Reducing Costs
One of the world’s largest pulp and paper manufacturers with revenues well above EUR 5 billion wanted to cut its purchasing spend and also support the integration of its global operations.

The McKinsey team planned to help them set up a purchasing program covering all external spend to reduce total cost of ownership (TCO), build employees’ skills by training them, and integrate decentralized purchasing operations from across the world and strengthen cross-functional cooperation. Some examples of the team’s achievements included:

1. Price Agreements
The team first determined that they needed to improve the RFQ process on some of the spend categories. There were sometimes quarterly negotiations with no volume commitment and client volume was not leveraged to its fullest, as purchases were done locally and sometimes with only one qualified supplier.

The team sought to leverage combined volumes to lower prices and asked each mill to qualify at least two suppliers for each application. They proposed a long-term contract linked to a price formula and had the mills request a guaranteed improvement target, with savings credited to the client even if not fully reached by the supplier.

2. Collaboration
The team then looked to improve collaboration between mills. There was very little cooperation between purchasing operations across the world. Mills pursued improvements in the coating binders recipes without consulting other mills.

Encouraging idea sharing between mills and showing the total potential would encourage further development and create significant savings.

The team had the mills reduce binder parts gradually in the recipe while maintaining acceptable lower surface strength. They also used high-strength binder to reduce parts even further. Costs could also be cut by substituting starch for binder, which was done in a critical mill, and then other mills were encouraged to follow the example.

3. Redefining Specifications
By analyzing the supplier cost structure, the team assessed that technical service was approximately 30 percent of total price. Mills used suppliers’ technical service as much as they wanted, which meant that some mills used supplier technicians daily, while other mills saw the supplier once a month. However, everyone was paying for the technical service in their current price.

The teams built one basic common frame which was valid for everyone, and extra service would be billed to the user. The common frame included one visit per month, and three development days a year per paper mill.

The cost of extra service was expected to be minimized as mills optimized their practices. Suppliers also agreed to dedicate a technician per geographical area and a dedicated expert for the group.

Results
Overall, the company had a reduction in spending of 8 percent in the respective spend categories and saw increased cooperation and integratoion between mills. A global price agreement process enabled one of the teams to leverage the client’s global presence and size. Recipe optimization of coating binders helped to reduce material consumption and to use more cost-efficient materials, resulting in an estimated annual savings of more than EUR 20 million. Redefining specifications helped to uncover unnecessary service requirements in some process chemicals. Consolidation of supply base and standardization of purchased items provided major savings in MRO spare parts. Optimized material and increased competition was one key lever for packaging material and outsourcing of printing and rightsizing of the printer fleet provided substantial savings to the IT team.