Despite productivity and labor concerns, Pulp & Paper's annual survey shows mill managers bullish on supply chain relationships

Production Tops Manager Concerns; Supply Chain Shows Profit Promise

Combined with the above challenges is the difficult task of recruiting and maintaining a quality workforce within the booming U.S. economy and its tight labor market. Labor relations and human resources tasks are even more time consuming than in the past because of the economy, as well as recent management changes that have left employee morale and confidence at a low. Also, with industry consolidation, investment in individual mills is uncertain, and, therefore, jobs. Because of this atmosphere, leadership and managerial responsibilities are apparently more pressing than ever.

FIGURE 1. Job satisfaction among mill managers is the highest it has been since 1997.

Pulp & Paper's 2000 survey questioned managers about a variety of industry trends, including consolidation, outsourcing, and supplier mergers. It also asked about labor relations, daily operations, and management responsibilities. Almost every mill size, grade, tonnage range, and geographical region were represented in the responses. In addition, a group of mill managers was contacted by phone for comments on survey findings.

Despite the challenges presented by the economy, competition, management changes, and defining profitable products, mill managers are reporting their highest job satisfaction ratings since 1997 (Figure 1). Many managers are expressing optimism about new "supply chain" relationships that put them in closer contact with end users to produce a tailored product that can help establish customer loyalty in a competitive environment.

MILL MANAGER RESPONSIBILITIES. Pulp & Paper's survey asked managers to describe their top priorities, most persistent problems, and input into strategic planning at the mill. Also, managers were surveyed about their use of the Internet as a business tool and for e-commerce applications.

Top responsibilities. Mill managers were requested to name their top three mill responsibilities, including daily operations and management duties. In this year's survey, leadership and managerial tasks were most commonly listed (65%), which rose 13 points from last year. These tasks included dealing with union issues, team building, employee development, and communication with both mill employees and corporate. Safety issues were also high on the list, with 52% of managers mentioning them-a six-point jump from 1999. In fact, managers were most likely to rank safety as the first item in the list, with 40% doing so.

Production and productivity-related tasks and goals were emphasized much more so this year (44%) than last (28%), just as quality, customer service, and grade improvement/development were ranked more highly (42%) in 2000 than in 1999 (31%). Cost control and financial management dropped slightly to 40%, although profitability concerns (17%) closed in on 1998 levels (19%) after dropping to 8% in 1999. Strategic planning (38%), both annual and long term, continues to grow as a top mill manager responsibility, up 23 points from 1998.

Persistent problems. A resounding 75% of mill managers listed labor relations and human resources as the most common "nagging" problems they encounter, which represents a significant increase over last year's 40%. Specific problems included adversarial union relationships, resistance to training from older employees, and a demotivated workforce. While these problems were typical of those listed in 1999, many managers described problems relating to the tight U.S. labor market that have resulted in employee turnover and difficulty in hiring qualified personnel (see sidebar below).

Safety performance as a persistent problem rose from just 6% last year to 25% in this year's survey, with many managers describing struggles with individual behaviors. Comments such as "too much acceptance of at-risk behaviors" and "lack of personal accountability for safety" are representative of many responses.

Although not mentioned last year, 25% of respondents reported problems with obtaining sufficient capital for their mills. Environmental/regulatory compliance also gained ground as a plaguing problem, up 12 points to 23%. Other problems included cost control, weak sales, an unstable market, and effective maintenance for older facilities.

Strategic planning. A large majority of managers (79%) indicated they had adequate input into strategic planning for their mills, although this was down somewhat from last year (88%). However, many managers expressed frustration at being unable to create strategic operations plans that would help reach financial goals, noting that they needed more complete information from corporate, especially a "keen awareness of market trends" that would allow them to plan for a grade mix with higher profit margins.

As one northeastern mill manager commented in a phone interview, "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 manager said, "The challenge is to stay ahead of competition, even when you don't really know where it will be coming from and how strong it will be."

