Sappi looks good on PAPER

Buyers boost leverage with single-sourcing strategy

By -- Purchasing, 12/8/2000

Purchasing at Sappi Fine Paper North America, a division of coated free sheet paper producer Sappi Ltd. based in Johannesburg, South Africa, has taken a focused, strategic position toward quality improvement and total cost reduction.

In the past four years, purchasing at Sappi Fine Paper North America, headquartered in Boston, Mass., has implemented a cost-of-quality program (COQ), which is designed ultimately to reduce its supply base, develop more single-sourcing contracts with world-class suppliers, improve quality and productivity, and remove significant cost from its processes. And besides the tangible cost reduction, the COQ process has some other, far-reaching benefits, namely closer relationships with suppliers, lasting process improvements, and a spirit of innovation.

In addition to its COQ process, Sappi Fine Paper North America is also working to develop and integrate its own operations with those of its suppliers. Using SAP's electronic resource planning (ERP) systems, the company has reduced paperwork and transaction-based tasks, allowing buyers to be more strategic in their contract and supplier development.

Contract development

To better streamline the supply chain and remove costs and waste from the procurement system, Sappi Fine Paper North America has concentrated its efforts on developing better contracts with fewer suppliers. Through its COQ program, a clearly defined supplier and contract development strategy, Sappi aligns its top suppliers, gets them thinking in terms of continuous process and productivity improvement, and works through a cross-functional approach toward reducing total costs.

"For whichever material we buy, we generally try to have one source supply it," says Michael Williams, VP of purchasing at Sappi. While this strategy isn't new to purchasing, Williams touts its effectiveness in getting the most from suppliers. "The main reason why we seek single-sourcing contracts for the materials and services we buy is so that we can have better leverage with our chemical suppliers," Williams says. "Often, we can obtain services because of our clout with one supplier that we would not normally get if we had four or five different suppliers," he says.

Beyond negotiating a better price with suppliers for their goods and services, Williams says that Sappi Fine Paper's COQ process is a sophisticated program for improving production processes, aligning operations with suppliers, and streamlining each link of the supply chain.

"Price increases and decreases are temporary-many factors may influence them in one direction or another," Williams says. "The idea behind our productivity program is that while prices may change, structural cost improvements are there forever."

"Generally speaking," Williams continues, "If you compare the lowest and the highest prices seen among normal buyers in the pulp and paper industry, there's really not all that much of a difference," he says. "Beyond basic price, we wanted to figure out some other way to get a competitive edge with fewer, closer suppliers. To accomplish this, we have been writing continuous cost reduction and process improvement clauses into our contracts with suppliers," he says.

"For example, if we're negotiating a contract for titanium dioxide (TiO ₂ ), we may request a percentage of total cost reduction or productivity improvement over the term of that contract," Williams says. The amount of the percentage is based on the total TiO ₂ business transacted with the supplier.

Williams says that most often, this productivity improvement percentage is mandated by Sappi and must be guaranteed by the supplier as a condition of getting Sappi's business. However, sometimes, he admits, the percentage is determined as a "best effort" arrangement.

For a commodity like TiO ₂ , Sappi may expect to negotiate a 6% structural improvement in the process over a four-year period, for instance. According to Williams, if the company spends $20 million with a supplier, and is able to get that 6% productivity improvement percentage built into the contract, the process improvement measures would equal a savings of $1.2 million.

Once the productivity improvement percentage of the contract is determined, both Sappi and the supplier work together in a structured, cross-functional approach toward fulfilling the common improvement goal.

COQ discovery: step by step

Sappi Fine Paper's COQ process was built on a foundation of quality improvement, cost reduction and improved productivity goals. An integral part of Sappi's COQ program is the discovery process, which is used to identify areas in the supply chain where improvement is required, and to encourage innovative thought toward resolving process problems.

According to Michael Williams, the company's supplier discovery process is divided into several stages of development. First, members of Sappi's cross-functional process improvement teams (comprising purchasing, research and development, accounting, operations and other functions) conduct an audit of a particular site or mill. This audit is designed to identify efficiency problems, address the particular needs of mill personnel, and point out opportunities for cost reduction or process quality improvement. The needs assessment may focus on any of a variety of areas, such as machine yield improvements or variable or fixed cost reductions, Williams says.

Next, the team compares the particular facility needs with the company's corporatewide goals to determine whether similar problems exist at other facilities, and to assess the possible synergies of large-scale problem resolution. For instance, improved use of raw material variability tracking data, or the development of techniques for improved paper roll shape at one facility may fall under corporatewide efforts toward full asset utilization. And process improvements may be expanded to other facilities.

Once this analysis has been conducted, key suppliers are consulted for their input. These suppliers are then asked to develop and submit specific proposals to address the needs and opportunities outlined by the Sappi teams. These proposals are then fleshed out, analyzed, and put into practice at the mills.

Cost-reduction projects

Cost-reduction projects proposed by suppliers as part of Sappi's COQ process may come in many forms. According to Williams, these projects may include anything suppliers do that results in a measurable reduction in Sappi's total costs.

One example of a supplier-initiated cost reduction is product substitution. "If we're coating our paper products with a high-priced latex material, such as acrylic latex," Williams says, "it may be possible to substitute styrene-butadiene latex, which is considerably less expensive and doesn't diminish the overall quality of the finished product." He says that on many occasions, Sappi's research and development function has worked with suppliers' research and development to create specialized products used in Sappi's operations. Often, these products resulted in a total-cost reduction.

Another example of a cost-reduction technique may result in the increased value of the product. "For instance, let's say there's a problem with the brightness of the finished paper product," Williams says. "If the supplier can supply us with an alternative product that improves the brightness of our paper at the same cost, we can charge more for the product, which could also result in a significant total-cost reduction," he says.

