Sunday, December 13, 2009

The 10 Most Common Paper-Purchasing Mistakes

I wrote recently that I was on the verge of publishing “the best article I have ever seen on paper purchasing” when Google’s robots disabled this blog. Here it is, from guest columnist Bill Lufkin, one of the country's top experts on paper buying. As president of Lufkin Strategic Procurement, Bill has helped a wide variety of publishing, catalog, and printing companies save millions of dollars on paper through better purchasing and negotiating practices, as well as helping buyers negotiate new printing contracts. Bill is the former Vice President of Materials Procurement at R.R. Donnelley and has spoken at several industry conferences. Check out, which offers an additional article on the basic elements of a paper-purchasing strategy and another on how to negotiate a printing contract.

With paper being the second largest cost item for most catalog and magazine publishers, avoiding common purchasing mistakes can be one of the best ways to reduce expenses.

Lufkin Strategic Procurement recently completed a proprietary survey of more than 50 catalog and magazine publishers’ paper and print purchasing practices over the past ten years. The study found a number of recurring mistakes that, once corrected, saved some of the publishers millions of dollars.

For paper purchasing, the 10 most common mistakes, in reverse order, were:

10. Not understanding the potential value of paper underconsumption. So often a buyer focuses so heavily on the price per hundredweight that he overlooks the other part of the paper cost equation, the pounds the printer states are needed to produce the job. When catalog or magazine publishers purchase their own paper, most contracts stipulate that underconsumption (that is, using less paper than estimated) will be shared 50/50. On larger runs, 1% or 2 % savings on the waste allowance can be significant dollars. Since the printers are responsible for overconsumption, they tend to be conservative in their estimated pounds requirements. In 27% of the cases in this study, the buyers were not aware that potential underconsumption was a benefit of purchasing their own paper.

9. Publishers avoiding purchasing their own paper fearing that the administration and paper work is complex. This mythical illusion of complexity was an issue in 31% of the cases, influencing the publishers to buy paper through their printers when in many cases it may have been to the publishers strategic and economic advantage to buy their own paper. When a merchant or broker sells the paper to the publisher, much of the “paper work” is handled by the seller.

8. Assuming that the big printer’s volume equates to lower customer paper prices. While some of the large printers are able to secure low contract prices on paper, that doesn’t necessarily mean that the price to the customers will reflect that volume advantage. Again, in 31% of the study cases, this presumption influenced the publisher’s decision to go with printer-purchased paper. Many of the printers treat paper purchasing as a profit center and charge prices as high as the competitive situation will allow.

7. Moderate sized publishers assuming their modest paper volume lacks purchasing power. For 35% of the cases, these publishers thought volume scale was the biggest influence on price negotiation when actually market knowledge and relationships can be equally powerful. In a number of situations, the publisher can take advantage of spot purchases in a soft market through a broker that may equal or beat the large volume contract prices. Even with contract pricing, the price spread between large buyers and moderate-sized buyers isn’t especially large.

6. Receiving a $1.50/cwt. price decrease from the incumbent broker or printer when the market price really went down $2.50. Fifty percent of the time, buyers were so pleased to get a reduction they were unaware the market slide was more dramatic. Likewise, an industry-announced increase of $2.50 passed through to the publisher may have been delayed or reduced to the middleman. A number of printers or brokers use these abrupt price movements as an opportunity to increase their margins. Carefully benchmarking their prices against others can help the buyer keep pace with the competitive environment.

5. Accepting industry-announced price increases when resistance can often delay or reduce the increase. For 58% of the buyers there was a presumption that you could not be successful in fighting an industry-wide price increase. Again, market knowledge and relationships can play an important role in minimizing the impact of upward price movements. Another tactic that can control the pace and magnitude of price escalation is through some form of indexing.

4. Commitment to primary supply contract may preclude occasional spot purchases. A variety of large to small buyers totaling 62% of the cases had aligned 100% of their volume with one or two suppliers and had no tonnage available for opportunistic spot deals. With many publishers’ pages and print orders down substantially, they felt their negotiating leverage had disappeared. We found that a viable solution in several situations was to keep 10% to 15% of their volume uncommitted so they can still enjoy the supply assurance of a contract while taking advantage of spot situations that can help monitor current pricing.