Tight labor market places strain on employee recruiting and retention Finding and retaining good employees within a tight labor market created by the prosperous U.S. economy is hitting home for many mill managers. The jump in labor relations/human resources as the most common persistent problem for managers from 40% (1999) to 75% (2000) elicited such comments as "the applicant pool is insufficient in numbers/quality." It also highlighted the tough mill working requirements that compound the employee retention challenge. As one manager described, "The hourly work schedule is out of touch with today's social/cultural realities." These labor market and work environment issues became even more prominent when mill managers were asked if retaining good employees was harder than it had been in the past. While some managers mentioned this was not a problem due to an excellent location, the majority of mill managers said it was, jumping from 42% in the 1999 survey to 69% this year. Almost half of these pointed to low unemployment/tight labor market as the reason.   Although some respondents specifically mentioned problems with information technology hires and electrical technicians, most indicated an overall hiring/retention problem compounded by a tough paper industry work schedule, lack of mill investment, and difficulties in advancing employees, as these comments demonstrate: "The strong economy encourages shift workers to find day jobs." "With unemployment so low, and the work schedule of a paper mill, it has been very difficult to get and retain good employees-mainly at the hourly level." "Lack of major investment in the mill is making people think seriously about their career prospects." "The business situation (uncertain future) makes it harder to retain good people." "Long hours discourage young people from the industry." "Can't promote."

FIGURE 2. Less managers reported outsourcing, but percentages within most functional categories rose among those mills that outsource.

Internet usage. Mill managers were again questioned about their use of the Internet for business-related activities, as well as use of the Internet for e-commerce applications at their companies. As the sidebar on pg. 35 shows, Internet applications continue to grow within the paper industry.

INDUSTRY ISSUES AND OPINIONS. As pressures increase for mills to meet financial objectives, Pulp & Paper questioned mill managers about industry trends that could impact this performance, such as supplier mergers, industry consolidation, customer service, outsourcing, research and development (R&D), and technology. Managers were also asked their opinions on the industry's direction, both short and long term.

Maintaining a competitive position. Throughout this year's survey, many respondents commented on a lack of capital needed to reach financial and operational goals. However, when specifically asked whether their companies were investing sufficient capital at their mills to retain competitiveness, most (66%) said yes, which has deviated little in the last three surveys.

Of the 32% experiencing inadequate investment, paper machine forming, pressing, and drying continues as the most frequently-listed area of concern (82%), which was the case in both 1998 and 1999. However, after falling significantly in last year's survey, areas such as process automation (71%), pulping (47%), environmental control (18%), and recovery (12%) were again described as needing investment.

Information technology (29%) continues to grow as an area for concern, up 10 points from last year and 20 points from 1998. R&D, however, has steadily hovered around the 20% mark in the last three surveys, although one manager found lack of investment in this area especially troubling, observing that "we are allowing the Europeans to get too far ahead of us technologically-their products are currently superior to domestic."

When asked to elaborate further on the investment at their mills, comments were mixed. Some mills reported significant production increases as a result of capital expenditures, and one manager noted that his company invested as a strategy for improving earnings. However, most comments were on the flip side, with many managers claiming that competitive advantage was threatened by a lack of investment in technology, especially as it relates to grade development. As one manager described, "We routinely try to stretch the capabilities of all equipment, and, in grade development, it shows."

Several managers interviewed by phone were in agreement. "We have been blessed, but the well is drying up," said one manager from the Northeast. "The Europeans have been technically ahead of us for many years and that won't change. It could be a huge problem in the future." A manager from the Southeast noted that the North American industry was "getting slaughtered by imports. A lot of this is the dollar right now, but even before that it was the fact that we are disadvantaged technologically." Another manager from the Southeast said that most of the capital at his mill is now "spent on replacement, not enhancement."

