By Richard C. Dow and Charles F. Miller
All too often there appears to be no rational basis for selecting targets for cost reduction activities in the pulp & paper industry. This can result in the effort lacking both credibility and the wholehearted support of the workforce. Many employees feel: “Here we go again…another cost cutting campaign”
In many cases the desired results appear to be achieved, but when reviewed later the gains are not sustained. Although helpful, shortterm gains do not make a sufficient contribution to ensure the longterm success of the company.
There is a better way to manage cost reduction efforts and achieve lasting results. The authors have designed a simple yet comprehensive spreadsheet program to model grades, paper machines, finishing operations and/or an entire mill’s potential profitability. The detailed templates, specific to each paper manufacturing and converting operation, are universally adaptable for different mills and operations.
In many mills, some cost components are not sufficiently detailed. The spreadsheet model provides an x-ray view of mill operations and the basis to answer such questions as: What should our costs be? What level of profit should we be earning? How much improvement is possible? What can be done with material costs, yields, waste, grade mix, pricing and other variables to improve the results? How much improvement should we expect? Why isn’t the operating plan being met? What is the optimum operating schedule for our machines? With overtime and similar components, what are our hourly costs? Which costs are variable based on machine hours run? Which costs vary with tons produced? Which grades are causing most lost time? It’s not difficult to determine the answers, provided it is known what each and every paper manufacturing cost component should be. 
Mills that develop their own or use the authors’ model can achieve exceptional returns and, equally important, reveal to all management levels what’s really happening at every manufacturing operation and support function. Interestingly, during the study process there are often surprising revelations, as formerly obscure issues are uncovered.
The first step in building the model is the selection of a team leader from the mill staff or a consultant who is thoroughly conversant with the intricacies of paper manufacturing and converting operations. Each department must be represented on the team to ensure acceptance of the model’s credibility by the entire organization. Team members will be oriented on the study methods, survey approaches and instructed in the design of worksheets specific to their assigned function.
The entire concept is simple and straightforward. The ideal model is developed on a zero loss basis, ie assuming that all materials, energy, machine hours and labour result in good production. When these ideal costs are compared with actual results, the adverse variances will be readily identified.
The authors’ model enables revision of any of its several hundred inputs from materials to energy and labor, speeds, weights, volumes, moisture, efficiencies and overhead among others. Data entries update each component specific to the grade or machine and are appropriately allocated in the overall mill costs. The effects of variable costs are critical because most cost improvement opportunities are in the efficient utilization of materials and equipment run time. In addition, there are many cases where grade mix and pricing offer significant opportunities. After a full review of the model’s cost results, realistic standards for manufacturing costs can be easily established.
Furnish costs are always open to question as tally sheets and computer data entries in the stock preparation areas usually reflect the mill’s standard furnish instructions. But what is the assurance that standard formulations and operating procedures were adhered to? Are the correct number and type of bales and wet laps loaded in pulpers? What about chemicals, dyes and fillers? Are the proper types added in the correct quantities and in the right sequence? Are time, temperature and consistencies in accordance with standards? What happens when furnish formulations are adjusted to rectify manufacturing problems, or when the specified materials are not readily available? Are sewer losses always logged? Compensating for these situations wouldn't be so perplexing if these occurrences were properly recorded. However, this is not always done, since mistakes and omissions are not always acknowledged. Routine comparison of actual furnish consumptions with modeled projections can uncover sources of waste, procedural errors and higher than anticipated costs.
Mills have procedures to record good production, trim, side rolls and broke, but is it certain that all crews strictly adhere to them all the time? Are all reels weighed before or after slab-offs? How are narrow side rolls accounted for? Is rejected paper removed at the rewinder recorded as paper machine or rewinder broke? How is trim accounted for when conveyed directly to the pulper? How is paper left on spools after winding off paper machine reels accounted for? Is damp paper encountered during rewinding recorded as rewinder or paper machine broke? What is the procedure for production accounting at shift changes and the designated daily cut-off time? When considering the dozens of people involved in the mill reporting process, with some applying less than the desired level of diligence, it’s not surprising that it can be difficult to determine why results can end up so far off plan.
Studies to determine what’s really happening requires surveys on each shift because there are usually four persons assigned to the same job. Chances are they all don’t do it the same way because employees have varying degrees of care, interest and skill. Make no assumptions! Every item and issue having an impact on production time and cost must be checked.
Although calculating material costs is usually straightforward, there are a few potential pitfalls. It is easy to calculate the weighted average cost per ton of material furnished to the system. However, the more difficult questions include: What is each grade’s yield? Are there materials consumed that do not show up as production? How should each category of broke be recorded for proper accountability?
