With global supply chains in disarray, consumer goods companies are scrambling to ensure their products get to market in a consistent, sustainable, and timely fashion. Despite their best efforts, many are still struggling with extended delays in filling orders, empty shelves, and lower customer satisfaction. In addition, inflation is driving up costs—notably for freight—to the point where companies are now forced to choose between higher prices and reduced margins. Compounding these challenges, demand has grown dramatically in many areas as people spend more time in their homes. Traditional levers—such as concentrating on supplier purchases, ramping up production, and managing transportation plans more rigorously—have offered some relief but often not enough. Midway through 2021, the stockouts average across all categories still remained at 30 percent, double prepandemic levels. And in the last quarter of 2021, stockouts for categories such as food and beverages, as well as electronics, continued at more than 30 percent.1
Design is playing an increasingly important role in companies’ overall success. Innovation has long been a focus of investment and continues to be an important part of a balanced portfolio of engineering efforts. Outside of innovation, players are shifting engineering resources from “design to cost” approaches adopted 20 years ago toward “growth by design” efforts. This broader scope tackles challenges such as generating growth through improved star ratings; refining the product portfolio more surgically at the attribute level to both reduce redundancy (overlaps) and to address unmet needs (gaps); embracing design for manufacturability; and harnessing the latest technology (for example, digital simulation tools such as finite-element analysis and generative design) to optimize geometries.
An often-overlooked lever in this broader tool set is “skinny design,” which involves reassessing the overall box size of products by reducing the total cubic volume of the package. It can be a powerful tool for improving performance in several ways.
- Top-line growth of 4 to 5 percent through improvements in shelf (and warehouse) holding power. The ability to fit more product in the same amount of space means more stock where it matters most, fewer stockouts, and, ultimately, growth.
- Bottom-line growth of more than 10 percent. The largest savings come from reducing transportation cost per unit by fitting more product in containers and trucks. Other cost reduction opportunities include designing packaging to minimize the labor required in the packaging process and increasing the ability to automate. Organizations can also decrease warehousing and shelf stocking by fitting more product into shipping containers and on pallets, resulting in fewer trips to and from shelves and stocking locations. Improved drop testing and other packaging performance attributes can decrease costs associated with product damage and returns. Companies may deploy advanced uses of molded pulp and other packaging techniques while still reducing the total cubic volume. For example, the most advanced players are using finite-element analysis to simulate drop tests to enable the next level of packaging optimization.
- Sustainability improvements are primarily associated with reductions in CO2 emissions through less diesel fuel burned per unit (thanks to better utilization of containers and trucks). Players can achieve additional improvements in overall footprint through material choices, such as replacing expanded polystyrene foam (EPS) with molded pulp.
The good news is that companies can often implement the elements of skinny design quickly and with little investment. By taking three steps—setting the aspiration, establishing a technology foundation, and implementing new ways of working—consumer goods companies can use skinny design to maximize the volume of their product that makes it onto shelves.
By setting the aspiration, establishing a technology foundation, and implementing new ways of working, companies can use skinny design to maximize the volume of their product that makes it onto shelves.
The changing shape of product packaging
If you want more evidence that the COVID-19 pandemic has affected nearly every facet of commerce, consider the form factor of products. For decades, companies took a traditional approach to package design, seeing it as a critical “billboard” for the product. Conventional wisdom held that the larger the packaging, the more a product stood out on the shelf (with more room to make product claims). However, changing consumer behaviors, accelerated by the pandemic, have diminished the importance of in-store point-of-sale marketing, thereby rendering traditional marketing approaches to packaging less important. In most cases, the current priority is ensuring goods make it to the shelf consistently. Billboard has historically been—and will continue to be—important. But gig economy shoppers, and online in general, are shifting the circumstances under which purchasing decisions are made. Consumer product manufacturers will increasingly find that reducing billboard in lieu of more shelf holding power is likely a good trade-off. Several factors have contributed to this dynamic.
Rise of e-commerce: Stores become warehouses for gig shoppers
The acceleration of e-commerce during the pandemic was a consistent trend across regions, reaching 20 percent of sales in some markets at the height of their lockdown. For many categories, online shopping is expected to continue at, or even grow beyond, these elevated levels. The result is that many retail stores essentially have become warehouses or fulfillment centers, with shopping-app “pickers” clearing the shelves. This trend is hastening the transition to slimmer package designs that can fit more product on existing shelf space so gig economy shoppers don’t empty them as fast.
