From budget and production scenarios to a better understanding of overall operating costs, Sappi’s Fine Paper Division shows how software pays off

Costing Software Helps Sappi Mills Make the Grade More Efficiently

That was the situation before Sappi acquired S.D. Warren’s four fine and specialty paper mills. Computer systems were old, the costing software was obsolete, and both hardware and software varied from mill to mill. “Budgeting was done at a macro level and we had no production and cost standards,” says Paulin.

Clearly, this was a major problem in today’s margin-squeezed, super-competitive business environment. "The margin of error for intuitive papermaking is simply a lot smaller than in the 1970s and 1980s,” adds Paulin. “We had to become more cost effective, and this called for more accurate and more detailed knowledge about our costs per grade.”

Sappi Fine Paper products are found in top-quality catalogs and annual reports.

DEFINING THE NEED. Sappi’s North American Fine Paper Division has a long history of papermaking in North America. One mill will soon celebrate 150 years in the business of making paper. Products are diverse and include coated wood-free paper for publishing and commercial printing markets, uncoated paper and board in a variety of colors and weights, and specialty grades.

“We routinely make hundreds of grades in the four paper mills,” says Mark Dudinski, manager of operations analysis. Each mill produces different grades and has very different process configurations than the others. Sappi’s challenge was to find grade costing software that could be satisfactorily applied across all four mills.

“Flexibility was key,” says Paulin. “We wanted to apply the same costing software across the company while tailoring it to the different products and processes in each mill.” This included activity-based costing methodology. “Flexibility in overhead allocation was critical, since we wanted to be more accurate and realistic in assigning manufacturing overhead,” adds Paulin.

Another essential was “drill-down” capability, allowing costs summaries to be peeled back so that costs could be analyzed at the component level—such as coating ingredients, fiber mixes, labor content, and maintenance load. “We absolutely had to know the costs in great detail, while rolling them up from process to process,” adds Paulin.

Though not normally associated with grade costing, a mill-balancing calculation also became an important criterion. “We knew that the new software would play a big role in budgeting,” says Paulin. “So somehow it had to identify process balancing problems, since we had to be sure that we could produce any sales budget selected.”

Since budgets usually result from the analysis of many scenarios, a strong “what-if” capability was needed in any new costing software. “What if we changed to a new grade mix? What if we increased production on the No. 14 paper machine?” These types of questions had to be easily answered.

“Clearly, we also had to be able to crunch all the data involved and produce the results in a reasonable amount of time,” says Dudinski. The Westbrook mill alone has more than 200 grades and more than 30 processes, while the Mobile mill has fewer processes but more than 600 grades. Either one requires a lot of computing. “If a budget scenario takes several days to run, it isn’t really very practical for us to use,” adds Paulin.

Since the division has standardized on Microsoft Windows and the Microsoft Office tools (e.g. Word, Excel, Access), Microsoft compliance was a must. “We wanted to use the Office applications freely with the new costing package,” says Dudinski.

After thorough evaluation, the company selected the “Impact:3C” costing system from 3C Software of Atlanta, Ga. “In addition to meeting our specified needs, Impact:3C most closely fit the unique requirements of process manufacturing,” adds Dudinski. “We also saw that the 3C software was working successfully in several other companies in our industry,” says Paulin. “That helped us feel good about using it.”

Five Sappi employees visited three Impact:3C installations and met with the cost accountants, who went online and demonstrated their use of the software. “Following the visits, we interviewed several more users by telephone,” adds Paulin.

In the future, Sappi plans to link costs into the real-time data coming from its distributed control systems (DCS).

OBJECT-ORIENTED DESIGN. Impact:3C is designed around costing “objects”which provide great flexibility of application. The object-oriented design allows a company to freely tailor the software to its business definitions and production processes—permitting companies to tailor it among mills.

The software runs in the Windows 95, 98, or NT operating environment, and its distributed architecture is fully open to other systems. Users can obtain quick costing overviews or drill down to get to great levels of detail. Importantly, the object-oriented design makes it highly modular, providing flexibility. Companies can therefore adopt their own costing methodology, tailor it to individual mills, and periodically update it as the manufacturing or business processes change or mills are acquired or sold by the parent (Figure 1).

Sappi sent a core group to the 3C Software training program in Atlanta. “The training was vital,” says Dudinski. “As a group we had the company knowledge, and after a week of training, we had a basic understanding of the 3C software package and its capabilities.”

The group then went to work designing costing models for each mill. “At least fifty percent of our development time was spent in conceptual discussion,” says Paulin, “trying to define a common grade costing methodology across all of our manufacturing sites.” The discussions included both financial people and production experts from each mill.

For example, a headquarters chemist studied each mill to define all raw materials used in every mill process. “In assigning the proper cost components to a grade, you really have to understand the details of the production process,” says Dudinski. “In that sense, costing is as much an engineering effort as it is a financial one.”

The development effort defined “levels” of production for each mill (e.g. woodyard, pulp mill, stock prep, paper machine, etc.), starting in the pulp mill and proceeding through to the wrapped paper. Each level has become a software object, which is rolled up into the next production level, which in turn also exists in object form.

