Supply chain management is set to revolutionize the paper industry, but it may just be a small step toward far more fundamental change
With prices for most pulp and paper grades heading north, executives across the industry are in a fairly optimistic mood as the millennium draws to a dose. Most managers have been through a lean couple of years, with weak prices and poor margins dominating the market. But if nothing else, at least the downturn has helped refocus corporate minds on the main job of the forest products business - making money.
That imperative has helped drive a couple of major trends in the marketplace, not least of which has been the headlong dash toward greater industry consolidation. But if the visionaries are correct, any changes that we've seen to date will pale into insignificance with the advent of an internet-enabled paper industry.
The most ambitious predictions indicate that pulp and paper buyers will simply dictate to a wrist-mounted computer (voice recognition enabled, of course) that they need x tons of grade y to be delivered in three days and an order confirmation and delivery time will come straight back at them. That is, of course, if they actually need to place an order at all. After all, with all the data processing technology that is becoming available, the computer will have already decided that it needed x tons of grade y and placed the request automatically.
Quite how far off that vision is remains to be seen. According to some, it is very far off indeed. But there can be little doubt that internet technology will have a dramatic impact on the industry, and the companies that recognize this and react first will be among the groups that survive into the next century.
First Steps
One of the first steps along this route for most companies in the next year or two will be the implementation of supply chain management (SC". SCM has made a wide sweep through several industries, with WalMart and Dell Computers possibly the most successfil examples around. Now, SCM appears to have come to pulp and paper. It is one of the most talked-about topics today, and although there are still relatively few schemes in operation, that is certain to change shortly.
Among the companies at the forefront of the charge toward implementing SCM is S6dra Cell in Sweden. According to the pulp compa@ nys IT (information technology) director, Gustav Tibblin, Sodra is still about one year away from implementing a full-scale SCM system. Tibblin believes that the scale of his group's particular project makes it one of the most ambitious SCM programs ever attempted in the forest products sector. "We are looking at supply chain management. But what we mean by that is not just one area, but everything from the standing tree in the forest right the way through to the customer," says Tibblin.
Tibblin reports that his group has already been working on the project for almost a year and a half and Sodra is now at the point where the in-house team is assessing and comparing the systems on offer from the various vendors. As Tibblin says, "At this stage, they [the suppliers] are promising everything." But he also knows that with any new business solution product, there will be some major hurdles to jump before a total SCM system becomes a reality for Sidra.
Indeed, one of the issues that detractors of SCM often complain about is the lack of flexibility inherent in buying a so-called business solution concept in the first place. Some would argue that all it does is to put all companies in the same straightjacket imposed by the demands of a rigidly defined business model that is programmed into the computer.
While Tibblin has heard the accusation before, he does not expect S'&ra to fall foul of the problem. That does not mean to say though, that the Sodra of tomorrow will operate in the same way it does today. "The most important thing is to start off with our own reality, really looking at what our demands are. That's what is really going to set the standard for what we go for," Tibblin explains. "Actually, we've not come across these obstacles yet as far as flexibility goes as we're really still looking at how these systems work. But it is certainly possible that we will have to change our own way of working in the future in order to get the most out of the system."
Inflexible position
To a greater or lesser degree, there is little doubt that operational changes will arise from the implementation of SCM systems. In fact they have to if many of the potential benefits are to accrue. SAP in Germany is one of the largest 'business solution' suppliers in the world. And as the corporate industry marketing manager for the metals, paper and wood sectors, Prashanth Narasimha, concedes, there are company@wide changes that do need to be implemented if a business chooses to use a SAP solution (see box). But the effects are limited he argues, "It's the business processes that change, not the fundamental business."
Many experts in the field of SCM go even fiu-ther though. Indeed, some believe that changes at a fundamental level are essential if companies are to leverage the potential advantages from such systems. Jouni Hakanen is the country manager in Finland for one of the world's largest management consultants, Gemini Consulting. He believes that once the concept of supply chain management is fully embraced by a company, the old business models simply do not fit any longer.
"If you look at the computer industry, or one of the other high tech businesses, the supply chain has had a very great impact on the organizational structure since the company becomes very flow structured," Hakanen explains. "But if you look at pulp and paper companies, you have the pulp division, then the fine paper division, then another paper division and so on, and each unit sits in its own separate silo. If you look at the overall supply chain, then these silos can no longer operate separately from the rest of the group- 11
Ready or not
Whether the forest products sector is really ready for such sweeping changes is a moot point. Clearly, Sodra looks as though it may be prepared to bite the bullet, but few senior company executives can relish the prospect of dismantling their entire organization in the way needed to implement a major SCM project. On top of that, there is also concern that many P&P companies lack the basic management or technical expertise necessary to make SCM work.
