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MarketIntellibits
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August,  2006
Volume II   Issue 12

"The  Time Machine"
by Jack Miller

I promised an article about the Machine Time Disease, and that’s what this
is. I just thought  The Time Machine was a catchier title.

I’ve written at length about the paper industry’s obsession with tons:
The
Tonnage Disease.

But, this disease is worse.

Like many diseases, the early symptoms don’t appear too bad. Correctly,
the industry recognizes that it is better to track margin per hour than margin
per ton.  Yes, mills sell machine time. Yes, printers sell press time.

But, the danger lurks.

We tend to consider that all tons cost the same. In fact, we sometimes think
that those “incremental” tons cost less because the fixed cost was already
paid for by other tons.

Hmm. Sounds fishy to me.

In fact, the incremental tons are the highest cost tons. If you were to cut out
one ton, would you cut the lowest cost raw materials, or the highest cost?
Would you cut overtime or straight time? Would you cut the most expensive
energy or the least expensive?   Studies have shown that those
“incremental” tons often are outright losers.

But, this disease is insidious.

Paper people sometimes compare machine time to airline seats. If the plane
flies with an empty seat, the value of that seat is lost forever. Same thing
with an hour of machine time. Printers look at press time the same way. The
pressure to keep the paper machines and presses running is intense, all the
more so because of the mind set that an hour lost can never be recovered.  
This can lead to some bad decisions.

Downtime is expensive. No doubt about it. But it’s cheap  compared to lower
prices.  In fact, the cost of downtime is overrated in the minds of many of the
people making day to day decisions, while the cost of lower prices is
underrated.

Hard to believe?

Consider this. At a sales meeting a few years back, I asked the assembled
mill reps: “Which is worse, taking all the paper machines down for two
weeks, or dropping the price by $40 per ton?”

Not just one machine. Not even just one mill. Every machine at every mill in
the system.

The answer was obvious. Two weeks of downtime is a disaster, but
dropping the price by $40 to meet competition is pretty routine. Happens
every day.  The downtime is far worse.

Wrong answer!

At that time, $40 per ton represented about  a 6% reduction in price. Doesn’t
sound too bad, but two weeks is only about 4% of a year. So, over a year,
one price cut will reduce revenue more that the lost volume, so already the
downtime is better.   

That’s the discussion starter.

What about costs? How much cost do you eliminate when you cut a price?
Like…  none.

How much cost do you eliminate if you make fewer tons? Like…  a lot.

Now we’re just getting started.  What about the impact on supply and
demand if you shut down unneeded capacity? What about the fact that after
you take a price cut, you need a price increase to get back to where you
were before (this is not like a Christmas sale),  but when the downtime is
over you are instantly back to where you were before.

Yes, it’s true that the price cut might be intended to be for one order, not for
a whole year. But, given the impact on supply and demand, and the
tendency for prices to continue to slide once they start sliding, the impact
may be even greater.

Think about it.

Mills and printers are notorious for poor profitability. They suffer from the
same disease. Yes, downtime is bad, but often the alternative is worse.

Need help explaining this to your sales team? Call Jack Miller at 203 925
0326 or email
jack.miller@market-intell.com.

To read The Tonnage Disease,
click here.




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Copyright 2006, Jack Miller



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