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State of the Industry: Age of Reinvention
August 1, 2006 By: Tom Andel Paperboard Packaging"What's going on at the mill level portends real problems with cost and supply. How can you shut down as many mills as are getting shut down and still be competitive? Our Achilles heel could be the fact that the prices have been kept down so low for so long that when things pick up there may not be enough capacity to satisfy customers on a JIT basis as everyone's gotten used to. Our business is going to be about sources of supply in the near future."
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This is how one independent folding carton converter replied when asked about the state of his industry. And, indeed, since Paperboard Packaging published its 2005 State of the Industry Report, many closures, mergers and consolidations have been announced, both on the corrugated and folding carton sides. Whether these changes bode well for the industry depends on whom you ask. Judging by the response of the above-mentioned converter, you might think the industry is in trouble. But where some see trouble, others see opportunity.
"The biggest development since last year would have to be the strategic repositioning of such companies as Caraustar, MeadWestvaco, and Smurfit-Stone Container," says Jerry Van de Water, president of the Paperboard Packaging Council (PPC). "Right now there's a lot of buzz about new capabilities and asset moves, so we will all anxiously watch further developments of these progressive companies who have a strong track record for innovation.
 Folding Carton Trends |
"The challenge will be the tendency of printer-converters as manufacturers to think first of ways to reduce costs and only secondarily of ways of selling on value," he adds. "Looking inward is always easiest because most everything is within our control. It's much harder to serve varied markets and still achieve success in knowing a customer's business or market segment so well as to find opportunity, demonstrate value, and get agreement on higher prices. PPC attempts to address both best practices for cost reductions and selling value."
Rampant Change
Van de Water mentioned Caraustar, and indeed, if any converter is focusing on the value in its restructuring, it's Caraustar. Tony Petrelli, vice president of sales and marketing for Caraustar's newly formed converted products group, says consolidation has been rampant "to a positive degree" in the industry.
"Consolidation has been a driver and a necessity because of the health of the industry," he says. "[On the customer side] we're seeing rapid product introductions and shorter product life cycles. We saw a lot of softening in our market and that was the result of many different things, open capacity, offshore imports, the development of new and interesting flexible packaging and rigid plastic packaging. Consolidation became a very aggressive and good move for the industry. The folding carton industry was being seen as fragmented and old and stodgy."
 S. Young, AICC |
Caraustar wants to be seen as an innovative converting organization. It is in the process of selling its coated mills.
"We don't want to be confined to what our capabilities as a converter are by the fact we need to support and sustain an integrated strategy for coated recycled paperboard," Petrelli says. "We believe in recycled paperboard, but we want flexibility. That's why we're combining the operational capabilities of all of our converting into one business unit, so it's no longer just the folding carton business, but we're centralizing all of our manufacturing so from a sales perspective we can go to customers with a wider variety of consumer and industrial packaging solutions."
That seems to be where the leaders are leading. They're recognizing that by doing what they've always done, they'll accomplish what everyone must eventually do — die. Not tomorrow, but in the short term.
 T. Petrelli, Caraustar |
"Our challenge is that we're still competing in a non-growth marketplace — North America," says Jim Keller, senior vice president, Weyerhaeuser Containerboard Packaging and Recycling. "Weyerhaeuser employees are concerned about the long-term viability of our business. They know that we haven't provided an adequate return to shareholders. They're under pressure to perform better on the job and they've seen us sell and close facilities. There's consternation more now than ever, so we're working with employees to help them understand what's required to meet the expectations of our investors and owners."
And to meet their customers' expectations too.
Supply Chain Managers
The biggest opportunity for converters in 2006 and beyond is to become integrated in their customers' supply chains and to push the envelope into delivery and merchandising.
 Corrugated Container Trends |
"We need to understand how the package can contribute to overall supply chain efficiencies," Keller says. For example, he cites the corrugated common footprint. This standardized produce packaging so that any commodity could be interstacked together, eliminating sloppy, damaging pallet loads and creating efficiencies for retailers.
"Making a box that may not optimize the box maker's system or be the perfect box for the grower/shipper, but delivers great value for the retailer is the preferred solution," Keller says. "The end game is that low cost through the entire supply chain wins."
And that's why converters need to become supply chain managers, with superior knowledge of supply chain costs, alternative materials and new technologies. You can push paperboard, but you'd better know how it really compares with other options.
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"The reality of claiming that one material is better than another needs to be based on good science," Keller says. "In the end, many applications will be better served by paperboard, but in some instances, plastics may have a smaller environmental footprint. You can't conclude that one is always better, but where we demonstrate superiority, our industry must tell our story."
That story must be directed at the customer's customer as well, now that Wal-Mart's supply chain initiatives are flowing upstream to converters. Take RFID for example.
"This is our biggest opportunity over the next 10 years," Keller says. "The technology exists to make RFID a significant component in the global supply chain. When tag costs decline, RFID will replace barcodes as a unit ID, whether it's a pallet, case or shelf unit. The only threat is if our industry doesn't embrace it."
Heather Marshall, president of the International Corrugated Case Association (ICCA), says RFID represents an opportunity for the entire supply chain to function more productively, but the cost issues still need to be ironed out.
 Folding Carton Industry Facts |
"RFID is probably not the most cost-effective method for the customers of our products," she says. "Especially since most are not tagging all products of an SKU. However, once our industry's customers are tagging most of their products for internal benefit, or the cost of tags and their application in the box plant setting becomes less costly than tagging at the point of distribution to selected retailers, our industry's participation will change. We need to be ready."