Retail labor shortages
Even when companies manage the complexity of forecasting, ordering, and delivery, this process can sometimes break down in the last few feet. A root cause of stockouts has been product sitting in stockrooms rather than being moved promptly to store shelves. The labor shortage, which left many stores without sufficient staff to handle operations, has amplified this issue. In the United States, for example, retail job openings hit their highest level in a decade this past summer: 1.2 million in August 2021, equal to 7.1 percent of the workforce. By comparison, the job opening rate was 2.6 percent a decade ago.2
Increasing comfort with switching—especially when products are out of stock
In many instances, and especially for commodity products, consumers are making purchasing decisions based on which products are available—an ominous trend for consumer goods companies. According to a recent McKinsey US Consumer Pulse Survey, about 40 percent of US consumers had tried a new product brand during the previous three months.
More alarming are the reasons consumers gave for this experimentation: the top two are “the product is in stock” and “the product is available where I’m shopping” (Exhibit 1). Essentially forcing consumers to engage in switching behaviors can have long-term negative consequences, including diminished brand power, less loyalty, and a loss of efficacy among many traditional trade levers. Of the 60 percent of consumers who faced stockouts over a three-month period, only 13 percent waited for the item to become available. Instead, 70 percent decided to switch retailers or brands.
How skinny design can significantly increase product availability
Although the current application of skinny design offers a novel way to address supply chain issues, this strategy has a proven track record, with prominent companies using it to achieve impressive results (Exhibit 2).
More than a decade ago, laundry detergent manufacturers pioneered a concentrated detergent that could wash the same number of loads as previous detergents while taking up just one-third of the volume. Smaller bottles increased shelf availability and had other benefits, such as alleviating the need for consumers to lift heavy detergent jugs and reducing the environmental impact of packaging (see sidebar, “Supporting sustainability through better design”).
Similarly, another laundry detergent manufacturer discovered that high-efficiency washing machines did not have enough space in their bleach dispensers for customers to add the correct amount, or dose, of bleach using the old formula. The company responded by compacting its iconic liquid bleach product. The new formulation not only allowed consumers to administer the right dose to loads but also captured other benefits: the company was able to put 25 percent more units on the shelf, improve gross margins by five percentage points, and reduce the product’s greenhouse gases by 23 percent.
Such improvements are not limited to packaged goods. Manufacturers of durables have also made innovative changes to packaging and product designs to enable shelf holding power. A home goods manufacturer noticed that a bathroom vanity SKU had poor shelf holding power. It redesigned the product with a folding origami-like design that reduced its packaging by 30 percent. With this flatter packaging, more of the product could fit on store shelves. The new format also saved 15 percent of cost of goods sold (COGS) and reduced damages compared with its bulkier, hard-to-handle predecessor.
Embracing skinny design
One of the advantages of skinny design is that consumer goods companies can implement this strategy with a relatively low up-front investment. To capture the value at stake, organizations must be prepared to embed new ways of measuring progress and value, develop new capabilities, and adapt the way they work. To ensure a successful rollout, companies can follow a three-step process.
Setting the aspiration
First, companies need to understand the size of the opportunity in order to create the business case. This case is typically made up of a mix of growth associated with reducing stockouts and cost through freight savings.
Growth from reduced stockouts: Measuring stockouts is relatively complex; it’s not simply a matter of examining computer records to determine the inventory on hand, because products are often not actually on the shelf. Several companies use sophisticated algorithms to compile estimates on product inventory and demand that, for example, monitor a drop in a product’s market share or a change in product sales compared with those of a competitor to signal stockouts. Estimating growth from improved holding power is a mix of art and science. Typically, organizations can gain alignment by presenting experienced sales and merchandising players with both past data and conservative predictions to spur discussion and alignment.
Cost reduction from improved freight utilization: This math is relatively straightforward. In some cases, organizations can use analytics of online data to determine which products in a portfolio present the largest opportunity. These insights help the team know where to start.
Notably, one of the larger obstacles to building a business case for packaging redesign is misaligned incentives across the organization. At most companies, for example, accounting and finance departments will select KPIs such as COGS, bill of materials costs, and gross margin. While the funds needed to invest in packaging changes can typically be covered by freight savings, gross margin may look worse on paper as a result. And because many companies do not allocate freight to specific products, the savings are not reflected in EBIT calculations used by accounting and finance. At the same time, marketing and sales seek to maximize revenues, but they may not yet be convinced of the wisdom of giving up packaging billboard space to increase top-line sales growth. This dynamic can make it difficult to garner support for changes from individual functions when they don’t get credit for the additional value creation.
Once companies have built a business case, they can clearly demonstrate why resources should be committed. They have several options for how to proceed. Every company has a road map for packaging redesign, so business leaders can incorporate this goal into the road map or reprioritize existing resources. They can also form a dedicated packaging team tasked with reviewing opportunities. If an organization doesn’t have the capabilities to handle package redesign, it can either build these skills internally or pay an outside firm.
