The 10 Most Common Paper-Purchasing Mistakes
I wrote recently that I was on the verge of publishing “the best article I have ever seen on paper purchasing” when Google’s robots disabled this blog. Here it is, from guest columnist Bill Lufkin, one of the country's top experts on paper buying. As president of Lufkin Strategic Procurement, Bill has helped a wide variety of publishing, catalog, and printing companies save millions of dollars on paper through better purchasing and negotiating practices, as well as helping buyers negotiate new printing contracts. Bill is the former Vice President of Materials Procurement at R.R. Donnelley and has spoken at several industry conferences. Check out LufkinStrategic.com, which offers an additional article on the basic elements of a paper-purchasing strategy and another on how to negotiate a printing contract.
With paper being the second largest cost item for most catalog and magazine publishers, avoiding common purchasing mistakes can be one of the best ways to reduce expenses.
Lufkin Strategic Procurement recently completed a proprietary survey of more than 50 catalog and magazine publishers’ paper and print purchasing practices over the past ten years. The study found a number of recurring mistakes that, once corrected, saved some of the publishers millions of dollars.
For paper purchasing, the 10 most common mistakes, in reverse order, were:
10. Not understanding the potential value of paper underconsumption. So often a buyer focuses so heavily on the price per hundredweight that he overlooks the other part of the paper cost equation, the pounds the printer states are needed to produce the job. When catalog or magazine publishers purchase their own paper, most contracts stipulate that underconsumption (that is, using less paper than estimated) will be shared 50/50. On larger runs, 1% or 2 % savings on the waste allowance can be significant dollars. Since the printers are responsible for overconsumption, they tend to be conservative in their estimated pounds requirements. In 27% of the cases in this study, the buyers were not aware that potential underconsumption was a benefit of purchasing their own paper.
9. Publishers avoiding purchasing their own paper fearing that the administration and paper work is complex. This mythical illusion of complexity was an issue in 31% of the cases, influencing the publishers to buy paper through their printers when in many cases it may have been to the publishers strategic and economic advantage to buy their own paper. When a merchant or broker sells the paper to the publisher, much of the “paper work” is handled by the seller.
8. Assuming that the big printer’s volume equates to lower customer paper prices. While some of the large printers are able to secure low contract prices on paper, that doesn’t necessarily mean that the price to the customers will reflect that volume advantage. Again, in 31% of the study cases, this presumption influenced the publisher’s decision to go with printer-purchased paper. Many of the printers treat paper purchasing as a profit center and charge prices as high as the competitive situation will allow.
7. Moderate sized publishers assuming their modest paper volume lacks purchasing power. For 35% of the cases, these publishers thought volume scale was the biggest influence on price negotiation when actually market knowledge and relationships can be equally powerful. In a number of situations, the publisher can take advantage of spot purchases in a soft market through a broker that may equal or beat the large volume contract prices. Even with contract pricing, the price spread between large buyers and moderate-sized buyers isn’t especially large.
6. Receiving a $1.50/cwt. price decrease from the incumbent broker or printer when the market price really went down $2.50. Fifty percent of the time, buyers were so pleased to get a reduction they were unaware the market slide was more dramatic. Likewise, an industry-announced increase of $2.50 passed through to the publisher may have been delayed or reduced to the middleman. A number of printers or brokers use these abrupt price movements as an opportunity to increase their margins. Carefully benchmarking their prices against others can help the buyer keep pace with the competitive environment.
5. Accepting industry-announced price increases when resistance can often delay or reduce the increase. For 58% of the buyers there was a presumption that you could not be successful in fighting an industry-wide price increase. Again, market knowledge and relationships can play an important role in minimizing the impact of upward price movements. Another tactic that can control the pace and magnitude of price escalation is through some form of indexing.
