables a company to answer key questions such as which customers should I prioritize, which products are most profitable, and which should I deprioritize?
For example, Bain worked with a leading European paper and packaging company to help it understand true profitability on a product and customer basis to inform the future portfolio it wanted to have. To do so, the company created a list of low-performing stock-keeping units in its portfolio that it deprioritized in sales and operations.
This not only created insights to support long-term portfolio strategy but also drove a list of quick wins for the organization, which included creating a list of unprofitable customers and corresponding pricing actions to take with sales teams.
Where is the market opportunity, and how do I win? Many paper and packaging companies do not understand how much share of wallet or business they could capture with existing customers, and they don’t have a comprehensive list of new customers to go after.
Successful companies start with a granular view of customer potential and prospects by focusing on geographic regions so that the salesforce has a list of very specific growth opportunities to go after. Once the company has a clear view into growth opportunities, it can determine if it has the right value proposition to win.
When a plastic packaging company, for instance, aspired to accelerate profitable organic growth, it found that with its top 20 customers, the company had a low share of wallet and a low Net Promoter Score℠, which measures the likelihood that a customer would recommend that company to a friend or colleague.
The customers' feedback provided clear instructions on what the company needed to do to grow with existing customers. Specifically, customers wanted better service, such as better availability of popular products and shorter lead times, as well as competitive prices for high-quality products.
Based on this input, the company created action plans for each of its top 20 customers: The company identified specific volumes to pursue at the right price, articulated the value proposition more clearly (including its unique approach to service and quality), and defined specific action steps with clear owners to win new volumes.
Do we actively manage price and discount levels? The legacy model of a stable price list that changes once per year with discounts based on outdated data and assumptions no longer works. In the current volatile environment, with supply chain disruptions, drastic changes in input and labor costs, and other destabilizing macro factors (market and economic), companies need to invest in pricing agility so that, for instance, prices can be adjusted if input costs change.
In addition, companies often experience price and revenue leakage from overly discounting or not getting value on the services they are providing, such as not charging for rush delivery. Finally, discount levels also often vary widely across customers and are typically based on a perpetuation of historic discounts rather than strategic decisions by the company that generate returns on investment.
Winning companies manage pricing proactively, adjusting it regularly and setting prices based on the value to the customer and their willingness to pay. Price floors need to be set to cover the cost. Price ceilings should be set based on what clients are willing to pay for the products.
Top teams are starting to establish dedicated pricing teams that build and execute on key pricing capabilities to ensure that they are accurately setting prices at a regular cadence to match changing market dynamics. They also improve price realization through a disciplined approach to discount management, ensuring that they have the right people, processes, and tools in place to do this well.
Digital pricing tools, for example, can provide sales with pricing guidance. This guidance can identify target margins for sales reps to hit and define a price floor below which no sales should be made. Plotting customers by realized price and size can help identify where a company may be discounting too heavily.
To tackle underperforming customers, developing a targeted approach based on customer size and profitability is key. This approach could include increasing prices, decreasing the cost to serve, or changing the product mix—all of which aim to increase profitability.
Do we have a robust sales and operations planning process? As a final step, after identifying their most profitable customers and products, leading companies ensure that their sales and operations planning (S&OP) process prioritizes selling and producing those products for those customers, and they allot their capacity accordingly.
An efficient and robust S&OP process will not only save costs on logistics and improve operational efficiency through production cycle optimization and capacity balance, but it also will help manage working capital through optimized inventory levels and lead to higher customer profitability through an optimized customer mix.
At a minimum, companies need good data quality; standard S&OP reporting, including stock levels, sales, and production volumes; clearly highlighted shortfalls; and regularly scheduled and structured S&OP meetings.
Those companies that differentiate themselves often leverage additional tools. For example, a large paper and packaging company used its recently introduced pricing tools to generate insights for its S&OP discussions, calculating whether increased price levels in currently unserved markets would enable profitably selling spot quantities to these markets, forecasting expected future price levels given expected raw materials price changes, or helping to fill unsold machine capacity at a positive gross margin during times of reduced demand.
Commercial excellence and pricing provide a huge opportunity to companies to increase their EBITDA. Gaining visibility into true profitability and market opportunity is key to deploying commercial muscle toward segments and customers with the most attractive growth. Finally, tools that allow for agile pricing and a robust S&OP process are critical for capturing value.
The roadmap alone, however, is not enough. Developing a culture of commercial excellence that fosters the right set of behaviors through coaching and supported by tools and processes will help embed the gains for the long run.