The issue of costs

According to Pulp & Paper's annual mill management survey, maintaining competitive costs in a global market remains in the forefront

December 2007
By Felicia Willis, Associate Editor

There's a great deal of truth in the popular saying, "the more things change...the more they stay the same." As much as the paper industry changes in terms of technology, personnel and outsourcing, it also remains the same when it comes to what appears to be in the forefront of manager's minds...costs.

Mill management throughout North America responded to Pulp & Paper's 2007 survey, in which various grades of paper and boards were represented, as well as various pulp grades. Managers were asked the tough questions about budgets, strategy, labor relations, daily tasks and industry trends.

Funding, labor and quick fixes

Today's mill managers are bombarded by the constant challenge to keep their facilities operating smoothly, all while dealing with pressures from the "higher-ups" to remain profitable. Pulp & Paper surveyed mill managers about the types of seemingly unrelenting problems they face and how much independence they have in regards to strategic planning for their respective mills, and what skill set they value most in their jobs.

Competition for capital funding. The concern that showed most important to the managers surveyed was money. Mimicking last year's survey, as high energy costs persist, rising costs and cost control (35%) were at the top of the list of tribulations that mill managers found most disheartening. Coming in second (19%) the respondents cited certain labor concerns such as micromanagement, training, attendance, commitment and moral as another problem they face in the mills.

Beyond the matter of continuously rising prices and labor concerns, managers also mentioned community political issues, equipment failures, machine runnability issues, keeping the processes and people at peak performance on a continuous basis and equipment reliability. Other less frequently listed problems were maintenance quick fixes, supply of furnish and unforeseen changes at the mill which may slow down production.

Controlling costs. Most mill managers continue to report that they have adequate or somewhat adequate input into strategic planning at their respective mills. Sixty-three percent of the surveyed group indicates a strong involvement in the process:

• "I am very involved in the day to day operations, financial decisions, budgeting, capital spending, etc."
• "I am directly involved with capital planning and improvement."
• "[Strategic planning] is controlled by the mill management."
• "I have the information I need to make decisions."
• "It is a team effort to weigh the opportunities and select the priorities by which to proceed."
• "I have input in sales, corporate and mill grades and operations."

Fig. 1 - Manager opinions about mills receiving enough capital show confidence.

In addition, 18% of respondents specified that they did not have enough input into planning. Coincidentally, another 18% indicated that they felt their input was adequate in some, but not all areas.

Here are representative quotes from managers on both sides of the fence with regard to strategic input:

• "There is a general lack of strategic planning at the mill level."
• "Directives come down from corporate."
• "The company has a philosophy of decentralized management to a great extent."
• "There is too much micro-management from the corporate office, and not enough input from the mill sources for planning long term."
• "Based on our location, equipment and role within the company, decisions have to be made at the corporate level to prevent suboptimization."

What skills are important? What skills do mill managers' use most to complete their jobs efficiently? Pulp & Paper asked managers to identify the skills that a young person or student aspiring to the top mill rank should develop. Imitating last years results, managers still consider engineering and technology the most critical (46%). Following closely was business and financial at 35%, which earned the leading position until 2 years ago. Management and human resources came in at 15%, while sales and marketing skills continued to take last place with 4%.

Staying competitive in North America

Ultimately, keeping mills competitive is the main objective for mill managers. Budgets, consolidation, technology and cost control are major factors in the equation for success, so Pulp & Paper surveyed managers about how their mills react to these variables. In light of these challenges, mill managers were also asked about the direction their mills are headed, as well as the North American industry overall.

Money trend. This year's survey is more equally disbursed between the major concerns of the industry. In the 2006 survey, most respondents chose mainly paper machine, process automation and pulping as areas of interest. 2007, however, is more equally yoked. There is still a concern about the availability of funds for process automation (27%), but that is down from 75% in 2006. Similarly, 23% of mill managers consider the paper machine as an area of concern, while in 2006, 63% of respondents found that to be most important. Pulping (19%) is down from last year's survey result of 50% as an area of concern. Finishing/roll handling, a new area added to this year's survey was cited by 11% of mill managers. Recovery and new product research and development were both mentioned by 8% of managers. Lastly, and keeping in line with previous years results, information technology and quality control both showed 4%.

Here is what some of the managers shared concerning the struggles their mills have to keep competitive:

• "Fuel source other than fossil, electrical self-generation, recovery boiler efficiency upgrades."
• "Improved quality control devices to manu-facture competitive products. More research into new and different products, with market research included. Improve the finishing and shipping to better handle more trucks and less rail shipping."
• "Paper machine upgrades are not done to maintain competitiveness."
• "Minimum dollars are available to maintain what we have but improvement monies are difficult to get approved."
• "New product development."
• "We need to continue to invest in new equipment and technology."
• "More sales."
• "We have a very large mill with many independent parts. Consolidation and streamlining would help enhance profitability."
• "The paper machines continue to increase speed and productivity, while no money is being spent on how to fiber these increases. The fiber has to come from somewhere."
• "Our mill is old and does not produce enough tons to compete with newer, larger mills."

Fig. 2 - Over half the managers are positive about their jobs.

Sharing the budget. Pulp and paper mill managers were asked to reveal, as rough percentages, how their mill budgets were structured with respect to maintenance, capital projects and operations. Although the statistical breakdown looks fairly typical, wide differences were described due to the various types of mills reporting, as well as differences in how budgets are allocated, especially in terms of financing smaller capital projects with maintenance dollars. Almost all respondents indicated spending more on maintenance than on projects.

