Looking for the sweetest spot
In his keynote speech for the Paper Industry International Hall of Fame's October induction ceremony (see Comment column, pg. 72, John T. Dillon, chairman and CEO of International Paper, outlined his corporation's approach for success in a global marketplace. Much of Dillon's speech was focused on managing capacity to improve financial performance, as well as becoming a customer-focused company.
While capacity management as a strategy to improve paper industry financial performance might not sound that unusual, it is apparently less common than it should be at the mill level. In this year's Pulp & Paper survey of North American mills (see pg. 33), 50% of mill managers reported that maximum tonnage was still the goal at their mills. Although 48% did say that production was becoming de-mand driven, one has to wonder at the long-term impacts from the other half's behavior-both for the industry and at that particular mill.
'SWEET SPOT' OR NOT? According to Dillon, IP is "changing from a belief that every machine and facility must be operated at 100% capacity." He describes IP's approach as focused on meeting its "customers' supply needs while avoiding excess production that builds inventory."
But how can facilities run profitably at lower operating rates for longer periods? Dillon says IP will focus on reducing absolute costs and finding "that 'sweet spot' where production is most profitable." Right now, with declining demand, he notes that matching production to customer demand is crucial to "taking cyclicality out of the earnings stream."
So, why are a larger number of mills not adopting this practice? Not only did this year's survey show that 50% of respondents were tonnage rather than demand driven, productivity and production seemed to be growing in importance since 1999, with some managers reporting plans for volume increases.
A group of mill managers was contacted by phone and asked about the survey findings. All were less-than-pleasantly surprised, with one noting that "the industry just does not get it yet-we have an oversupply situation right now." Another noted that using excess tonnage to spread out fixed costs was "ludicrous with over capacity everywhere," a tactic that Dillon also criticized in his speech.
With the contacted mill managers seemingly as critical as Dillon over the tonnage-driven focus, perhaps other survey findings could shed some light. One trend associated with strategic planning hinted at a possible reason. Although most mill managers (79%) reported adequate input into strategic planning, managers indicated they did not receive adequate market and other information from corporate to create strategic operations plans that would meet financial goals. A manager contacted by phone was in agreement: "Mills are becoming profit centers, and I need to know all aspects of corporate strategy in order to drive profit and not tons. We just don't get enough information from corporate."
Another survey finding that might explain the tonnage-driven focus related to capital. Although two-thirds of mill managers reported they receive enough capital to stay competitive, comments about lagging technology in-vestments, especially as they related to new grade development, were common. Certainly, it's hard to react to demand and customers with equipment stretched to its technical limits.
CUSTOMER FOCUS: THE SWEETER SPOT. Dillon also described another big change for IP-moving from a commodity focus to a customer focus. "We must know as much about our customers' businesses as we do our own," he commented. "We have to help them grow and become more successful if we are to be successful."
Survey findings showed the majority of mill managers in agreement with such a concentrated focus on customers, especially as it related to new "supply chain" type relationships, as Dillon expressed. Many managers described creation of more customer-targeted "private label" products. One manager specifically described supply chain management as "the greatest change in thinking," although he noted that this was still "in its infancy" for the paper industry. Another manager pointed to the challenge of getting some mills-and em-ployees-to accept the importance of catering to customers.
"Many older people in the mill keep saying that 'it used to be good enough, we are letting our customers walk all over us,' but times are different now," noted that manager. "It is a challenge to get these people and these mills (especially older, small mills) to change."
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