Northam Packaging Company

NORTHAM  PACKAGING COMPANY

Northam 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 company's 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. Northam's market share in this segment had declined over time. Customers attributed the decline to Northam's  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

Northam's 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 Northam's 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 Northam's 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 processor's  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 Product

The blank cartons were set up , filled and then sealed in the processor's 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 carton

Converting , 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 $0.07

Production container cost $0.64 per carton

Converting   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                                                                              $2,800

Extruding Plant                                                                               $   190

Carton Converter                                                                            $   830