Northam Packaging Company
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NORTHAM PACKAGING COMPANYNortham Packaging Company produced 2,06,000 tons of coated paper board in 1989. This paper board was sold to consumer product firms ( processors) who formed the paper board into cartons, then filled and sealed them for shipment to retail outlets. Northam served two market segments. In 1989. 146,000 tons of the companys output went to commodity product firms from whom the carton was just a box. For these firms, price was the major purchase characteristic assuming normal quality and services. The company had 40% market share in this segment. These processors products were considered commodities because they did not have an ability to achieve a price premium for the brand name. These processors were typically smaller in size. Northam sold to over 300 customers in this segment. Overall sales in this segment has declined 3% per year over the last five years, but were believed to have stabilized in 1989.The second customer segment to whom Northam sold 60,000 tons of paper board in 1989 was high quality differentiated processors for whom the carton was an important element of the marketing strategy. Northam had a 15% market share in this segment. These processors where typically larger in size .Northam sold to only six customers in this segment. This segment was growing at approximately 14% per year and was projected to grow even faster in the future. The quality of the packaging material (strength, durability and printability)was particularly important for this segment because the carton was a point of scale merchandising ad for the differentiated products. Northams market share in this segment had declined over time. Customers attributed the decline to Northams inability to consistently produce the high quality board this segment demanded.Northam was one of four major competitors in the costal paperboard industry. Because of the scale technology and integration economics of these firms, new entrants were effectively shut out.Substitutes Plastic was the major substitution threat to the manufacturer of coated paper board. Shell chemical and Hoover international (now Johnson Controls) had changed the consumer packaging industry overnight in 1965 when they combined to introduce the plastic resin pellet and the blow molding machine to manufacture plastic cartons. At first , the polyethylene pellets supplied by shell chemical were quite expensive . But the blow modeling machine was so easy to use that plastic made steady inroads into the consumer packaging industry . However, coated paperboard continued to be used.Cost Structure Process flow is from the basic raw material sources through the end – use product delivered into the final customers hand. Paper mill, extrusion and conversion stages of the chain relate to Northam .The timber, logging, chipping and pulp mills stages are deemphasized. The full value chain would consider these stages as well.Step 1 Paperboard Manufacturing The Mill Northams primary manufacturing facility bought pulp on the open market for $319 per ton and converted the pulp into uncoated paper – board at an additional cost $ 105 per ton . The company sold some of the uncoated board to outside customer to an average price of $ 483 per ton plus freight to the customer . But the major customer for the uncoated board was Northams own plastic extruding plant.
Step 2 Adding The Plastic Coating Extrusion The uncoated board was then trucked to a nearby coating plant at an average cost of $3 per ton. Polyethylene coating was applied to both sides of the board by two extruders at an average full cost of $91 per ton. Coated board was currently sold in market for an average price of $605 plus freight. On these shipments, the extruding plant earned a profit of $ 28 per ton.Step 3 Carton Conversion After extrusion the coated board was shipped to Northams carton converting plant at an average freight cost of $35 per ton. In the first stage o f the converting operation, rolls of coated paperboard are spliced together to form a long continuous web. Next each particular processors name, logo and design are printed on one side. Then the carton (container) blanks are stamped out and stacked on shipping pallets for loading. The total cost of the conversion operation averaged $ 234 per ton . The converting plant also paid an average of $10 per ton for freight to the end- use customers. Industry statistics showed that one ton of board yield an average of 14,400 cartons.Step 4, The Filling Plants- Processors Of consumer ProductThe blank cartons were set up , filled and then sealed in the processors factory. The processors delivered their products to convenience stores and supermarkets. Without recycling, the cycle was complete when consumers purchased the products and eventually threw away the disposable cartons. The processors who produced an undifferentiated product usually paid $.08 per carton. The other costs of such processors were on average:Product cost $ 0.75 per cartonConverting , distribution and shrinkage cost $0.12 per carton.They sold a carton of the commodity product for an average of $1.04 to supermarkets.The differentiated processors. on other hand, had a very different cost structure. Their cost structure was as follows.Average container cost $0.07Production container cost $0.64 per cartonConverting distribution. and shrinkage cost 25% of the $1.42 per carton which is the whole sale price to supermarkets or $0.36 per carton.Step 5 The Retailer The supermarket A typical supermarket sells the undifferentiated product for $1.16 and the branded product for $1.89.The assets invested at each stage of the process were estimated using current replacement cost assuming full utilization of the were as follow.Paperboard mill $2,800Extruding Plant $ 190Carton Converter $ 830