Carol Ptak works for IBM's worldwide ERP (enterprise resource planning)/SCM solutions group executive in the USA- As she points out, "The level of sophistication in the industry is far from homogeneous. In the pulp and paper sector, we've seen everything from 'Gee, we just got e-mad', right the way through to the fairly advanced things that the likes of Weyerhaeuser are doing and all points in between."
Ptaks main job, she says, is simply educating people as to what is possible with SCM systems. But the possibilities are likely to prove fairly daunting for many pulp and papermakers. Ptak points to the fact that much of the interest in SCM is being generated by a drive to enhance customer service and use better delivery to help leverage margins. As she points out, chemical industry suppliers have moved a lot further down this path and the likes of Shell have already moved to direct replenishment, thus managing their customer's inventory. One of the most high profile cases in the paper industry so far is perhaps the similar service being offered by another chemical-type group ECC. But few, if any, of the major pulp and paper producers are anywhere near this level of service as yet.
Ptak is convinced that several factors will drive companies down this road and argues that SCM could even help stabilize prices. If a major buyer leaves the supplier to worry about inventory levels, they could well be prepared to pay a little more in return for stable prices. This would offer the pulp company, for example, a chance to lock in a customer on a long term deal in return for fewer price fluctuations.
Hakanen at Gemini also believes that the customer relationship component will be important in pushing companies toward implementing SCM programs. "My understanding is that the industry is moving more toward the end benefits for customers. I see more and more people moving that way," he says.
Hakanen is a big fan of several of the latest CRM (customer relationship management) and APS (advanced planning system) programs, especially the 12 systems, which he describes as "brilliant". He is also convinced that companies will have to make a change sooner rather than later. "Some companies have realized that they have to change or they will be left behind, but whether they're ready or not, it really requires a big change from the pulp and paper companies," he says.
A case in point is to be found at S6dra. Tibblin is convinced that standing still is not an option. "From the project we're doing, it is obvious from our point of view that we must take this step. It is certainly ambitious, but we are confident that it is the right way." Tibblin would not be drawn on any numbers, but it is clear that S6dra expects to gain a real competifive edge from the investment - and that investment is not just down to hardware and software. "It is a large amount of money, but the biggest investment is what the company puts into it in terms of management time," he says.
Best practice
Clearly, implementing a fill-scale SCM system is not easy. But one supplier that recently installed a component-based ERP (enterprise resource planning) solution for Peterson Packaging in Norway (see box) has outlined some of the main elements that it believes are required to make such projects succeed. According to the business unit manager at IFS Norge, Tom Gulbrandsen, a modem ERP solution has the following critical success factors:
management involvement and support. An ERP installation should not just be a formal decision taken at board level based only on potential cost savings, it should also take a leading role in communicating why ERP is used and what benefits it will bring. Getting all the end-users on board is crucial if the expected benefits of an ERP solution are to be fulfilled. This means both motivating and training the end-users
*company specific needs must be identified and the system has to support those requirements. The guiding principle is that since the organization continuously changes, the technology that supports it has to change with it. This requires a flexible ERP solution
implementation times must be kept to a minimum so the system is up and running profitably as quickly as possible. A component based ERP system makes this possible, since relevant components can be installed when they are needed by the organization, rather than in older, monolithic ERP systems where the whole solution is implemented at once in a "big bang" mariner
continuous adaptation means that the ERP solution should be easy to adapt and reconfigure to changing internal/external conditions.
Perhaps understandably, the sheer scale and complexity of implementing a full-scale SCM concept has driven many companies toward a piecemeal approach to implementation. In some ways, this is a prudent approach, but it has also helped blur the boundaries between the academic definition of SCM and concepts such as preferred supplier relationships or even simple outsourcing.
In the end though, the examples from other industries indicate that the most ambitious companies opting for a major implementation could well move to head of the pack And from there, a vast array of internet applications beckons for the future. 0
Leveraging opportunities with a vertical component-based ERP solution
Peterson Packaging is part of Norway's Peterson Group, and with 1,200 employees, it is Norway's largest packaging manufacturer. The unit produces corrugated paper and paperboard at 11 sites in Norway and Finland, mainly for the Nordic market.
In 1997, Peterson Packaging decided to invest in a new ERP solution. Initially, the implementation program was designed to cover the five Norwegian production sites where the greatest potential for improvement had been identified.