Customer service. Although somewhat less so than last year (71%), most mill managers in this year's survey (65%) said the industry is living up to its claim of being more customer focused. As proof, many managers describe a supply chain approach with more contact with the end user, as well as development of "private label" products:

• "Supply chain management is the greatest change in thinking. It has gone beyond just pricing and better quality, as these are now entry tickets. The industry is finding new ways to improve the supply chain and drive total costs out. However, this is in its infancy and the industry lags others by a great margin."
• "Even though market pulp is classified as a commodity, our customers definitely have preferences they can invoke. We are attempting to cater to this aspect of the market."
• "We sell more directly to end users instead of printers or brokers. 'Supply chain' types of agreements are more common."
• "We are finally listening to what our box plants need in order to satisfy their customers."

Supplier mergers and R&D. Mill managers were asked their opinion on how supplier mergers would impact their mills, especially in the areas of price, service, and new product offerings. Perhaps because the impacts are now becoming more obvious, more mill managers (44%) appeared convinced that these mergers will have a negative overall effect than in last year's survey (31%), while those who were unsure of the impacts (33%) dropped nine points since 1999. In addition, only 23% thought there would be a positive effect from supplier mergers, down from 28%.

Further, 63% of mill managers indicated that supplier mergers would result in worse pricing of products, 52% saw worse service, and 58% predicted less new products-all of which increased since 1999 to support a more negative view this year. Conversely, 35% of respondents thought these mergers might bring better prices and better service, and 23% saw more new products as a result. However, except in the area of pricing, the positive percentages dropped somewhat since the previous survey.

FIGURE 3. Of the combined 44% of managers reporting the same or worse labor relations this year, around 25% reported difficulties associated with new mill management or ownership.

Mill managers were again asked if the growing reliance on supplier research rather than paper company research was acceptable, and the majority of mill managers (56%) said it was, which showed little change from last year. Most respondents claiming that supplier R&D was sufficient indicated they were from a small mill or company where research budgets were not practical. However, this was not always reported in a positive light, as one respondent indicated: "We don't have much choice. Funds are not available to provide significant research initiatives."

Those who were against a reliance on supplier R&D complained of a lack of market understanding from suppliers, whom they often described as driven by profit and not concern for the mill. Others noted that suppliers were ineffective in researching specialty products or in differentiating products within the marketplace, and one respondent deemed the approach of some suppliers as "leaving us exposed to copycat innovations that will eventually harm North American competitiveness." Another manager mentioned that "suppliers have done a terrible job of getting with industry leaders, and vice versa, to understand the real needs of our business."

Paper company mergers. As the trend toward paper company mergers and industry consolidation continues, managers were once more asked their opinions on how this would affect mill profitability, customer service, and new product development. Showing little shift since last year, the majority of managers thought these mergers would increase mill profitability (88%).

Opinions were a bit more split on customer service and new product development, although trends were mostly negative. Forty-eight percent thought customer service would get worse, while 29% thought it would improve. In the past three surveys, opinions about the effect of mergers on new product development have steadily worsened, with 52% of respondents now saying it will limit the number of new products-a 12 point increase since 1998. Following this negative trend, a lower number (17%) now say there will be more new products as a result of consolidation, as opposed to 33% in 1998 and 28% in 1999.

Outsourcing. To determine the extent mills are outsourcing certain functions, Pulp & Paper questioned managers about the areas and the rationale behind their outsourcing choices. The percentage of managers reporting the use of outsourcing dropped from 48% to 42% in the 2000 survey. However, when questioned about the various areas where they were outsourcing functions, almost all percentages rose, indicating that those mills using outside services are now choosing to use more and varied ones (Figure 2).

For example, the outsourcing of transportation was reported at 55% this year, up 16 points from 1999. The use of outside energy services also rose from 19% to 35%, as did those for woodyard operations, rising from 16% to 20%. Maintenance was still the most common area for outsourcing at 65%, which ran close to the 61% reported in 1999, while water treatment services were least common at 10%. Other areas for outsourcing included engineering, converting, shipping, and testing.