When the packaging function faced challenges to winning the resources needed to make changes, consumer goods companies found clever solutions. Some suppliers will handle the redesign for the product manufacturer in return for creative reimbursements—for example, a royalty equal to 2 percent of the savings up to a certain amount.
Establish the technological foundation
Once the business case is clear, the second step is using advanced tools that can build the fact base to determine the specific packaging levers to target. For example, companies can investigate publicly available dimensions of competitors’ packaging to identify significant deviations from industry benchmarks. One cereal manufacturer used a digital teardown database to compare the volume of its own packaging to that of competitors (normalized for cereal type and weight). The tool uncovered an average cube optimization opportunity of approximately 33 percent across five of the company’s cereal boxes. If fully implemented, this approach could translate to an approximately 4 to 5 percent reduction in its logistics costs and CO2 footprint.
This same digital technology is being used in other product categories such as nonfood and consumer durable goods. One company deployed a similar analytical approach to reduce packaging and freight costs by 30 to 35 percent and to shrink its CO2 footprint by 6 percent for LED light bulbs. Comparable results have been observed in LED TVs and many other product families (for example, small consumer electronics such as USB drives and batteries).
New tools have also made it possible for consumer goods companies to analyze packaging design opportunities with breathtaking speed. Tools such as finite-element analysis can rapidly improve the test-and-learn cycle associated with trying multiple packaging configurations and materials (for example, molded pulp) and simulating an International Safe Transit Association (ISTA) drop test before any physical prototypes are created. In the hands of an experienced operator—internal or a contracted resource—these tools can rapidly accelerate the process of finding the optimal package configuration that maximizes the amount of product on shelves while minimizing damage.
New tools have made it possible for consumer goods companies to analyze packaging design opportunities with breathtaking speed.
Implement new ways of working
The third step is making the changes to packaging or product design. As previously mentioned, one way to accomplish cube optimization is to focus design changes and upgrades solely on packaging components—for example, rearranging how LED bulbs are packed inside the corrugated retail box to eliminate empty space between units, or reducing overhead and lateral space in the case of cereal or TVs. Companies may also accomplish space optimization by redesigning the product itself. This last angle may yield more innovative and effective results, although it tends to be more resource intensive (as measured by funding and time, among other elements) than packaging redesign, while requiring closer coordination between organizational elements.
Regardless of the element being addressed, companies must make important cross-functional trade-offs during the redesign phase, because proposed changes are not always well defined. For example, complexity is a consideration: companies will need to consider the level of standardization of boxes and packaging against customization to optimize each product. Similarly, the packaging reduction needs to take product “protection” into account. A smaller box needs to be designed and tested correctly to ensure it adequately protects the product.
Because collaboration and alignment among product designers, packaging designers, marketing, category managers, and sales and operations planning are critical, companies should consider designating a lead function to coordinate the process. In our experience, three functions are natural choices. Packaging could take the lead if it has the bandwidth. If the project focuses on a specific product, the corresponding product manager could step in. The third option would be logistics because it stands to benefit from the direct savings.
Skinny design in action
By completing these steps, consumer goods companies will be well positioned to capture additional value. Amid the current supply chain challenges, companies that can figure out how to fit more product in the same container space will reduce logistics costs and improve product availability. For example, a global food manufacturer was struggling with low margins and stockouts. It identified a packaging redesign opportunity through nesting concepts and a cubed package design to increase shelf presence (Exhibit 3). The new gusseted, cube-style package would allow the company to improve from 12 facings to 14 in the same amount of shelf space, reducing stockouts by 15 percent, increasing revenue growth by 2 to 4 percent, and cutting packaging costs in the process.
An industrial tool and equipment manufacturer used a third-party data provider to uncover higher-than-anticipated stockout rates in many of the retail stores where its products were sold. Further investigation revealed the size of the retail bay restricted the SKU to only two boxes at a time (compared with three to four boxes for competitors). Demand spikes would leave the manufacturer’s SKUs retail bays empty before restocking could occur.
With this insight, the company identified product redesign as the best way to match competitors’ in-stock rate. It developed a compressed design, which would enable a more than 30 percent reduction in cube size and increase sales by more than 4 percent, thanks to the improved in-stock rate. The smaller packaging footprint also had upstream impact, lowering shipping costs by 12 percent and cutting CO2 by 800 metric tons each year.
The supply chain challenges confronting consumer goods companies show little sign of abating, meaning a return to normal could be years away. The acute need to explore all solutions makes design a potent tool for achieving real benefits for a relatively small investment. Organizations that build the internal muscles now to embrace skinny design will be better positioned to confront supply chain constraints in the future.