4. Commitment to primary supply contract may preclude occasional spot purchases. A variety of large to small buyers totaling 62% of the cases had aligned 100% of their volume with one or two suppliers and had no tonnage available for opportunistic spot deals. With many publishers’ pages and print orders down substantially, they felt their negotiating leverage had disappeared. We found that a viable solution in several situations was to keep 10% to 15% of their volume uncommitted so they can still enjoy the supply assurance of a contract while taking advantage of spot situations that can help monitor current pricing.
3. Accepting printer’s paper pound requirements that may be padded. For some reason, over 65% of the buyers accepted the printer’s stated requirements without checking the level of waste allowance included. As mentioned earlier, paper is a profit center for many printers, and they are entitled to underconsumption savings when they purchase the paper. A quoted “competitive” price per cwt. may not be advantageous when the pounds billed on the invoice are higher than necessary. Just like manufacturing, paper requirements are negotiable and subject to competitive comparisons. In print contracts that were last negotiated several years ago, allowances that were previously competitive may have become out of line because of improved technology and efficiency gains. A printer is likely to retain such paper savings unless challenged in a competitive environment.
2. Trusting suppliers’ input on competitive market prices. For 77% of the cases, the buyer’s trust was being abused from slightly to significantly by the incumbent printer, broker, or mill. Because it can be cumbersome and time consuming to pursue competitive bidding every quarter, most publishers presume the incumbent supplier is providing valid market pricing input. Monitoring prices through an independent source that is not involved in selling paper is an alternative way to assure your prices stay competitive. If the incumbent supplier knows the buyer is diligently tracking the market, their pricing is more likely to stay within a competitive range. Also, by keeping a modest portion of their volume uncommitted, buyers can occasionally get a new quotation from a challenging supplier.
1. Accepting quarterly price volatility when six-month locks, caps, and/or collars may be available. This number one common mistake was an issue in 85% of the cases. For years paper buyers have become used to the paper industry practice of quarterly price movements. Mills would rarely hold prices for longer periods. Buyers who have been able to soften the volatility of their pricing have generally fared better than those who have ridden the roller coaster of soft and tight markets. Identifying the best strategies and dealing with the most trusted sellers have helped certain buyers save their companies significant dollars. Knowing when the best time to negotiate a longer term deal is critical to the success of these arrangements.
While the 10 mistakes outlined above were the most common, there were several others that came up multiple times and had a significant negative effect on the particular cases involved:
- Fragmentation of volume or suppliers or purchasing authority. Consolidation is still a good idea in most aspects of paper purchasing strategy.
- Choosing paper grades or weights that have higher specifications than necessary for the catalog or magazine’s content. An office supply catalog using a coated freesheet for its body stock is probably spending more money on paper quality than is necessary.
- Allowing printer’s handling and storage charges for customer paper to influence an otherwise prudent decision for publisher to purchase own paper. The paper has to be handled regardless of who purchases it. The charge should be minimal to cover some of the printer’s administrative cost but not so high as to discourage customers from buying their own paper.
- Allowing too many brokers to contact the same mills for bids. Mills will not provide their most competitive bids if they sense a free-for-all approach. A broker who is challenging a printer-purchased paper situation should not contact the incumbent mill.
- Frequent spot purchases may lead to “bottom fisher” label. During very tight markets, the buyers who consistently shop for the lowest spot prices have had difficulty getting supply at any price.
For many of the mistakes listed above, the solution was merely discontinuing the practice. However, since each case’s paper purchasing volume, specifications, and supplier situations are unique, there may be multiple alternative solutions. Which one is best for the particular client takes careful analysis, market knowledge, and experience in what has worked best in prior similar situations.
For additional information, please see:
- Paper - Back to Basics: Bill Lufkin’s guide to developing a paper-purchasing strategy.
- Coated Paper Market: Been Down So Long This Looks Like Up: Have paper prices hit bottom? And what of 2010?
©2009 Lufkin Strategic Procurement. All rights reserved. None of this report may be reprinted without express written consent. www.lufkinstrategic.com.