Pulp & Paper

External forces, such as high energy and raw materials costs, combined with internal pressure from cost cutting and layoffs, are placing a cloud over mill managers' opinions of industry status, according to Pulp & Paper's 2003 survey of North American mill managers. And, while this year's respondents complained less about a lack of capital threatening mill infrastructure, concerns have shifted to the impacts from less spending on research and new product development.

FIGURE 1. Job satisfaction remains high, although mill managers are troubled by many trends in the North American industry.

Although most mill managers like their jobs (Figure 1), a growing frustration with costs outside of their control, such as those for energy and raw materials, along with depressed prices, have made them much more pessimistic about the North American paper industry's future than recent survey results have shown. However, respondents seem to indicate that hope still remains, given that a recovery of spending occurs for research and development and the technologies needed to create new, more competitive grades and products.

Almost every mill size, grade, tonnage range, and geographical region were represented in the responses to Pulp & Paper's 2003 survey. The survey questioned managers about a variety of industry trends impacting their mills, including consolidation, capital spending, outsourcing, and supplier mergers. It also asked about labor relations, daily operations, and management responsibilities.

MILL MANAGER SKILLS AND RESPONSIBILITIES. Pulp & Paper asked managers to describe their involvement in strategic planning at their mills, as well as the top three persistent problems they encounter as mill managers. They were also questioned about the skill sets most vital to their positions as mill managers.

Persistent problems. Mill managers continue to list labor relations and human resources (63%) as the most common "nagging" problems they encounter. Specifically, several managers mentioned an "inability to attract and retain top staff" and "attracting new talent to pulp and paper" as a persistent issue. Safety‹another human resources issue‹was not listed as frequently as in previous surveys, garnering recognition by only 7% of respondents.

Apparently, cost control and rising costs are becoming the most pressing issues on a mill manager's radar screen. Unlike last year's survey where 33% of managers listed insufficient capital as a persistent problem with increasing frequency, only 22% of respondents categorized it as so in 2002. This year, however, cost control (22%) became one of the fastest-moving categories‹up 14 points from 2002. Similarly, rising costs (30%) jumped 13 points from last year's showing, with about half of those managers citing the rise in energy costs.

Concern regarding market conditions, pricing, and oversupply (37%) was again high on the list of persistent problems, rising from 23% in 2002. Also, production and productivity issues jumped 13 points to 23% in this year's survey. Less frequently cited were problems related to market share, a poor economy, quality, customer demands, public relations, regulatory requirements, and a degrading and costly fiber supply.

Strategic planning. Almost 90% of mill managers indicated that they have adequate input into strategic planning for their mills, which is an increase over previous surveys. This year, when asked to explain their involvement, the answers reflected the internal and external pressures impacting the strategic planning process:

• "I have reasonably adequate input, but it is dependent upon the goals of the division in which this mill participates."
• "Yes, to a degree. While the mill manager solicits and welcomes ideas that will either cut costs or increase productivity, selling these to the owner is our biggest hurdle. We must compete for capital with the carton plants in the corporation."
• "No, the market is worldwide, and it is more difficult to predict the future. Even if we control our costs internally, we do not have any control of our results because of selling price variation, energy costs, and raw material costs. We have to compete with ourselves and be better year after year."

FIGURE 2. Despite a growing emphasis on budgets and cost control, most mill managers find technical skills, combined with people skills, as most necessary in their jobs.

Mill manager skill set. What skill sets do mill managers think are most important to their jobs? Pulp & Paper asked respondents to identify the skills that should be developed by a young person or student aspiring to become a mill manager. Engineering/technology was chosen most often (46%), followed by management/ human resources (34%), reflecting the continual challenges managers experience with personnel issues. And, despite a growing emphasis on budgets and cost control, only 17% encouraged a strong business/financial background or sales/marketing skills (3%).

INDUSTRY ISSUES AND OPINIONS. Mill managers must cope with a variety of industry trends, including increasing customer demands, consolidation, and supplier mergers. All of these impact profitability, so Pulp & Paper asked for opinions about them. Mill managers were also questioned about technology, outsourcing, research and development (R&D), and overall industry direction.

