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Purchasing Lessons
November 1, 2008 By: David Gabel Paperboard PackagingIt was a sobering choice: I could keep trying to do the job from the states, or move to China. I loved my job, which was to create a new supply management organization for John Deere, in North Dakota. But I was spending more than half my time in China. I knew the position should move there.
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That's what I recommended, but my family and I decided not to go. I continued my global procurement career in the outdoor power and heavy equipment industries, first for Stihl Inc., then for Dana Corp.'s Commercial Vehicle Systems group, in Kalamazoo.
In late 2007, I started talking with Bell Inc., and became intrigued by the state of things in paperboard packaging. Here was an industry where strategic sourcing — global sourcing in particular — was in its infancy. Maybe I could help navigate for paperboard the same kind of changes I'd been through in heavy equipment, where the largest commodity was steel. My family could come home to the Dakotas. And I'd have my dream job: virtual carte blanche to design the kind of purchasing strategies that help position a company for just about any changes this unpredictable world might bring.
So here I am at Bell, several months later. That's obviously not enough time to know this industry the way most readers of this publication do. But the transition is still fresh in my mind, so perhaps this is the right time to share some observations about how lessons from my former lives apply to paperboard packaging.
From "Three Quotes and a Cloud of Dust" to Global Sourcing
It makes sense that the steel industry had to re-engineer its purchasing long before paperboard packaging. On one hand, you're producing a $250,000 combine. On the other hand, a 10- or 20-cent container. When steel prices fluctuate, the total cost of goods sold is impacted dramatically, enough to move a whole industry. In my early days in the steel industry, however, we were still purchasing in the style I call "three quotes and a cloud of dust." For every job there was a bidding process — one winner, two losers, and it started allover with the next job.
At John Deere, we were under pressure from Wall Street to get more profit per unit, despite the rising cost of raw materials. The temptation was to be like the automobile industry, which had responded to similar pressures by forcing most of the cost reductions from the suppliers. Inside John Deere, we didn't see that as a long-term option and instead embraced a two-part approach. One, reduce the cost of product through strategic sourcing. Two, identify long-term sources with which we could partner to develop new products at an even lower total cost.
Strategic sourcing can mean a lot of things, but developing partnerships with overseas partners was, in my opinion, the biggest single component of success for U.S. steel buyers who were reengineering their purchasing. Sure, global markets involve volatility, language barriers, and a litany of challenges you probably know by heart.
But China and Brazil had plenty of iron ore resources. Suppliers there began building steel mills from the ground up, with brand new technology capable of faster, more efficient, more versatile production. Steel orders tend to be more custom than paper, more highly engineered. These overseas companies had the capacity, technology, and will to meet our requirements.
The companies I worked for didn't source overseas exclusively, but foreign competitors certainly gave domestic steel mills a run for their money. The companies that embraced what are now standard sourcing strategies in the steel industry, including developing a mix of overseas and domestic sources, prevailed.
Paperboard Packaging 2009
Paperboard may be one of the last industries driven to source strategically. Even now converters may not have cost pressures like we saw in steel. Most of us aren't subject to Wall Street scrutiny; the vast majority of converters are privately held. The cost of the box is a relatively small percentage of final product cost, and fluctuations in paperboard don't affect our customers' businesses the way fluctuations affect steel.
So why does our industry need to worry about applying strategic sourcing lessons learned from steel and other industries?
You don't need me to tell you that costs are rising and margins are shrinking. Or that things come to market differently today versus five or 10 years ago. It used to be, if your costs went up, you could raise your prices. Now we have ubiquitous, big-box customers, and they aren't allowing increases. We're seeing more shrink wrap, pouches, other trends that ultimately mean less demand.
Paper mills don't have it any easier. The marginal mills of five years ago are out of business today. Less capacity and less competition should help the remaining mills. But unfortunately for them, U.S. paper mills, like steel mills in the 70s and 80s, have older equipment than their competitors in emerging economies like Asia. Perhaps for that reason their strategy seems to be to produce mostly generic board, with minimal process variations, and minimal customization.
That's probably a good strategy, but a one-size-fits-all approach tends to preclude the kind of long-term partnerships and co-development that drive cost efficiencies throughout the supply chain. And converters whose customers require more customization need to go elsewhere. For Bell's courier envelope customers, we buy clay-coated, 100 percent recycled board that has to be stiffer, yet lower caliper. We're buying some from overseas mills because we couldn't find a U.S. mill with the interest and capacity to produce enough of it.
One Size Doesn't Fit All
When I see how surprised prospects and customers are to hear about our sourcing initiatives at Bell, or when I talk with other converters, I can't help but think that some solid options are yet to be explored by much of the paperboard packaging industry.
If I were working for one of the integrated companies, who don't have the independents' sourcing flexibility, I would do what they're probably already doing: driving their mills to manage every penny, producing and selling into their sweet spots.
But for independent converters, options are wide open.
My goal at Bell is to continue to think like the publicly-held companies I once worked for. Even without pressure from Wall Street, industry pressures are driving us to seek alternative sources, predict where the market will be five years from now, and build long-term relationships at both ends of the supply chain to mitigate at least some cost increases. I'd rather be ahead of the curve.
Smaller independents have a lot of purchasing clout, too, especially if they pool their resources.
Consortium Purchasing
Buying consortia were essential in the industries I came from. The difference was, one company was usually big enough to be its own consortium, by coordinating buying across divisions. Divisions still had choices, though, and I watched this play out early in my career, at Rockwell International. Rockwell Goss, the division that manufactured printing presses, chose not to participate in the company's global buying consortium. Their costs got out of hand; they were divested, and eventually went bankrupt. I became a believer.
I won't downplay the challenges of organizing a consortium. Even within the same company, it takes a lot of trust and involves some risk. It only gets tougher for competitors. But it's a powerful way, and for some companies perhaps the only way to achieve buying clout.
My understanding, though, is that there are only a couple of buying consortia in paperboard packaging, and the vast majority of converters are not part of one. Bell is big enough to source independently, and has some unique requirements where we have to do so. But we also are part of the Independent Carton Group for a much of our domestic purchasing. Whether I worked for a large or a small independent converter, I would be in — or form — a consortium committed to sourcing aggressively, including globally.
Another option is a cross-industry consortium for indirect purchasing of everything from copy paper to office furniture. We were our own consortia for MRO in my prior jobs, but there are plenty of precedents for cross-industry buying of indirect goods; it's another way to manage costs and source strategically.
At Bell, we're launching vendor-managed inventory programs for safety, prepress, janitorial, and other MRO supplies. In my previous jobs, vendors clamored to participate, but here I find we have to sell the concept to our vendors. Once they're in, they love it. There's more control, fewer surprises, and long-term business arrangements they can offer in turn to their own suppliers. Vendor-managed purchasing frees our own team to focus on more strategic initiatives. Independents of any size could do the same on a cross-industry basis or within their own consortia.
The steel business model, where the end-user customers purchase the raw materials, might apply for some paperboard converters. At Bell, one of our largest customers purchases board for us. They use multiple converters and want uniformity. It works, but there is always some risk when your supplier sees your customer as theirs. Some of the smaller converters in particular might consider exploring this option with some of their customers, if it helps everyone keep costs at bay.
It's a tough environment and getting tougher. It appears to me there's room for more creativity in paperboard sourcing and supply management, and if there's any lesson I learned in former lives, it's to assume that creative, predictive, proactive sourcing is essential to long-term survival.