3. Accepting printer’s paper pound requirements that may be padded. For some reason, over 65% of the buyers accepted the printer’s stated requirements without checking the level of waste allowance included. As mentioned earlier, paper is a profit center for many printers, and they are entitled to underconsumption savings when they purchase the paper. A quoted “competitive” price per cwt. may not be advantageous when the pounds billed on the invoice are higher than necessary. Just like manufacturing, paper requirements are negotiable and subject to competitive comparisons. In print contracts that were last negotiated several years ago, allowances that were previously competitive may have become out of line because of improved technology and efficiency gains. A printer is likely to retain such paper savings unless challenged in a competitive environment.

2. Trusting suppliers’ input on competitive market prices. For 77% of the cases, the buyer’s trust was being abused from slightly to significantly by the incumbent printer, broker, or mill. Because it can be cumbersome and time consuming to pursue competitive bidding every quarter, most publishers presume the incumbent supplier is providing valid market pricing input. Monitoring prices through an independent source that is not involved in selling paper is an alternative way to assure your prices stay competitive. If the incumbent supplier knows the buyer is diligently tracking the market, their pricing is more likely to stay within a competitive range. Also, by keeping a modest portion of their volume uncommitted, buyers can occasionally get a new quotation from a challenging supplier.

1. Accepting quarterly price volatility when six-month locks, caps, and/or collars may be available. This number one common mistake was an issue in 85% of the cases. For years paper buyers have become used to the paper industry practice of quarterly price movements. Mills would rarely hold prices for longer periods. Buyers who have been able to soften the volatility of their pricing have generally fared better than those who have ridden the roller coaster of soft and tight markets. Identifying the best strategies and dealing with the most trusted sellers have helped certain buyers save their companies significant dollars. Knowing when the best time to negotiate a longer term deal is critical to the success of these arrangements.

While the 10 mistakes outlined above were the most common, there were several others that came up multiple times and had a significant negative effect on the particular cases involved:
  • Fragmentation of volume or suppliers or purchasing authority. Consolidation is still a good idea in most aspects of paper purchasing strategy. 
  • Choosing paper grades or weights that have higher specifications than necessary for the catalog or magazine’s content. An office supply catalog using a coated freesheet for its body stock is probably spending more money on paper quality than is necessary.
  • Allowing printer’s handling and storage charges for customer paper to influence an otherwise prudent decision for publisher to purchase own paper. The paper has to be handled regardless of who purchases it. The charge should be minimal to cover some of the printer’s administrative cost but not so high as to discourage customers from buying their own paper. 
  • Allowing too many brokers to contact the same mills for bids. Mills will not provide their most competitive bids if they sense a free-for-all approach. A broker who is challenging a printer-purchased paper situation should not contact the incumbent mill.
  • Frequent spot purchases may lead to “bottom fisher” label. During very tight markets, the buyers who consistently shop for the lowest spot prices have had difficulty getting supply at any price.
For many of the mistakes listed above, the solution was merely discontinuing the practice. However, since each case’s paper purchasing volume, specifications, and supplier situations are unique, there may be multiple alternative solutions. Which one is best for the particular client takes careful analysis, market knowledge, and experience in what has worked best in prior similar situations.

©2009 Lufkin Strategic Procurement. All rights reserved. None of this report may be reprinted without express written consent.


Anonymous said...

Some of these are a little misleading but the point I feel obligated to bring up for the sake of any small/midsized publishers is that the practice of buying your own paper can come back to bite you.

If you feel wronged in knowing that a printer is upcharging you on paper from their bulk negotiated contracts you should also look at the flipside of the argument. The 5-10% upcharge on paper is demolished at any job that requires re-work. If a printer fudges up a job that they bought stock on, they are responsible for fixing the problem and getting replacement stock (sometimes at emergency turn-around prices) to meet your expectations. When the publisher is buying stock and the printer comes across a problem and the job needs to be re-worked, the responsibility of organizing paper and getting replacement material into the printer lands squarely on the shoulders of the publisher. Also in the printing business you can have a variety of problems with paper stock that the printer would normally take care of without your knowledge. Any hiccups in production and/or finishing work caused by the change in paper stock can come back to bite you in the form of production slow-down fees and surcharges.