Maintaining a competitive position. After dropping to a low of 48% in 2002, 59% of mill managers now say their company is investing sufficient capital in their mills to keep them competitive. For the 41% of managers reporting inadequate investment, basic paper machine forming, pressing, and drying were listed most frequently (73%) as the areas of greatest concern. "Investments are required to reduce variability and make less culls, and the machine needs some investment to stay competitive," said one linerboard mill manager. "Customers are demanding high-performance paper. To stay competitive, we have to follow that by improving the formation of the sheet, and the results will be better MD and CD profile, as well as more production at lower basis weights." Another mill manager said that "without sufficient paper machine capital, long-term viability is questionable."

Perhaps most interesting in the 2003 survey was a renewed focus on R&D, which managers frequently commented on when asked to elaborate on where investment was lacking. Twenty-seven percent of respondents said that a lack of R&D was threatening their mill's competitive position, especially as it relates to new grade and product development.

"Paper machine and new product research is key to growth," said a coated free-sheet mill manager. "Paper machine investments lead to more volume and more products offered. R&D investment leads to improvements in cost and performance, but perhaps more importantly, new products."

As in previous surveys, process automation remains a top area of concern (55%), which is in line with previous surveys. In the 2003 survey, bleaching was listed more often as lacking in investment (27%), jumping 19 points over 2002 results, while pulping dropped 17 points to 18%. At 9%, information technology also dropped, losing 8 points since last year, while recovery held steady at around 18%. Concern about environmental controls rose from just 4% in 2002 to around 18%, which is closer to the results of surveys prior to 2002.

This year, pulp and paper mill managers were asked to define how their budgets were weighted in terms of maintenance and capital projects. Almost all respondents indicated spending more on maintenance than on projects. One mill manager reporting a budget that was one of the most favorably weighted toward projects (60% capital projects/40% maintenance) still had to comment on its divergence from previous years.

"This [60% of budget spend on projects] is quite different than the average over the 1990s and early 2000," he described. "A typical split would be 20% maintenance, 80% capital. I also believe short-term reduction in capital can be prudent, but it cannot become the norm without the expectation of declining production, quality, and a viable competitive mill 5 to10 years down the road."

Customer service. The majority of mill managers (63%) continue to say the paper industry is more customer focused than in years past. However, like last year, comments in 2003 reflect both the push to be more competitive with tailored products and the strain of continual customer demands in a depressed market, as these comments show:

• "I believe that [it is more customer focused] for the most part. However, I also believe it has been a forced event, not one necessarily chosen."
• "In our industry, we are no longer producing a product and expecting customers to adjust their process in order to use the product. The customer now has a bigger say in what they require, and we use their input to try and optimize the paper we are manufacturing for them. In addition, just-in-time delivery is key to the customer and an expectation of that is growing."
• "With less and less customers (due to consolidation), it becomes more critical to focus on satisfying customers' needs in order to retain customers."
• "There is more attention to specific needs of customers, especially 'captive' plants that were once told to just 'shut up and take it.'"
• "Customers are pushing more tasks on suppliers‹so we have to be more focused."
• "Since the market is shrinking, we are more sensitive to customer needs and perceptions. Quality is improved and more consistent. We are more willing to work on special products and services and just-in-time delivery.
• "Much of the capital spent at our mill is to improve quality in order to meet customer expectations. In addition, the market is so competitive that we must be able to meet the quality that our competition offers in order to have that customer base grow."

Reliance on Supplier Research Jeopardizes Competitive Advantage, Grade Development    In Pulp & Paper's 2003 mill managers' survey, respondents seemed much more troubled by the trend toward cuts in research and development (R&D) spending by paper companies and an apparent reliance on supplier research. When asked if supplier research was sufficient, 63% said "no," while just 33% said "yes," representing a virtual flip in percentages toward a more negative viewpoint when compared to surveys from the previous two years. Of the 33% who felt that supplier research was adequate, comments again indicated that this, in large part, is driven by economic necessity, not conviction that such research is better. "Mills do not have sufficient return on equity to allow research spending," said one manager at a directory papers mill. "Until capacity closes and returns are reasonable, only suppliers can do research." Also, several managers that found supplier research acceptable still indicate an unease with the sharing of technology among mills. "Companies are having to establish partnerships in order to have this type of research and development completed," said the manager of a newsprint mill. "The downside to outsourcing the research is that this information is no longer the sole property of the manufacturing site and can be shared very quickly with competitors." Among the 63% of respondents that found a reliance on supplier research unacceptable, many voiced a concern about the ability of suppliers to help with new product development, although some managers recognized that supplier research in cost control was beneficial. Mill managers this year seem preoccupied with a need to differentiate themselves from the competition with the development of new grades and products, presumably in an effort to gain long-term stability, as some of these comments indicate: "Supplier research can be biased as opposed to in-house development." "Suppliers have different interests and motivations than paper companies. They also have less incentive to promote change and take the risks necessary to develop new products. Based on recent experience I had with designing a machine, I found the suppliers to have very little imagination or tolerance for risk." "Paper companies are cutting costs to address other rising costs. R&D expenditures are directly impacted by this move. Without development, we will stagnate our product offerings as an industry." "We can only survive with ongoing new discoveries, and suppliers will limit their range of research. We, however, need to make a profit sufficient to support the research." "Yes, supplier research is sufficient from a cost reduction point of view, but it is not sufficient from a product development point of view" "No 'new' products come from suppliers." "Supplier research leads more toward cost-reduction research versus product development research." "Restricted research misses good opportunities." "We have to spend a percentage of our sales for research and development. To make a good cake, we might have to break some eggs." "We pay for this service in some fashion but don't reap a competitive advantage if this research is available to all."

