Single source or no source

Recently I cleaned out my huge files-many with 15 years of information-on paper and supplier companies around the world. It was nostalgic to see all the names no longer around. It's not getting easier. Every time we turn around a name that has been on the books for years, at times decades, disappears.

The list is huge. Champion, Rainy River, Feldmuhle, Nord, Betz, Beloit, Union Camp, and ECC, to name a few. This exercise got me thinking again about the true impact of consolidation. In turn, this brought to mind one result-the increased use of single source purchasing. Have these developments accomplished something meaningful?

First, consider the huge global consolidation effort, driven by the profit crisis at pulp and paper companies. The rationale is that larger companies can control market swings better by improving the supply and demand balance. The industry has gone far down the road in terms of consolidating, although in grades such as market pulp, capacity remains fragmented. However, consolidation has already transformed the structure of the industry.

IT MAY BE WORKING. I have to admit that I've been a skeptic about all of this for some time. I've taken a contrarian view that what we'll have is bigger companies that concentrate on making fewer types of widgets (or pulp or chemicals) as cheap as possible and not necessarily ones that will that will be more customer focused or innovative. To me it has always been difficult to meld the concept of bigger with better, hands on service.

However, it appears that to some extent consolidation is working. The most notable examples are in two areas-newsprint and containerboard-where capacity concentration levels are among the highest. Here, the current degree of pricing resilience appears to run counter to supply and demand. Historically, given current demand fundamentals, pricing would be much weaker than it is. This suggests that the bigger companies are, in fact, able to better manage the market by taking downtime, for example.

Similar forces have driven supplier consolidation, including the need to acquire the heft and reach to serve larger customers. An added facet is that consolidation has driven the customers (paper companies) to increased use of central purchasing strategies. "I'll give you all the business if you can give me a cost break." Paper company corporate staffs have pushed this approach to lower costs.

Has it worked? It would appear costs per unit per ton are down for some products. However, the evidence to support this isn't conclusive, at least according to some people. At the recent TAPPI Papermakers Conference, a lively session ensued about the pros and cons of single sourcing. Several examples were raised where the rush to single source arrangements has been problematic.

It's not that it hasn't worked at all. It has. However, some products that worked were simply replaced by ones in the new single source toolbox that didn't work as well or at all. So we may be seeing a slight shift in this area, although I have no real measure that it is substantial. It seems to have also resulted in a more confrontational relationship between buyers and sellers. I'm not sure that's good.

WHO'S LEFT STANDING. Another aspect of all of this is the pressure of these arrangements on suppliers. They want more business, but large cuts in mill staff means mills also lean more on their suppliers. They want better service and at lower prices. This is driving down supplier margins, in some areas significantly. Mill people will scream about how much higher margins are in areas such as specialty chemicals than they are at paper mills. That may be true.

However, it seems clear that if these demands push margins down enough that some unintended consequences will be felt. One effect clearly felt already is that some companies that sell to mills are reaching the point that they have to ask themselves a fundamental question: "Do we want to sell to the paper industry?" Those with more active boards of directors are finding it harder to say yes. One could put forth the hypothesis that if enough people drop out of a market that higher, not lower, prices to the mill will be the result. Seems like there are some examples in other industries where bigger hasn't meant cheaper products or higher service levels.

I'll be interested to see who's left standing in five years. If the answer is no one, then I worry about how we're going to develop the products needed to survive.