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Back to basics: Cost restructuring for the future

In an industry already challenged with consistently covering its cost of capital, the current credit crisis has added pressure to the balance sheets of many paper and packaging companies. The era of available and inexpensive credit for all is over, this much we know. Tapping the capital markets without addressing underlying business issues is no longer an option. Collectively, the industry lost sight of the fundamentals of lowest cost production as a key driver to a sustainable and profitable enterprise. Growth by acquisition has given some groups strong market positions but left them with parallel structures that needlessly duplicate many functions. Where divestiture was the strategy, companies have been left with cost bases originally built for larger enterprises but are no longer necessary for the leaner organization.

The convergence of these two challenges makes a new look at cost reduction imperative for survival. Companies that have borrowed to merge, acquire, or invest in capital equipment need to deliver the synergies from those deals, and they need to deliver them sooner rather than later. The lending world has changed; it should not be assumed that lenders will tolerate underperformance without corresponding compensation (or marking to market). The approach must be holistic. Operational performance and balance sheet management cannot be viewed separately. In fact, no part of the company can be spared careful scrutiny. Each can play an important role in reducing costs, preserving cash, adding shareholder value, and contributing to the long-term health of the company.

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•This report looks at a new look at cost reduction imperative for survival; a paper industry perspective

•The strategies for cost reduction are grouped into two main groups: Cost focus strategies and Growth and Sustainability strategies

Back to basics

The 3 main cost-reduction strategies under “Cost Focus” include the following: 

  • ‘Lean-out ' operations: the main activities engendered under these strategies are joint ventures, compression of cash conversion cycles and leveraging scale to improve efficiency among others
  • Shifting fixed costs to variable costs
  • Simplified business models

 

The strategies that make-up Growth and Sustainability

  • Grow smart which includes revised pricing strategies, understanding customer behaviour and innovation among others
  • Proactively manage talent
  • Bolster planning disciplines
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