Paper company mergers. As paper companies continue to merge in an effort to improve industry performance, mill managers responding to the 2003 survey seem a bit ambivalent about some aspects of this trend. Although the majority (78%) thinks mergers will increase mill profitability‹a percentage that continues to grow with each survey‹an increasing number (48%) find that it may limit new product development, an increase of 15 points from the 2002 survey. However, 33% still think that mergers may improve product development.

Also, managers in last year's survey indicated mixed feelings about consolidation's impacts on customer service, with 38% seeing its resulting in better service and only 30% seeing it as resulting in worse customer service. This year, mill managers showed an almost evenly split opinion on the topic, with 44% leaning toward a positive impact on customer service and 41% seeing it as becoming worse.

Supplier mergers. How have supplier mergers affected mills? The 2003 survey results show that mill managers are steadily forming an opinion on the subject, with a shift toward a positive viewpoint as time passes.

Although 40% still answered "don't know yet" when asked how these mergers have impacted their mills, 33% said "positively," up 12 points from 2001 and the highest percentage since 1999. Still, 26% of respondents said these mergers had affected them negatively.

Research and development. Since many paper companies have cut their R&D expenditures to improve the bottom line, mills have become more reliant on supplier research. Is this sufficient? This year, as opposed to other years, most managers (63%) say "no," and many indicate this is due to a concern about grade and product development (see sidebar).

Outsourcing. With the continued focus on cost control at mills, managers were once again questioned about their use of outsourcing. This year, 41% of respondents reported the use of outsourcing, which is down somewhat from last year (46%).

When questioned about the various areas where functions were outsourced, maintenance (73%) was the most common, followed by transportation (36%) and water/wastewater treatment (36%). Although transportation outsourcing dropped slightly from the 2002 survey (45%), water/wastewater treatment jumped 22 points from last year. In addition, outsourcing of energy-related activities (18%) increased 5 points, as it did for woodyard operations (18%) which doubled from the 2002 survey results. Once again, many managers (27%) wrote in outsourcing areas other than those listed on the survey, including purchasing, operations, and product development.

The 2003 survey also asked managers to identify what areas should not be outsourced. Operations and core competencies, such as pulping, papermaking, and customer service, were common answers (19%). "Outsourcing mill operations duties costs more, and you lose quality of work and control of direction," said a newsprint mill manager.

However, maintenance (22%) was the most frequently listed area deemed inappropriate for outsourcing, despite the fact that it is the one most commonly outsourced, according to respondents. "With in-house support on maintenance, you build knowledge in a loyal workforce," said a free-sheet mill manager. "Outsourcing builds little loyalty and builds the knowledge in someone other than yourself."

Technology. When asked to identify the most important technology advancement for the paper industry in the last five years, most mill managers (19%) listed some sort of process control technology, including improved controls for continuous digesters, lower-cost DCS technologies, and online inspection and detection. "Some of the technology is not new, but the detail and accuracy is much improved," commented one mill manager.

TABLES 1a-b. Managers are somewhat optimistic about their mill products' performance in 2004, but for the long-term, they are much more pessimistic about industry health than in previous years.

The Internet and information technology (15%) was the next most common answer, followed by advances in shoe press technology (11%). However, 11% of managers described "nothing of note" occurring on the technology front in the recent past.

