Converting processes depend on many internal and external variables to work well. Focusing only on your link in the chain will sap energy. Consider implications up and down stream.

The more complex your supply chain, the more important supply chain management is. Unfortunately, companies that make paper and packaging are complex by nature, therefore more subject to supply chain disruptions. These not only test a company’s good name, but its very value, as well.

This was the finding of a study published last year, The Effect of Supply Chain Disruptions on Longterm Shareholder Value. Authors Kevin Hendricks of the Richard Ivey School of Business at The University of Western Ontario, and Vinod R. Singhal, of the College of Management at Georgia Institute of Technology, make a compelling case that ignoring the risk of supply chain disruptions can have serious negative economic consequences.

Their study examined a sample of more than 800 supply chain disruption announcements. These firms experienced 33 to 40 percent lower stock returns relative to their benchmarks, a 13.5 percent increase in share price volatility, a 107 percent drop in operating income, 7 percent lower sales growth, and an 11 percent increase in costs.

“More importantly, firms do not quickly recover from these losses,” the authors write. “The evidence indicates that firms continue to operate for at least two years at a lower performance level after experiencing disruptions. Given the significant economic losses, firms cannot afford such disruptions even if they occur infrequently.”

The report found that the average level of stock price underperformance was highest among companies in the process industries: -51 percent, compared to –27 percent for firms in the high technology industry, -42 percent wholesalers and retailers, and –36 percent in service industries.

Jim McNutt, executive director of the Center for Paper Business & Industry Studies at Georgia Tech, tells OBM that the problem with supply chain management from the woods to the customer is it requires every entity in that chain to be on the same page.

“Get one major component, whether trucking or a box plant or a sheet plant, that doesn’t want to play full boat, it makes the whole system fail,” he says.
Even getting companies in the forest industries to submit to a study to find improvement opportunities was impossible for McNutt. He gave up on a project two and a half years ago that would have examined supply chain management of maintenance and operation materials.

“We wanted raw data about how they bought stuff, who made the purchasing decision, how they tracked, and how the purchasing decision was made,” he states. “The need was for 15 to 20 mills to provide information so we could analyze the data and apply supply chain management concepts. We could only get two mills to participate. The others were too busy or they were downsized, and it didn’t matter that we could show them if they did this right they could make the company and shareholders millions of dollars in value added.”
Even implementing enterprise management tools such as those from SAP and other software vendors is a major challenge for this industry, according to McNutt.

“No two paper mills or corrugated box plants are alike,” he notes. “The result was a lot of failures because these tools were not set up to address these complexities. The other problem is that companies in this sector are amalgamating. With that they bring into their house very different legacy systems for financial reporting and data collection and analysis. Trying to have a corporate wide supply chain system with all these different archival legacy systems is a struggle.”

Authors Hendricks and Singhal point to other popular fixes that turn out to have detrimental effects:

• Single Sourcing. This may reduce purchase price and administrative costs, but it may also increase the supply chain’s vulnerability if the single-source supplier can’t deliver on time.
• Focus on efficiency. Strategies for improving efficiency can increase the risk of disruptions. Firms tend to implement fixes without considering the inverse relationship between efficiency and risk.
• Over-concentration of operations: To take advantage of economies of scale, volume discounts, and lower transaction cost, firms may over-concentrate operations at a particular location, or with particular suppliers. This reduces the flexibility of the supply chain and makes it susceptible to disruptions.

The moral of this story is that paperboard converters must consider themselves part of a stream. Links can weaken a chain. Streams have only one option: to flow.OBM