“The object design makes it easy to roll up the costs, process by process, right through to the finished product,”adds Dudinski. The objects can be easily changed as mill methodology changes in the future. The entire costing system was rolled out to the mills during the last quarter of 1997 and has been in use ever since.

FIGURE 1: Data sources are assembled and mathematically processed in the Impact:3C calculation engine.

VALUABLE IN MARGINAL COSTING. Increasingly, the company uses “marginal costing” (sometimes called “incremental costing”) when making decisions regarding future production. “Do we have the fiber? Must we fire up another boiler? Do we gain gross-margin benefit? We’re increasingly called upon to provide financial answers to strategic production questions,” adds Paulin. “A back-of-the-envelope calculation simply isn’t good enough anymore.”

Though incremental cost data is not continuously updated, costing models have been created to run the most likely incremental scenarios when needed. “We have about two dozen incremental costing models that we update using the Impact:3C data,” says Paulin. “Other incremental costing we do on an ad hoc basis. People come to us with a scenario and we help them by building and running the model.”

Incremental costing has been useful in defining the most expensive production bottlenecks and eliminating or reducing them as needed. The detailed costing models make incremental costing a reality. “In the past we’ve improved the productivity on the paper machines only to find that we couldn’t get the increased production through a downstream finishing or converting process,” adds Paulin.

HIDDEN PROFITS IN THE COSTS. “The industry as a whole is getting smarter about making and marketing its paper,” says Kelvin Hill, mill operations manager. “We all have essentially the same manufacturing assets (e.g. digesters, paper machines, winders, wrappers). The differences lie in how we manage those assets in making our products and how we offer our products to the markets. We’ve got to sharpen our pencils and know our variable costs, fixed costs, and marginal costs if we’re going to manage the business properly in today’s environment.”

Hill provides an example: “If the Westbrook mill needs to trade off an order of its ‘Aero’ for ‘Somerset Matte’ product, we must understand the financial implications of that tradeoff. A system like Impact:3C helps us understand those implications.”

The mills now know their true production costs—grade by grade, ton by ton, and customer by customer. They can get detailed information on the recipes and usage of materials—in pounds per ton of paper, by grade, and understand their exact effect on the profit margins. “I can also see the cost of quality versus the grade specification,” says Hill, “and make raw material changes that improve mill margins, while keeping the quality at specification levels. That’s the real value of the Impact:3C software.”

As another example, Hill recounts a recent financial exercise. “We were developing contingency plans to identify additional savings beyond what we built into our yearly plan,” he says. “We focused on the cost-of-quality (COQ)—namely the product costs above and beyond that required to meet grade specifications. We found materials that had crept into some grades over the years that really weren’t required to meet the quality specifications.”

This information has been given to the Sappi technology center, which is reviewing the actual vs. the ideal grade structure. “This would have been extremely difficult, if not impossible, to do without the new costing software,” adds Hill. “Fifteen years ago, nobody had this type of software, so competition went along successfully without it. If we’re not leveraging the technology to help us understand our financials, we’re just going to be left behind,” concludes Hill.

The new costing data is also being used by sales and marketing personnel to encourage them to place emphasis on those products yielding the highest return. “It helps us manage the marketing product mix more effectively,” says Paulin. The cost data can also be used to analyze cost, price and profit margin by customer, if desired.

BETTER OPERATING DECISIONS. Sappi has also shown that as people become more informed, they become more productive. “We have found that the more we inform our operating people on the cost implications of their actions, the better their operating decisions are,” adds Hill. “They better understand the puts and takes of the business.”

Sappi continually explores new financial opportunities by using the scenario capability of the software. “I can create an entirely new mill configuration in two to three days and run cost scenarios that show the financial implications,” adds Paulin. “We constantly look at new opportunities using the costing software. It’s an excellent planning tool.”

Sappi is also implementing an enterprise resource planning (ERP) system across the organization, moving toward the total integration of all software, from ERP to the process control systems. A fully integrated approach, tying key process data from the control rooms—e.g., flow rates, consistencies—into the cost system is the ultimate goal. This will enable employees at all levels to have increased access to more timely and accurate cost data.

“When our operating people can see the impact of their decisions on the costs, there’s no question that their operating performance will improve,” says Paulin. “Anything that we can do to move cost understanding down to the machine room floor will help us in reducing costs, while still producing a high-quality product.” The organization is relentlessly moving toward knowing their costs in real time—from the president’s office to the operators on the machine room floor. “Anything we can do to shorten our response time helps to make us a killer competitor in the market,” adds Paulin.

“Our goal is integration enterprise-wide,” says Hill. The ultimate objective is complete visibility of operations for operating people in all the mills, described by the Gartner Group as the “Zero Latency Organization,” or one that can retrieve any data needed, on demand, in real-time across the entire enterprise. “Our ability to access, retain, and utilize information will be the key to our success in the future,” notes Paulin. “The companies that do that well are the companies that will succeed.” *

BOB YEAGER is president, Integrated Marketing International, in Westport, Conn.