As Jon Karlsen, CEO of Peterson Packaging, explains, "Within packaging, our aim was to be able to coordinate the utilization rate between the production sites and eliminate the Y2K problem. To be able to do so, we needed to find a more efficient and flexible resource planning solution than we had."
A specification of requirements was set up as a first step. This included a standard solution from an international vendor to be implemented at each production site, which had to be relatively easy to connect to existing support systems such as the central customer and supplier databases and specific software applications connected to each site's machinery.
In the second half of 1997, both the Peterson Group and Peterson Packaging started an independent evaluation process of leading ERP solutions on the market. Pejk Nessje, project manager at Peterson Packaging explains, '"We evaluated a number of systems from different vendors before selecting IFS
Applications. We choose IFS simply because they could provide a modern standard and component based ERP solution and could provide good references from earlier installations."
Investing in a new ERP solution can be a very long process, involving numerous people internally, external consultants and time-consuming adaptations. As a result, one of the most important objectives for Peterson Packaging was to be able to implement the solution using as many internal resources as possible, reducing the need for external consultants and giving the in-house staff a good chance to learn the system from the ground up.
"It is important that all the users get a thorough education on the new system so they know how to use it and are able to make use of all the benefits the system can bring," Nessje points out. "So far everything is going as anticipated. We implemented at two smaller production units during 1998 in order to see that the ERP solution was working property and that it fitted together with the internally developed systems and third party software. We are currently learning the new system."
When the new system is fully implemented by the end of 1999, all five of the production sites will be connected and the system will cover logistics, manufacturing, economics and purchasing. "The new solution will enable a much clearer understanding of the utilization rates at the different sites and that enables us to direct orders accordingly," says Karlsen.
[Sidebar]
Forest industry sees SAP rising
The German group, SAP, is the fourth largest player in global client/server business applications. That places the company in the same league as the likes of Oracle, Computer Associates and the might of Microsoft, so the company dearly has a battle on its hands if it is to win hearts, minds and customers in this particular market segment.
As SAP's corporate industry marketing manager for the metals, paper and wood sectors, Prashanth Narasimha is the man who has been charged with the task of bringing the benefits of SAP's know-how to the forest products industry. As he explains, SAP is very keen to stake its claim in this particular sector, which the company sees as a major customer base for the future.
A new focused business unit was started up in March 1998 and the company has already covered a lot of ground in its attempts to customize its services for the paper industry. It has over 1,400 installations worldwide in this segment, with over 45% of them five.
SAP has also been working closely with all the big players to define a solution for the forest products sector, including such major names as International Paper, MoDo, Norske Skog, UPM-Kymmene and MetsaSerla. As Narasimha explains, "They've all given us input on the solution map that we will be incorporating. This has been a very good industry sector for us."
As Narasimha points out, paper companies differ from other industrial process sectors in that they have a highly varied product range running on individual machines, whereas many other product sectors have lines dedicated to a single product. Also they have to deal with a large number of variant characteristics eg widths, colors, thickness, compositions etc. On the other hand, P&P companies share many of same issues in areas such as price margin pressure and logistics.
On the map
SAP Mill Products is the solution for the forest products industry segment. The system is basically a series of software components that can be used to meet individual needs, or to create an overarching business management solution from strategic enterprise management down to regulatory compliance in distribution. SAP's system is based on discrete operational levels, and individual packages within the software have been created to hanthe identifiable areas within each segment.
"All SAP components are sold under the umbrella of the SAP Mill Products industry solution, but clients can implement certain components of the system, depending on what they need," Narasimha explains. "Customers can use it to smooth out their financials, for example. In fact, most new customers start off using the material management and financial control functions, but human resource management, plant maintenance and EH&S (environment, health and safety) have also been quite popular. We are also enhancing it further by bringing to market more industry focused functionality with the IS-MP component." Ultimately though, the entire business process can be integrated into the SAP system.
The race Is on
SAP is growing at a phenomenal rate around 40-50% each year. But even for a company that is expanding as quickly as that, Narasimha knows that the race is very much on as rival groups compete for superiority across the sector. "Europe and America are where we started so we're further ahead there, but we're still weak in Asia-Pacific as we're really still in the process of getting set up," says Narasimha. "We need to expand geographically, and that includes growing in existing markets as well as new ones in Europe and the USA, South Africa, Brazil, New Zealand, India, Canada, everywhere."
On that basis, it appears that there is still much to play for the in the battle to be the leading SCM services provider.
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