You also have to make certain that the printer handling your job records every detail about non-performing paper that you will need if you ever hope to make a claim against a paper mill. And when you do get approved to get a refund, don't expect a check in the mail. Instead expect a credit towards your next purchase. If you use a relatively small amount of paper and you're buying by the truckload, it could be awhile before you see your money back.

You really have to think to yourself whether the savings you may get is worth the possible risk as getting into the paper buying practice is not as easy as this article leads you to believe and not all paper merchants/mills are as honest as you would like to believe. Furthermore, new customers may have a hard time forcing mills/merchants to stand by their product.

Having said that, printing simply wouldn't be profitable if companies didn't hedge against these problems. You see the 5-10% upcharge as money in the printers' pockets when in actuallity it probably is simply offsetting losses on another job or perhaps helping offset losses incurred printing your job!

Gordon Pritchard said...

Who takes responsibility if there is a press problem related to the supplied paper if the publisher supplies the paper?

Anonymous said...

"Who takes responsibility if there is a press problem related to the supplied paper if the publisher supplies the paper?"

Typically the buyer of the paper is responsible for any problems that were caused by the paper. When your printer buys your paper and there is a problem, they take care of it. If the publisher buys the paper and there is a problem, be prepared for the phone call at 3 a.m. if there are problems and/or the delay in your print job while you scramble to find substitute stock.

I'm not saying this will happen, I'm simply stating this is what you trade off for when you choose not to allow the printer to take care of the paper purchases.

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jt said...

I like this:
"6. Receiving a $1.50/cwt. price decrease from the incumbent broker or printer when the market price really went down $2.50. Fifty percent of the time, buyers were so pleased to get a reduction they were unaware the market slide was more dramatic. Likewise, an industry-announced increase of $2.50 passed through to the publisher may have been delayed or reduced to the middleman. A number of printers or brokers use these abrupt price movements as an opportunity to increase their margins. Carefully benchmarking their prices against others can help the buyer keep pace with the competitive environment."

No mention of the fact that often the printer is forced to absorb a good portion of these increases to stay competitive. So of course, if there is a decrease, isn't it fair for the printer to recover something?

The printer buys the paper and adds value to it and resells it. How about if you start buying your own sheet metal and plastic and supplying it to the auto manufacturer that is making your car? The printer builds a relationship with the mills/suppliers with volume that contributes to keeping paper costs down on jobs of all sizes. A printer that moves high volumes and pays the bills will get a good price on paper, keeping the cost of the job down. This purchasing power in turn will keep the presses busy with other jobs when your job is not running, so that your printer will be there the next time you need them. All those in-house print plants closed up because they need other business to sustain payments on equipment. The printer buying paper for jobs for multiple customers helps both the customer and the printer. Customer supplied stock routinely costs the printer more than any "handling" charge can cover. Receiving, handling, tracking, quality and shortage/overage issues. There's more than "administrative costs" involved. It's a more complex issue than that understated description implies. At least with the printer buying the paper they control where it is coming from and can dictate the quality.

Also, the mentioned "padded paper requirements" is another point of contention for me. In an age of "no unders/overs" the printer must be allowed to insure that they will not have to go back on press for a shortage, thus eating into or surpassing slim margins. At the same time, somebody has to pay for the paper when a customer dictates these terms. Printing Customs have been thrown out the window, and it is the printer that has suffered.

The whole article has a bit of an anti-printer bent to it. For some reason the writer appears to want printing to not be profitable. If the printer does not make a profit, there's no way to stay in business. Paper "as a profit center"? How about paper as a way for printers to sustain unrealistically low equipment hourly rates?

Anonymous said...

Really good article - and I would like to note that too often there is a scare tactic at play as to "what happens if there's a problem on press?" The reality is that all paper claims are handled and processed the same way - whether the printer buys it or the end user - and while many may not want to admit this, more often than not the end user carries more weight with the mill. You can bet the mill does not want the end user to have a bad taste in their mouth when it comes to a claim on their paper - most often the mill will use it as an opportunity to show what stellar customer service they offer.

I know this comment will be slammed, but it is the truth. In today's business environment (re:credit), many mills would rather sell to the end user.

As for accepting a price decrease at face value - that happens to printers as well as end users, it always pays to get competitive quotes - complacency breeds greed (IMO).