The Bottom Line

Vendor Contract Management: Why Paper Supplies Will Remain Tight

Posted by Jeff Moeller on Jan 30, 2018 9:00:00 AM

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The continuing explosion in online retail sales was one of this holiday season’s major headlines. While there has been plenty of debate over its impact on shopping malls and other brick and mortar outlets, another downstream effect is rarely discussed—one that can be seen on your curb every recycling day.

More e-commerce sales translate to greater demand for corrugated boxes. The pulp and paper industry spent the early 2000s consolidating and shutting down excess capacity. Paper mills are currently operating at 97-99 percent capacity. With the economy in expansion mode and no end in sight to demand for shipping boxes, any remaining headroom is likely to be used up soon.

Naturally, market forces will eventually lead to the construction of new paper mills. However, the building process takes years—not including the time to identify and acquire the ideal location and secure necessary approvals. All these factors support our recommendation in a blog post last year that now is the time to lock in a stable source of corrugate supply.

Timeless Appeal of the Simple Brown Box

Consolidation is ongoing on the manufacturing side as well, with integrated paper mill companies investing in robot-enabled “super plants,” generating greater efficiency with fewer employees. One super plant can often replace three legacy ones—and depending on their relative locations, this can drive meaningful shifts in the supply/demand equation.

At present, the future bottleneck in the system is clearly on the paper mill side. However, the box production plants are undergoing their own set of challenges. In virtually any other business, you’d expect big players, such as many of those in the box production business, to pivot away from commodities and toward higher margin products.  After all, specialty box units are growing at a healthy rate, with recent innovations supporting new use cases. For example, e-commerce retailers have come to see the box as an opportunity to build brand awareness and loyalty. To meet their needs and support their overall goals, specialized printing that allows for a logo and/or print to be placed on both the inside and outside of the box has become more common.

That said, the fact is that the big players’ throughout the industry remain focused on standard brown corrugate. Why? Chalk it up to the “80/20 rule” and the need to satisfy one’s biggest customers, whose insatiable appetite for brown boxes generates the volume necessary to keep plants humming. It’s hard to imagine industry leaders passing on the opportunity for additional high-margin business but they cannot pursue it at the expense of the bread and butter that pays the bills. We believe many will make a commitment to do both, by dedicating internal machine centers to this process.  Whether it is “in house” or a dedicated sheet plant in a regional location, they will find a way to support high-margin demand while utilizing the rest of their facility as they have been; i.e., corrugate paper and produce finished boxes, as well as, satisfy the growing needs of their largest clients

Don’t Get Too Comfortable

Consumers of box products should be prepared for change, particularly on a regional level, as capacity shifts as a result of consolidation, acquisition and supply and demand.  New manufacturing capabilities such as digital print and improved technology are two examples that will impact the local market. With box usage and e commerce trending up and capacity running at a high 90s percentage...a price increase is realistic.

It is a complicated picture with scores of variables. It is difficult to respond as needed while needing to devote time to priorities, such as getting the next shipment out the door.  That is why many manufacturers are asking vendor contract management experts with years of experience to help them figure out their next move.

Topics: Vendors & Contracts