As expected, most managers reported cost control (65%) as the reason for outsourcing mill functions, followed by the need to focus on core competencies (60%), both of which rose somewhat in the 2000 survey. However, considerably more mill managers indicated that labor savings/issues were a reason this year (60%) than last (42%), perhaps as a result of the tight labor market. In addition, when interviewed by phone, one midwestern mill manager said that labor issues were a major reason because "headcount is a big thing looked at in the paper industry by financial analysts." Also, corporate pressures (36%) to outsource almost tripled in the 2000 survey.

Technology. As opposed to last year's survey, where managers reported a wide variety of answers when asked to name the paper industry's most important technological advancement in the last five years, managers focused on process control technology. Although it was the most commonly mentioned advancement at 15% in last year's survey, 31% percent of managers in 2000 mentioned various process controls, including profile controls, closed loop control, pulp sensors, wet end controls, and digital cameras on paper machines. However, some managers specifically noted the open architecture that allows process controls to "finally become truly integrated."

Other common answers included extended nip pressing and information/ Internet technology, both at 8%. Alkaline papermaking, dilution control headbox, chlorine bleach as a standard, liquor gasification, and fiber cleaning equipment were also mentioned. However, one manager listed the most important technology as "the realization that the latest/greatest technology is likely being located off-shore."

Future issues and challenges. Mill managers designated meeting production and productivity related goals (23%) as the biggest challenge facing their mill next year, replacing cost control (21%) as the chief concern, but only by a slight margin. Also, about 10% mentioned a volume increase for the coming year. Grade and new product development (10%) and profitability (10%) were also common answers.

In phone interviews, Pulp & Paper asked several mill managers about this slight drift towards production and productivity as a challenge for 2001. All were surprised, with one manager from the Midwest commenting that "the industry just does not get it yet-we have an oversupply situation right now." Another mill manager from the Southeast noted that, while increased production could be used as a way to control costs by spreading out fixed cost per ton, the "bottom line from such a strategy is more tons, which is ludicrous with over capacity everywhere."

In terms of their mills' products in the marketplace, the outlook among mill managers for 2001 showed only slight change from last year's outlook for 2000. Fifteen percent said their outlook was excellent, while 54% said it was good, 27% said it was fair/guarded, and only 2% said it was poor. The outlook noted in the 1999 and 2000 surveys was much better than that mentioned in the 1998 survey, when poor financial performance and lagging markets caused 59% of managers to choose poor or fair/guarded.

Mill managers were also asked if the North American industry would remain competitive for the long term (next ten years), given that other world regions have large cost advantages in fiber. Seventy-nine percent said yes-a 13% increase since last year. However, one manager indicated regulatory issues as key, noting the industry could maintain competitiveness "if allowed to by the government." Another manager from the Southeast who was interviewed by phone was not as positive. "The North American industry is dying, with all new technology going elsewhere," he described. "The only ones who will survive are new mills that are in a good fiber basket."

Many respondents limited the North American industry's success to certain grades, with 29% of respondents mentioning specialty and value added products. "Making money on commodities will be the ability of a select few as more commodities are consolidated onto larger machines," said one northeastern manager in a phone interview. "If you have a small machine and find a niche, you can make money."

Another 21% specified recycle grades as remaining competitive, while 21% named "brown" grades such as corrugating medium, linerboard, and other strength oriented products. While brown and specialty grades were mentioned frequently in last year's survey, recycle was rarely mentioned as a key North American grade, showing a significant increase to 21%.

DAILY OPERATIONS. Pulp & Paper surveyed managers about daily operations, asking questions about operational philosophy, staffing and labor relations, and challenging mill events.

Operational philosophy. Managers were again asked if maximum tonnage was still the goal at their mills, or if the philosophy had moved toward targeting production in response to demand. Responses were almost evenly split, with 48% reporting demand-driven production and 50% reporting tonnage-driven production. This shows a slight drift toward tonnage-driven production from the 1999 survey, where only 42% reported that maximum tonnage was the goal and 51% said they were targeting production to demand.

Commenting in a phone interview, a southeastern mill manager said that such a drift was "surprising in an era of consolidation when the large companies are shutting down mills." However, he noted that continued volume growth might be necessary in tissue and some board grades. Another mill manager from the Southeast expressed the hope that the industry would move from being "productivity minded to focus on quality and improving technology instead of extra tonnage."