For maintenance, respondents reported amounts between 8 and 45% of a mill's total budget, while the range for capital projects was between 1 and 45%. The operational allocation ranged from 4 to 84% and it was assumed that fiber and energy costs were included in that figure.

Fig. 3 - Managers were asked how their mill budgets are structured.

Show us the money. "As a mill manager, if you suddenly had access to a large amount of capital, what new technology would you implement at your mill?" Surprisingly, the wish list responses for this question were all over the map:

• "Dryer felting and moisturization shower."
• "Solid fuel boiler and turbine generator."
• "Improved headbox control, smaller, slice positions on all other controls and a modern monitoring system to control these devices."
• "Laser guided vehicles."
• "Energy systems and process control."
• "Water and waste recovery."
• "Paper machine and boiler."

Consolidation conundrum. Have mill managers changed their feelings about paper industry consolidation over time? Pulp & Paper survey data from the past seven years show that the general trends in opinion have remained fairly stable.

For example, the majority of respondents have always believed increased mill profitability would result from paper company mergers. Very few managers have gone so far as to say consolidation would actually decrease mill profitability, which also shows very little shift in opinion from previous surveys.

Opinions about consolidation's impact on customer service have fluctuated more dramatically over the years, but the general inclination among managers in this year's survey determines that it will not have a positive impact. In 1998, 34% of respondents saw consolidation as favorable to customer service, while only 6% thought so this year. Although opinions about whether service would become worse also fluctuated. It appears that now only 13% of respondents see it as a negative compared with 48% in 1998.

The general consensus regarding new product development in an era of mergers is that it will occur less often. Twenty-three percent of those surveyed said that new product development would be limited by consolidation, while 8% said it would be increased.

The answer is outsourcing. As mill managers search for ways to offset rising costs, are they turning more frequently to outsourcing? Fifty-nine percent of 2007 respondents say they have, which is up about 10% from past surveys. Once again, maintenance (48%) was also one of the top areas targeted for outsourcing, followed this year by transportation (31%), woodyard operations (7%) and energy (10%). Also, water treatment outsourcing dropped from a high of 28% in 2003 to just 3% in 2007.

In addition, many managers (44%) in the affirmative category wrote in areas they were outsourcing; warehousing and distribution were the most common add-ons. Security and export sales and information technology and process control were also cited.

By a rising margin, however, mill managers (41%) say they do not utilize outsourcing – a response that is way up from previous results. To gauge which areas were deemed most sensitive, Pulp & Paper specifically asked managers what areas should not be targeted for outsourcing:

• "Too much outsourcing in the maintenance area is of concern to me due to the specific knowledge needed in each plant for many maintenance jobs."
• "Maintenance should not be outsourced. Dedicated maintenance teams are better able to repair and improve their area of expertise."
• "Areas such as maintenance where direct involvement with the processes and people is required. Outsourcing does not cultivate a sense of real ownership or performance."

What's next? As with predictions from last year's survey for 2006, pulp and paper mill managers list rising costs and cost control (73%) as the greatest challenge facing them for 2008. When asked how products from their mill will perform in the marketplace in 2008, managers seem hopeful, with 76% expecting excellent or good performance.

Longer term, mill managers appear optimistic that the North American paper industry can remain competitive for the next 10 years. Fifty-eight percent of this year's respondents think it is possible to stay in the game for the long haul, but 42% still think it is unlikely. Many of the more optimistic group limited long-term competitiveness to certain grades, especially tissue and specialty products.

Fig. 4 - Maximum tonnage as a mill goal is up from previous surveys.

The daily grind

To better understand the daily issues that mill managers face, Pulp & Paper surveyed them about operational philosophy and labor relations, as well as demanding mill events.

Challenges faced. Mill managers overwhelmingly deemed costs as the biggest challenge faced in 2007. According to respondents (74%), targeting production in response to demand is the goal at their mills. This year, 26% of survey participants reported maximum tonnage was the goal at their mills, which is up 18 points from 2006.

Are labor relations better? In each survey, Pulp & Paper asks managers if labor relations with union personnel are better, worse or the same at their mills than they were five years ago. Significantly, no more than 17% in the past five years have reported that relations were worse, but 2007 appears to be the exception at 23%.

This year, most managers (41%) felt that relations were better and 27% felt they were the same.

RISI would like to thank all of the mill managers who took the time to fill in the survey and provide valuable feedback for this report. Everybody who answered the questions was entered into a draw and eligible to win this year's Mill Management Survey prizes. We'd like to congratulate the following people:
Set of Golf Clubs: Harold Norlund, Mill Manager, Nippon Paper Industries, USA (pictured)
$200 American Express Voucher: Mark Bendikson, Mill Manager, Carter Holt Harvey, New Zealand Digital Camera: Juan Antonio Navalpotro, Mill Manager, Munksjo Paper, Spain Free RISI Conference Pass: Edison Duran, Mill Manager, Arauco, Chile
Lockwood-Post Directory and RISI Mill Map: Lin Hsiang-Chu, Mill Manager, Cheng Loong Corp, Taiwan (pictured)
International results appear in the December issue of our sister magazine, Pulp and Paper International (PPI) Sponsors: We would also like to thank our sponsors, Metso Paper and Anthony-Ross/SAS for supporting this annual survey.

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