FMN Supplement -- A Well-Thought Recovered Paper Purchasing Plan

As an example, Moore & Associates, Atlanta, recently performed a comparison of a group of mills’ delivered prices for a bulk grade in a single supply basin in the United States. Over a six-month period, the spread between the average delivered price of the lowest cost versus the highest cost mill was $30 per ton.

How can a mill consistently be at the low end of the market? Sound tactics and a good purchasing strategy can make the difference. We have found that the most important elements of a recovered paper purchasing program are the following:

            •Type of recovered paper purchasing agreements used

            •Managing transportation costs

            •The mills’ approach to quality

            •Types of suppliers utilized

            •Purchasing organization structure

            •Tapping innovative sources of recovered paper

            Moore & Associates divides the type of recovered paper purchasing agreements into four categories:

• Long term contracts greater than two years

• Short term contracts less than two years

• Committed buying of similar tonnage from the same suppliers on a monthly basis, but without a written contract

• Spot market purchasing

The trend over the long term has been an increase in contractual buying. Fifteen to 20 years ago, almost all recovered paper was purchased on a spot or committed basis. Very few supply contracts existed. With an increase in the use of recovered paper by the paper industry and higher recovery rates of a number of grades, more and more companies have been signing contracts for supply. This trend towards more written contracts should continue.

The need for and desirability of contracts varies for different grades and mill types. For example, a 100 percent recycled containerboard mill consuming old corrugated containers  should have a significant portion of its supply under contract. It is solely dependent upon recovered paper, and the recovery rate and the distance for sourcing OCC continue to increase. On the other end of the spectrum, a recycled boxboard mill in a major urban area that changes product grades frequently would have much less tonnage under contract. If you are not sure what product you’re going to be running in three weeks, therefore, your recovered paper needs may vary, and committing to large percentages of contractual tonnages is not in the picture for you.

Mills using pulp substitutes and printer grades secured through brokers are less likely to use contracts, as they are buying on a more committed basis. Because all business relationships come down to personal relationships, committed buying, which is really an unwritten contract, is quite common in the recovered paper industry. However, with changing personnel, company acquisitions and other factors, it often helps to put terms in writing.

A significant block of the recovered paper tonnage transacted in the U.S. moves on a committed basis.

True spot market buying probably represents the smallest portion of recovered paper transactions. Frequently, this is reserved for the highest risk takers in the marketplace. However, for those good at it, leaving a block of tonnage to be purchased on a spot basis can save a company money.

Another factor contributing to how a company purchases its recovered paper is the amount of inventory held. Everyone is aware that over the years, the trend has been toward just-in-time inventory. Many people in the recovered paper business feel that this approach to inventory control contributed to the run up in price of all grades in 1995 and to the recent price increases in OCC this past summer.

Transportation Costs

With a low value material like recovered paper, the cost of moving it from the generator to the mill can be a significant portion of the delivered cost. In the final analysis, only the delivered cost counts. Fifteen or 20 years ago, the typical recycled material based mill was a small, urban boxboard producer that sourced all of its recovered paper within a 50-mile radius. Today, a mill’s buying zone has grown. It is not unusual for a mill to purchase recovered paper from as far away as 1,000 miles.

Moore & Associates uses five recovered paper supply/demand basins to divide the U.S. For example, corrugated routinely flows from supply basins in the Midwest and Northeast to mills in the Southeast. Office grades and other higher value commodities may move even further.  The chart on page 18 shows the geographic boundaries of these regions.

The deregulation of both truck and rail freight transportation has led to the inter-regional transport of materials. Both long distance truck and rail rates, in real dollars, are less than under the old regulated system. Most mill companies manage their own transportation network for recovered paper. Moore & Associates has found that, for given types of mills using similar quantities of the same grades, as much as a $5 to $8 per ton difference exists in the average freight costs for the mills.

This comes down to optimizing the management of the transportation involved. Some mills buy a portion of their material on a delivered basis. This can make sense, especially with nimble suppliers. Occasionally, mills will not choose to manage their own freight network, and unless they work hard at managing the outsourced method, they are probably overpaying for transportation of recovered paper.

Quality

The quality of the recovered paper purchased by a mill cannot be separated from the ultimate cost of the fiber delivered to the head box. As we move to higher recovery levels of all grades, it is inevitable that there will be some erosion in quality, especially in those tons.

It is unusual for a mill to totally reject a shipment of recovered paper. Unless the quality is completely unacceptable, or it’s the wrong grade, mills generally try to work out an agreement with their suppliers on a price for materials that do not meet their quality specifications.

We have seen many cases of mills that have a minimal quality assurance program that is a surefire way to throw away dollars. Office grades typically get closer scrutiny than low grades; mills have a varying level of inspection of the commodities received.

