Price vs. quality and value

by WILLIAM J. HASKINS

WILLIAM J. HASKINS is marketing development manager with Specialty Minerals, Bethlehem, Pa.

The high-tech boom fueled the long 1990s economic expansion, but we're now in a market downturn—one marked recently as a recession. However, during the 1990s expansion, many industries, including paper, focused on increasing profitability by implementing supply chain management systems and on increasing short-run profitability by consolidating and commoditizing purchases. Very heavy emphasis was placed on price, while quality and value were difficult to sell. Importance was also placed on shortening supply and delivery cycles by optimizing just-in-time (JIT) delivery cycles, since reducing inventory turn cycles can improve cash flow.

Are we currently going through a market cycle similar to that experienced in the 1960s, 1970s, and 1980s? Some lessons from that period could prove very enlightening. Back then, companies also focused on cost cutting to improve profitability during the boom. At that time, the prevailing thought in the paper industry was if you can get it on a roll, then you can ship it.

However, by the 1980s, domestic producers had to compete with superior quality products from other countries, such as Japan. This was particularly evident in the automobile and electronics industries. To restore profitability and to differentiate themselves from competitors, many companies looked to quality and value. They implemented internal quality control systems such as statistical quality control (SQC) and statistical process control (SPC). They also looked to their suppliers to provide consistent high-quality products by following these statistical monitoring tools, coupled with JIT delivery to minimize waste and inventory-carrying costs.

RISKS OF COST FOCUS. More recently, in the late 1990s and into 2000, Ford Motor has been a leader in supply chain initiatives. The company pressured its suppliers to provide products at lower and lower costs and, in some cases, mandated cost reduction targets. But did these pressures on costs push their suppliers into providing products that had marginal quality? The Ford/Firestone example might be sending a warning signal to other industries to renew emphasis on the quality and value of their raw materials.

In the paper industry, this might mean more emphasis should be placed on value in $/ton of paper rather than on the lowest $/ton for raw material. There are performance differences among similar products, and, by commoditizing purchases, mills may be missing out on value creation opportunities. In some cases, this may even lead to purchasing products that are marginally fit for use.

Of course, there aren't many paper industry applications where product failure can cause loss of life. However, failures or unacceptable quality can create financial difficulties in the form of delays, rejects, and consequential damages. ISO 9000-series monitoring systems emphasize consistency in the manufacturing process, but do they place enough emphasis on fitness for use? Can a product be consistent and not perform in its intended end use?

Certainly, managing raw material and finished goods inventories can save millions of dollars each year. Wal-Mart and Dell are examples of JIT masters. According to John Case in a recent Harvard Management Update article, Dell has less than 5 days of inventory compared with 25 days at Compaq. This tight control of inventory management has allowed Dell to remain profitable, even during this market downturn. Wal-Mart also has a very strong JIT network that assures products are in stock, and, in some cases, product is shipped directly from the manufacturer to the store, bypassing warehousing.

VALUE OF RE-EMPHASIZING QUALITY. In 2002, will the paper industry begin to see renewed emphasis on quality and value as a means of differentiation, while placing continued focus on the supply chain aspects of JIT? Should companies reassess their quality programs to ensure customers are receiving products that are fit for use?

Some innovative JIT systems have been implemented in the paper industry. For instance, linerboard mini-mills are located in cities close to raw materials and to corrugated plants—their customers. In fine paper, precipitated calcium carbonate satellite plants are located on a mill site, allowing for reduced inventories.

More specifically, Georgia-Pacific (G-P) is working with Wal-Mart to refine its supply chain. G-P has designed truck trailers capable of handling multiple products. For example, tissue, toweling, toilet tissue, and cut-size copy paper can be mixed on a truckload and delivered directly to the store. This bypasses distribution warehousing and reduces handling, time, damage, etc. This type of innovation will continue to help reduce inventory-carrying costs.

Will those mills that effectively combine the positive inventory management aspects of the supply chain with an emphasis on quality and value win the race to gain higher value and market share? These improvements will fill paper mill order backlogs and improve profitability.