Concerning ROI--is that all there is?

Jim

Your article on ROI, IRR, RONAE, etc is spot on. If you've not already done so, you need to read the book "Blue Ocean Strategy"

Regards,

Myles Cohen
Division Vice President and General Manager
Sonoco Recycling

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Jim, once again you’re on target.

I’ve always thought that what something is worth has little to do with what it cost to make it; it’s value is determined by the buyer! I’ve always enjoyed hearing Sales guys talk about explaining the rationale behind a price increase as the raw material costs have increased or insurance costs have increased or something like that. You are correct; that mentality leads to the company becoming a ‘tolling’ operation. It makes sense, then, that customers who hear this rationale would reply by asking to see the accounting ledgers to verify proper cost management and proper cost assignment. I doubt many industrials would find that very acceptable.

Price increases need to be, some how, associated with improvements to the value proposition being offered so the customer will be willing to fork over more $$$’s for the offering, but feel he, too, is getting a better deal.

It seems to me that in a ‘tolling’ situation, cost reduction is about the only issue; the ‘toller’ has to continually reduce his cost lower and lower to improve his “margin”. Innovation, then, seems to be limited to how can we provide the same old value proposition at a lower cost? An example, with that line of thought….a 1957 Chevrolet would today cost LESS than it did in 1957!

The other option is value proposition enhancement; as much as I would like to have a ’57 Chevy in my garage for sentimental value, I would MUCH prefer most any of today’s cars for my routine commuting today. Now, if given the choice of a ’57 Chevy at ’57 prices (even grown for inflation), I might think differently, but that’s another issue.

The first tractor my Granddad purchased that I remember cost less than $2000 and it did everything he wanted it to do. (The tractor still runs quite well today, some 52 years later—without a restoration having been done, just good care over time.) He never had more than 3 tractors and thought getting the 3rd was silly since there were only 2 operators routinely available! He didn’t do ROI calculations either; he just purchased what he needed to do the job he wanted to do and not much else. (Maybe he was doing ROI evaluations after all and didn’t know it!) On the other hand, a close friend of mine at one time had 8 tractors, each costing more than $50,000 with the most expensive one considerably over $100,000—and he only had 2 operators also! He “purchased” a new tractor and complimentary equipment every good year. After a couple of successive not-so-good years, he’s now out of the farming business as an owner and is running equipment for another farmer. He was a college graduate in Ag Indust. Business and was fully aware of ROI considerations but he seemed to let cash and credit availability and the desire to get bigger overshadow the financial side of his operation. Given these two management systems I prefer the “buy what you need to do what your core business, take care of it and utilize it” system that my Granddad used. I know he never heard of OEE, TPM and the like; he just didn’t like to see his assets sitting in the shelter and he wouldn’t tolerate anyone abusing it.

Did his system work; He died a farmer and went to his grave having never owed anyone a dime and had socked-away more than a few sheckles as he said, “just in case”. And every tractor he had purchased during my memory was still on the farm (all three of them) and running quite well along with most of the equipment he had purchased with them. Not bad for a little old man with a 4th grade education.

I know times are different today but the ‘horse sense’ management system he used coupled with his integrity could be applied today with the same positive results that he enjoyed, I think. Couple this with a commitment to improve value propositions as the drivers for price increases, and management would be considerably different today.

By the way, your suggestion that someone outside the industry will likely be the one to revolutionize it fits very well with Joel Arthur Barker’s writings in his books “Paradigm Pioneers” and “Future Edge”. Good reading if you haven’t already.

I hope this note finds both you and Laura well. Keep driving home the point that it isn’t the paper industry that needs help, it’s the management systems that created the industry we know today.

Ed Turner
Houston, Texas USA

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Jim

I'll guess at the riddle
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I remember several projects that were built on ROI which were later deemed marginal because the assumptions used in the ROI determination proved incorrect. In the long run they were all good projects but they did not meet their original ROI schedule.

There perhaps are other projects that we know in our gut are the correct thing to do but ROI prevents their completion. How can we get around this stumbling block? I sure don't have the answer except for the obvious legally required projects which have to be done or shut down.

In the good old days, a savvy senior VP would say he just wanted to do it - period. Those days are long gone.

Anyway you ask some very pointed questions. And your observation that the answers will probably come from someone outside pulp and paper is astute. History says that is often the case. A new set of eyes just sees things differently.

Peace,

Gene Canavan
Prattville, Alabama USA

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Jim,

This was a great article and a good analysis about the decisions we make all to often in our industry. Breakthrough performance comes from creative thinking and not just following the crowd.

Neal Stephenson
NGC Industries

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Jim -

Appreciated your editorial this week very much. There's some great things in what you wrote. I'll connect it with something Ken Rohleder (President of Rohleder Group Inc.) said that has stuck with me - "principles must trump analysis". What you are talking about here is a fundamental principal - 'better products and lower prices'. Paper manufacturing is not going away... but those who do not deliver to this principle will be left behind... no matter how astute their analysis, or great their "ROI".

Kind Regards,

Darin A. Jensen, P.E.
Engineering Team Leader
Liberty Paper, Inc.


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