With the model in place, the profitability of a grade, a grade family, a machine or the entire mill can be easily determined. Further, it provides the basis for development of budgets and profitability projections for any given operating period. The model also facilitates a very effective focus on the profit improvement process by running any number of ‘what if’ scenarios such as; What if a certain amount of waste was eliminated? What if downtime could be reduced a given amount? What if furnish substitutions were made? What if finished product moisture percentages were more closely monitored to assure the maximum allowable for the grade? Using the model, the answers to these and numerous other questions can be determined in mere moments.
As a matter of course, reported information is assumed to be correct simply because there appears to be no reason why it shouldn’t be. After all, the data has been coming from the same sources for years and its accuracy has never been questioned before.
It could very well be that it’s never been checked before either. Most mills have long established systems in place that include scales, meters, charts and log sheets that are recorded and maintained on a regular basis. And further, it is assumed the employees know their jobs because most of them have been doing them for years. But what happens when all the reported information is put together? Will the data compiled from all these sources balance and reflect the results projected by the model? Chances are it won’t and this is the indicator that not all input data is correct. The problem then becomes one of determining which of the data is incorrect. There are far too many factors involved to assume that a review of reports, records and log sheets will reveal the cause of the variance and all excuses for estimating and guessing must be eliminated. Unless there is a daily balance of material, production, energy and man-hours, managers will never know what really happened when a variance occurs.
The cost model can also be of significant help to the product development and marketing. Often, when the origin of variances from expected financial performance are not really understood by the managers, the conclusion is; ‘It must have been the grade mix’. However, when each grade’s variable contribution is known, the impact of mix variances on the financial results of operations is easily determined.
Unfortunately, many times when a new grade is developed, it is discovered that it isn’t as profitable as expected. This results in the organization having invested in a technical success but a commercial failure. This can happen by not being aware of all variable costs during design changes. Sometimes there’s not a thorough and realistic understanding of the new grade’s potential profitability from the beginning. Therefore, it’s important to assure that a continuing evaluation of the product’s prospects for profitability becomes an integral part of the development process.
Cost models for new grades should be developed with input from marketing and sales for pricing and volume projections; technical and/or product development for design and materials; and manufacturing for runnability and production issues impacting yield. Manufacturing concerns must also include any unusual requirements for stock preparation, machine set-up, and clean-up considerations. As changes are encountered, the model must be revised to assure that no significant deviation has occurred, or to confirm that, given the deviation, the project should be continued. Calculating new grade costs using this method can be a quick and simple task with a properly designed model. Frequently reviewing each grade’s spreadsheets and profitability projection is a most important part of the mill’s continuing product development activities.
A word of caution relative to pricing: A contribution analysis should never be used to establish a selling price. Unfortunately, it is much too easy to use a profitability model to calculate a price.
Calculating a total cost and adding the target or average profit to determine a price can be a serious mistake. The product price should be determined by its market value. The market price is an input to the model and the selling price is never an output. There will always be a range of profitability from the highest value-adding grades to those where competitive or other factors dictate closer margins. Using the model and the grade’s market price, management can evaluate strategic and tactical factors, the acceptable levels of profitability and then decide whether or not to participate.
Another pricing issue arises when there is a significant change in a major cost component. If the pulp market goes up $30/ton, what price is needed to recapture the increase on the using grades? Using a well-constructed grade profitability spreadsheet, material costs can be revised with all related grade profitability data being updated simultaneously. New selling prices can then be evaluated based on market dynamics, competitive pricing actions and any additional criteria.
It is important to remember that it is not only the different grades that impact the mix and profitability of a machine or mill. Often the same grade is sold to different customers or markets at varying prices based on applications, volumes or other considerations. This will result in a similar mix and profitability impact that a variety of grades can have on the company’s economic success. In cases, where there are several machines capable of running similar grades, the authors’ model facilitates scheduling the most profitable grade mix on the available machine time and/or the most cost effective machines for the specific grades.
The relative grade contribution spreadsheet is an invaluable tool for managing and evaluating ongoing profit improvement efforts. The model should be installed or developed with the participation and input from each mill department and administrative function. Effectively implemented and used, it can facilitate timely and informed decision-making at all organizational levels.
It is not uncommon to have inconsistencies in a mill’s reported costs and questions and concerns relating as to why margins aren’t meeting expectations. Many of these issues can be more clearly understood by using a cost model to compare ‘should be’ costs to actual results on a grade-by-grade basis. Once this information is attained, mill management can do what is necessary to eliminate the causes of waste and inefficiency. Improvement in margins and profitability will always result.
TW