Other answers included the dilution and profile control headboxes, wet end chemistry, online calendering, increased paper machine speeds, through air drying, gap forming, surface winding/slitting, chip thickness technology, and wood genetics.

Future issues and challenges. Fifty-nine percent of mill managers cited rising costs and cost control as the most pressing challenges for their mills in 2004‹a 22-point increase from last year, when those categories were listed by 37% of respondents as the test for 2003. "We are making short-term sacrifices in costs to stay competitive during the downturn," said the manager of a corrugating medium mill.

Profitability (19%), union issues/morale (19%), and productivity/production (15%) were also listed as major challenges for 2004.

When asked how products from their mill will perform in the marketplace next year, managers are definitely not seeing a change for the better any time soon. In the 2003 survey, they continued a negative outlook that began two years ago, with 61% describing it as either poor or fair/guarded (Table 1a).

Longer term, mill managers are dramatically less optimistic than they have been in previous surveys (Table 1b). When asked if the North American paper industry would remain competitive for the next 10 years, 63% of 2002 survey respondents said it would, while just 30% said so in 2003, representing a very visible shift in opinion from previous surveys, as Table 1 details.

DAILY OPERATIONS. Pulp & Paper surveyed managers about daily operations, asking questions about operational philosophy, staffing and labor relations, and challenging mill events. In addition, managers were surveyed about their use of the Internet for e-commerce applications.

Operational philosophy. Managers were again asked if maximum tonnage was still the goal at their mills, or if the philosophy had moved toward targeting production in response to demand. Fifty percent of respondents reported demand-driven production, which is down 6 points from last year. Also, 48% of managers reported tonnage-driven production, which rose from just 38% last year. For at least one mill manager, tonnage has been increased to offset rising costs:

"We are offsetting increased energy costs with an incremental increase in production. With the sales price of board remaining somewhat flat over the last several years, being able to turn a profit as energy costs skyrocket is becoming extremely difficult. Trying to find areas to cut costs and still maintain productivity and efficiency is a huge challenge," he described.

Challenging events. As in past surveys, mill managers were asked to identify the most dramatic event at their mill in the past year, and responses implicated the industrywide strain on capital spending. Once again, a capital project (30%) was cited most frequently. However, this percentage has dropped significantly since 1998, when 60% listed a capital project as the most dramatic event. In addition, a very low percentage specifically indicated a major rebuild as their project, while 16% of respondents in 2001 and 37% in 2000 did so.

FIGURE 3. Despite oversupply of some grades in the market, managers indicate that maximum tonnage is still a common operational philosophy.

Labor relations activities, such as managerial restructuring, downsizing, retirements, and contract negotiations as a result of mergers (19%), were also commonly mentioned as dramatic events, which held steady with last year's survey results. Other dramatic events cited include the major power outage in the Northeast and part of Canada this past August, safety awareness, mill accident, paper machine closure, change of focus from production to cost reduction, performance turnaround, and sale of the mill.

Staffing and labor relations. Reflecting impacts from consolidation, downsizing, and restructuring, the number of mill managers reporting improved labor relations (37%) dropped five points from 2002 survey results and 24 points from 2001. However, most of those shifting from a positive perspective indicated that relations were merely "the same" (41% in 2003, 25% in 2002) rather than worse (15% in 2003, 17% in 2002).

When asked if it is harder to retain good employees than it has been in the past, the majority of managers (63%) said "no," which is up slightly from last year (56%). However, prior to the economic downturn in 2001, survey results showed that 60% of respondents were actually having difficulties retaining such employees.

Further evidence of industry trends such as downsizing and poor market conditions was seen in the 2003 mill managers' survey when participants were asked if they had cut support staff to control costs. This year, 77% of managers reported that they had done so‹the highest percentage in five surveys and up 14 points from 2002.

Internet and e-commerce. Mill managers continue to report a steady use of the Internet for e-commerce activities. Thirty-three percent of respondents stated that their company sells its pulp and paper products through the Internet, a number that is in line with last year's results. However, the volume of sales through the Internet still remains relatively low, with most managers (83%) estimating it at 1 to 5%.

This year, the percentage of mill managers reporting Internet use for purchasing dropped 12 points to 44%, which is more on par with 2001 levels. Respondents reported a large variety of items being purchased over the Internet, including computer items and chemicals. However, office supplies (25%) and maintenance supplies (42%) were the most common. Also, a growing amount of managers (25%) reported the purchase of service contracts, including those for transportation, through the Internet.