A similar example involves the weight of the finished product. As a general rule, lighter, brighter paper (or specially coated paper with other particular performance attributes) commands a higher market price and has a greater overall value.

Other cost-reduction techniques involve improvements in the method of supply. According to Williams, Sappi has negotiated supply agreements under which the materials they need are consigned. "Essentially, we set up an agreement with the supplier where they buy enough inventory to cover our annual requirements, and we pay only when we actually use that material," Williams says. In this scenario, the cost-reduction benefit is found in the guaranteed availability of the material, even in tight supply conditions.

Another cost-reduction benefit of single sourcing is improved supplier support. Williams explains: "At our Skowhegan, Maine, location, we have a supplier representative that provides bearings support to the entire mill. That person audits all the moving parts in that facility, ensures that the bills of material reflect what is actually used on that equipment," Williams says.

Using knowledge of best practices, the supplier representative can bring about many process improvements. "If, for instance, the representative can help us increase bearing life by greasing the paper machines, that can help us improve productivity, we won't have to shut the machines down as often to change the bearings," Williams says. "We can measure that amount of up-time and translate that into a dollar figure of reduced cost."

"In the past, if there was a problem with the machine, we would have to call a sales representative, who would have to call a service representative, who would have to travel to our location, assess the problem and work on a solution," he says. "Now, that's all taken care of on-site, and the representative is on the supplier's payroll."

Measurement and follow-up

Williams stresses the importance of realistic measurement and follow-up with suppliers regarding their process improvement goals and the techniques used to reach them.

"Process-improvement programs need to be owned by someone, pushed by someone, and measured very closely," Williams says. "If you're not closely measuring your efforts in these areas, you're not maximizing their effect toward total cost and productivity improvement," he says.

Williams says that Sappi's accounting department has been involved in the COQ process from the beginning, tracking productivity improvement by gathering empirical data, and their relationship to total cost. "We want to make sure that we are actually reducing total cost and improving quality at our locations," Williams says. "We're not just giving these objectives lip service. This, I believe, is why our total cost per ton has been going down for the last four years," he says.

Feedback and communication with suppliers is another important focus of the process. And while communication with suppliers is near constant in Sappi's COQ discovery process, the company also schedules formal quarterly meetings with participating suppliers to discuss the implementation and progress of the cost and productivity improvement projects.

These quarterly meetings include top management, which, Williams says, has taken a very positive view of the purchasing function and its ability to affect Sappi's bottom line. "Upper management is very involved in what we do," says Williams. "And I believe that this is one of the primary reasons why Sappi has been successful in meeting its cost-reduction and process-improvement goals," he adds. Purchasing gets support and recognition, not only for helping to reduce the price of products, but also in obtaining suppliers that will provide long-term structural cost advantage that other companies might not have," Williams says.

Other structural improvements

In addition to its COQ process, Sappi has made some other changes to the way it purchases raw materials and services from suppliers. With total-cost reduction and improved dealings with suppliers in mind, Sappi's North American business has implemented an ERP system over the past few years. This, coupled with its other purchasing initiatives, has brought about significant change in the structure of the purchasing function and contributed to improved purchasing process efficiencies. In addition, Williams says that its ERP system implementation has been met with substantial success, and the company plans to roll it out to its global operations in the near future.

"We're now fully integrated," Williams says. "Using our ERP database, we have formed a common link throughout all of our locations," he says. "Our ERP system has allowed us to go out to one supplier, such as a supplier of bearings and transmission products, designate that company as the sole source of those particular products," he says. "Also, we can add a negotiated price and a time period denoting how long that price is available," Williams says.

For Sappi's procurement department, the benefit of this system is that purchasing no longer deals with the purchase orders, requisitions and other paperwork associated with traditional chemical transactions. "All the chemicals and raw materials that we buy are handled using an evaluated receipt settlement," Williams says. "Suppliers let us know what quantities of what materials are put into the system, and under the terms of our contractual agreements, materials are paid for automatically."

Currently, more than 60% of Sappi's material orders go directly to the storeroom in the form of a requisition-or, they go directly to the supplier without travelling through a procurement person for approval. According to Williams, purchasing's goal is to expand that percentage to 80% of material orders going directly to suppliers and originating from any of the company's North American locations.

Williams comments, "By taking the transactional work away from the buyer, we're giving them the time to work on more strategic long-term contracts and better leverage our position with suppliers," he says. "Also, procurement can take a closer look at the entire supply chain and see what process improvements and cost reductions can be made each step of the way."

Other benefits

In addition to the benefits of total-cost reduction and improved process efficiency, Williams says that Sappi Fine Paper has achieved some other benefits from its purchasing initiatives. One of these is a streamlining of the purchasing function across Sappi's North American operations.

Williams explains, "When you reduce transactions and the paperwork involved, you're ultimately reducing the number of people needed to do the work required." As a result of its purchasing programs, Williams says that Sappi has effectively reduced its procurement workforce in North America by about 25% in the past four years.

"We have tried to retain our best procurement employees and re-educate them," Williams says, explaining that nearly all of the positions eliminated from purchasing in the past four years have involved transaction-focused administrative tasks.

"We're trying to maintain and improve the level of service that we've experienced in the past, with a fewer number of purchasing people and a different type of procurement system that's going to be easier for everyone to use, "Williams says.

Another benefit of the improved purchasing structure and processes at Sappi Fine Paper is the development of expertise among purchasing personnel. According to Williams, it is not uncommon to have a buyer at the Sappi mill located in Muskegon, Mich., buying certain products for its facilities in Boston, Maine or Alabama. "If we have a buyer at one of our locations who becomes an expert at sourcing one particular item, we want to share that expertise throughout all our operations," he says.

Sappi Fine Paper North America at-a-glance

Purchasing structure at-a-glance