Green: Color of New Era
Another initiative flowing upstream is "environmental sustainability." Wal-Mart has made it clear to shareholders that it intends to "right size" its packaging and shift to reusable and recyclable materials within two years. The goal is twofold: avoid losing shelf space and protect the environment. According to Matt Kistler, vice president for product and packaging innovation at Wal-Mart, paperboard is becoming a stronger contender among the packaging alternatives.
 J. Keller, Weyerhæuser Containerboard Packaging and Recycling |
"Packaging impacts all three of our current sustainability goals at Wal-Mart: renewable energy, zero waste, and preferred products," he says. "We are working in tandem with our suppliers and manufacturers to improve the packaging of merchandise sold in our locations, which brings us closer to meeting our goals. Most experts agree that paper is recycled at a higher rate within the U.S. There are some plastic packaging types that are not recycled today in the U.S., therefore converting to paper may improve the potential to recycle."
With Wal-Mart, Target and other giant retailers taking a leading role in demanding supplier adherence to sustainability goals, paperboard stands to come out on top in their estimation, Van de Water says.
"Without question, paperboard packaging has distinct advantages over alternate materials when it comes to sustainability," he says. "Paper is both a renewable and recyclable resource. More than 1.7 million trees are planted every day to sustain the various industries relying on paper as a raw material. About half of all paper used in the United States is recycled for reuse, and that volume has continued to grow each year. We have a wonderful, environmentally sound story to tell and are doing our part in getting the message to both consumers and decision-makers."
 Fibre Box Shipments (Billions of Square Feet)* & Shipments By Month 2005 |
Blurring Boundaries
Corrugated and folding carton designs have always had separate forms and functions, but new structural designs and printing technologies have blurred the boundaries separating them. However, while corrugated is getting more face time on the retail floor in the form of displays, it still has a way to go before attaining folding carton's state of the art.
"Lithography printed sheets laminated to singleface, litho labels on corrugated, or preprint in many cases, can provide the same, full-color graphics as folding cartons," Weyerhaeuser's Keller says. "But on the other hand, because of the nature of the corrugated board, direct print on corrugated can't match folding carton, although we have seen tremendous improvement here."
 H. Marshall, International Corrugated Case Association |
Steve Purwitsky, executive director of the Canadian Corrugated Case Association, says improving on those improvements will contribute mightily to the value corrugated converters add to their products.
"The biggest opportunities are much lighter flutes with the needed strength," he says. "You can print color graphics more effectively on corrugated than before and that's opening advertising opportunities for retailers that they never had before. The technology to print on boxes is phenomenal and a lot cheaper than ever before."
Indeed, corrugated wants to make its presence known on retail floors around the world. Heather Marshall says a group of ICCA members recently met to discuss global trends in retail packaging.
"While retail-ready packages have yet to really catch on in places like South America and Southeast Asia, in the United States and Europe it is one of the areas with the strongest potential for growth," she says. "Retailers are dictating that the primary package also be the package the customer sees on the shelf. They want easy-to-handle and easy-open boxes. They want high-end graphics. In short, they want corrugated to do it all."
Inventory Expertise
As converters look for ways to stand out in a market that's at capacity, they'll need to gain control of the inventory that's out there. Steve Young, president of the Association of Independent Corrugated Converters (AICC), says closing plants isn't enough.
 Fibre Box Shipments by Type of Plant |
"Overcapacity depresses selling price," he says. "It's our biggest danger, but also our biggest opportunity: to reinvent ourselves."
One way to do that is becoming a one-stop shop for customers, Young says. He tells of the Detroit converter that makes setup automotive packs for one car maker.
"The more you can hook yourself to a customer that's not a commodity buyer, and take cost out of their packaging line and handling processes, you become more valuable," he says. "The biggest bottlenecks in production are work in process. You have to be able to fine-tune your system to manufacture when the customer needs it. It's almost like becoming a logistics manager rather than just a packaging supplier."
 J. Van de Water, Paperboard Packaging Council |
One of a logistics manager's greatest concerns is the cost of inventory. U.S. tax policy isn't making those managers' jobs any easier. That will be an AICC agenda item for its annual Washington D.C. Fly-In early next year in conjunction with the National Association of Manufacturers. Young says converters need to make their voices heard in government if they want to effect change in their industry.
"We need to get government focused on helping the business community," he says. "We're hoping to double attendance at our Fly-In next year by telling people their LIFO [last-in, first-out] inventory accounting is going to change and they may lose their deductions, costing them another $10,000 a month in cash flow. That should get them excited. If we can kill this idea we will have done a lot to preserve the fortunes of small and medium size business in this country. Forget about China and Mexico, just focus on the tax code."
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The National Association of Wholesaler-Distributors (NAW) estimates that approximately $78 billion in wholesale distribution inventory is currently classified under LIFO. Repeal of LIFO would generate billions of dollars of revenue for the government. The measure was introduced earlier this year, then taken off the table after a sharp negative response from the business community. But apparently the measure isn't dead. Finance Committee Chairman Chuck Grassley (R-IA) is said to be planning committee hearings to further consider LIFO repeal.
Whatever happens in Washington, corrugated and folding carton converters are proving they can survive and thrive by keeping their companies in sync with the industrial mainstream otherwise known as the global supply chain.