The problems with ONP derived from curbside recycling, and the potential for wax in OCC derived from supermarkets or restaurants are well known. The best assurance of good quality is to do business with people who are known to ship the highest quality of materials.

One contaminant that is present in all recovered paper and is not always closely watched is moisture. Although most mills have a specification for the moisture content, there are no available quick techniques short of oven testing for accurate results. In fact, visual inspection is the routine method. This is in sharp contrast to the high tech, computerized, on-line moisture measurement at the other end of the paper machine to ensure quality of the product produced. While not strictly a product quality issue, excessive moisture is costing the mill industry millions of dollars.

The stickies problem is also well known, and one industry expert (Tom Friberg of Weyerhaeuser, Federal Way, Wash.) calculated that the yearly cost of stickies to the paper industry is more than $400 million dollars. Surprisingly, more than half of that was attributed to containerboard mills.

Another tricky area for buyers and mill quality inspection is downgrades. When and how frequently to downgrade depends on the market. If recovered paper is short, quality can go out the window. Unfortunately, this has been the case through the last few rapid price increase cycles. A purchaser must have a well designed, quantitative program that inspects a sampling of bales and does actual measurements on contaminants and outthrows. Grading shipments and giving feedback to suppliers is the only way to establish a norm for quality and to be able to take action when problems arise. The name of the game in quality is consistency, accuracy, and communication.

Type of Supplier

Obviously, how a mill distributes its purchasing by type of supplier depends greatly on the grades necessary. When analyzing a purchasing program, Moore & Associates breaks suppliers down into the following categories:

Brokers

Packers

Solid Waste Haulers

Municipal Governments (for ONP and residential mixed paper)

Supermarkets (for OCC)

Industrial Generators

Printers

Commercial/Retail Generators

Brokers always have played and always will play an important role in the recovered paper supply circle. Depending on the grades (for example, printers and industrial generators with balers), a major amount of these materials are handled by brokers. One of a broker’s skills is being able to quickly supply tonnage a mill may need to get through a tight time. To take advantage of this, a company must do a regular level of business with the brokerage firm.

The other major service brokers supply is a high level of service to the generators. This is especially applicable to sources that have a variety of grades and could not on their own easily manage and sell them. However, brokers clearly handle a smaller percentage of the bulk grades than in the past. Many successful brokers work on specialty and niche grades as their forte.

Although we have seen their numbers dwindle, the independent packer is an important part of the recovered paper supply network.

The solid waste haulers primarily deal primarily in the bulk grades, OCC, residential mixed paper and ONP. In recent years, many of them have geared up to also supply mixed and sorted office papers.

Depending on the mill's size, the grades consumed and the geography of the mill, a different mix of the suppliers listed above will form an optimum purchasing program.

Purchasing Organization

Providing the proper motivation and organization structure to recovered paper purchasing professionals is an important component in optimizing a mill’s fiber cost. Whether a company chooses to use a recycling division (with packing plants), centralized purchasing or individual mill buyers frequently depend on the company’s corporate philosophy.

There are important differences between procuring paper for the mills using these different structures. Moore & Associates has found anywhere from a $5 to $15 per ton spread on similar mills, depending on the type of organizational approach used for procuring recovered paper.

The responsibilities, incentives and authority must be clearly defined for executing contracts, day-to-day purchasing, transportation and quality.

Every mill has a formula for the purchasing organization that works the best. Periodically analyzing the purchasing approach versus industry practices is highly recommended.

Innovative Sources

After a mill buyer has expended all of his/her energies optimizing the purchasing strategy, the final step is reaching out for new,  innovative sources (i.e., lower cost) of fiber. If it’s a recycled boxboard mill, this might be RMP as a source of low cost fiber.

 The only really untapped sources of recovered paper are in the mixed paper area. Residential mixed paper is well known and beginning to be used on a wider scale basis. The trick with residential mixed paper is to get the right type of grade with the lowest amount of contaminants.

For containerboard mills and other recycled board producers, good commercial mixed paper makes an excellent fiber substitute for OCC. While RMP has received much publicity, collection programs are emerging that include front-end loader routes for commercial mixed paper. This can frequently result in a stronger grade (i.e., more OCC) than the typical residential mix.

Be Prepared

Purchasing agents at mills should ask themselves the following questions. Are you prepared for the next upturn in recovered paper prices? How does your purchasing strategy compare to the best practices in the industry? If you analyze it and work on it, you can improve the strategy and tactics used by your company, and the end result will be a lower delivered cost of recovered paper. – Bill Moore.

The author is principal of Moore & Associates. He has performed a number of recovered paper purchasing strategy projects for mills under the company’s SmartBuy program. The company can be contacted at (770) 518-1890, by fax (770)518-2779, or email MARecycle@aol.com .