Challenging events. Once again, mill managers named capital projects (27%) when asked to identify the most dramatic event at their mill in the past year. Of those, rebuilds (37%) were cited most often, followed by environmental projects (23%), which surpassed information technology projects in this year's survey, most likely due to the completion of many Y2K projects in 1999. Labor relations activities such as contract negotiation, restructuring, and downsizing were also commonly mentioned (17%), as were production improvements (15%). Other dramatic events included mill sale, high raw materials costs, machine shutdown, fire, quality focus, and safety achievements.

Staffing and labor relations. With so many mill managers (75%) reporting labor relations and human resources as a persistent problem, it is no surprise that managers are a bit more ambivalent about labor relations this year than last, as Figure 3 shows. Although more managers say that labor relations with union personnel are better (43%) than five years ago and less managers report they are worse (6%), a large number say there has been no change (38%).

Of the combined 44% reporting no change or worse relations, around 25% reported difficulties associated with new mill management or ownership-many of which related to morale and confidence issues. Those with better relationships pointed to new, less contentious union contracts. Managers also mentioned better communications, safety partnerships, involvement of unions in business decisions, and a better understanding of competitive pressures, as one manager described: "A confrontational relationship is changing into one where we both understand we need each other to survive."

Despite the reported difficulty in hiring and retaining workers, 58% of mill managers reported that staff had been cut in recent years to cut costs as compared with 49% in the 1999 survey. When asked what type of staff was cut, technical staff (24%) was the most commonly listed, followed by engineering, production, and maintenance, which were each mentioned by 15% of managers reporting reductions. Managers at mills producing board grades (35%), including recycle products, were most likely to report cuts. However, managers from mills producing fine papers (21%) and pulp (18%) also appeared frequently.

Internet develops as business tool; E-commerce shows early growth   For mill managers, the e-revolution is apparently in full swing, with Pulp & Paper's 2000 survey showing the web as a vital information and communications tool for managers. Also, Internet use for e-commerce at mills and paper companies has grown significantly since Pulp & Paper asked about it just last year. A business tool. In 1996, only 50% of mill managers reported having Internet access, which steadily rose to 92% in 1999. Now, however, 100% of mill managers indicate access, with 90% having connections both at home and at the mill.   The trend continues as mill managers are asked about Internet use for business activities. A full 90% said they use it to obtain paper industry news, as well as to communicate with managers (85%) and with customers (52%). The Internet was also an important source for product information (77%) and information about competitors (75%). Significantly, the percentages in all these categories have virtually doubled since 1998, indicating not only manager acceptance of the Internet as a business tool, but also the development of many web sites supporting the paper industry. An e-commerce upswing. Managers were again asked if their companies sold products through their Internet web sites, and the number reporting they did more than tripled since the 1999 survey, growing from 9% to 31%. When asked what percentage of sales were transacted this way, most (54%) indicated it was less than 5%, although 21% reported that the Internet played a part in 10% to 20% of sales. During a phone interview, one mill manager from the Southeast described e-business as "the wave of the future," although with some reservations.   "We must make supervisors aware of this change, because it will be dramatic," he describes. "There will be ten times more change in the next three years than their has been in the past five, and I am afraid that some will not be able to accept it. We will have to become information driven, connected with our customers through the Internet and tracking systems-a partnership. Mills who don't proceed quickly in this direction will be very sorry." Not only are mills selling more through the Internet, they are apparently buying more as well. When asked whether products for their mills were purchased over the Internet, 48% of managers said yes, an increase of 30 points. Respondents listed a range of products, but "general" office supplies were most common (40%). Chemicals, maintenance parts, used equipment, travel, fuel, and even raw materials were also mentioned. This trend toward e-purchasing will "accelerate," according to a northeastern mill manager contacted by phone. "E-purchasing is simple and reduces non-value added work," he notes. "It is more competitive, as we can get bids faster without using lots of internal resources."