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Focus On: Paper Manufacturing |
Top business challenge: Mitigate bottom-line hit from high energy costs and flat or declining industry growth
Solution: Control costs; create value-added services for customers, such as intelligent consumer goods displays and overnight delivery
How IT can help: Technologies like RFID enable innovation for new services; IT can be backbone for cost efficiencies
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For many industries, rising energy costs have taken a bite out of profit margins. And for paper manufacturing, where the average margin is 3.8%, the toll has been particularly great. Modern papermaking is an energy-intensive affair. Wood chips become pulp and then liquid during various water- and chemical-based processes. The pulp then travels through various screens and rollers as it is matted, pressed and dried on its journey to becoming paper.
Rock-Tenn Co. is a $1.7-billion manufacturer of packaging products, recycled paperboard and merchandise displays. Its costs for natural gas are estimated to be $30 million more in fiscal year 2006 than in fiscal year 2005. Rock-Tenn's first-quarter operating income was down almost $11 million compared with the same period a year earlier, despite a 27% increase in sales.
So the company is trying to offset rising costs by expanding its business. In 2005 the Norcross, Ga.-based company purchased paperboard and folding carton mills from Gulf States Paper Corp. And like other midmarket paper manufacturers, it wants to transcend its status as a commodity provider by creating value-added services. New offerings include "smart" products such as in-store display racks embedded with radio frequency identification (RFID) technology. Earlier this year, Rock-Tenn invested in Goliath Solutions, a Deerfield, Ill.-based provider of RFID technology.
The Double Whammy
Rock-Tenn is not alone in confronting these challenges. Whether large cap or midmarket, most paper firms face significant cost pressures, says Patrick Schillinger, president of the Wisconsin Paper Council, an industry trade group in Neenah, Wis. Indeed, margins and earnings growth are expected to decline at 69% of 47 publicly held paper manufacturers in fiscal 2006, according to investment analyst firm PriceTarget Research.
Thus cost containment is a priority as these firms wrestle with a double whammy: rising energy prices and flat demand for their products, which include tissue, writing paper, newsprint and paperboard for packaging, Schillinger says. In a 2005 survey of paper mill managers by Pulp & Paper magazine, 49% of respondents said that they worried more about controlling costs than anything else in the coming year.
Midmarket firms are particularly challenged by industry conditions because they tend not to be as diversified (in terms of location and product mix) as large companies. And with more consumer products manufactured in China, Schillinger says, product packaging has followed as manufacturers seek to package goods where they are produced.
For the long haul, paper manufacturers have to focus on perfecting operational efficiencies as a means of keeping costs under control. Process control automation -- software that monitors every aspect of a mill's operations -- is one way IT can help streamline operations and reduce costs, says Monica Shaw, editor of Pulp & Paper. Enterprise resource planning (ERP) and supply chain software are others.
Appleton is an employee-owned paper manufacturer in Appleton, Wis., with approximately $1 billion in revenues. In 2002 it installed an ERP system from JD Edwards (now Oracle), with supply chain efficiency the "main driver," according to Mike Steers, executive director of information services. The system, Steers adds, is more flexible than the customized ERP the company had used for a dozen years. With the system's graphical user interface, employees have a level of insight into various costs that wasn't possible with the previous system. For example, "We now know our transportation costs on almost a day-to-day basis," Steers says.
In another nod to operational efficiency, Steers is now consolidating servers throughout Appleton's divisions by standardizing on VMware, virtualization software that allows Appleton to divvy up processing within individual servers. By tying in the divisions to a central e-mail and file server -- and by using standardized tools for data backup and recovery -- Steers aims to improve operations while avoiding costs associated with buying individual servers.
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