Paper — Stockpiling Isn't the Solution

"Sir, please put the abundant supply of paper down and slowly back away from the edge! Don't stockpile for Y2K; you simply won't need that much paper before the new millennium. C'mon, buddy, don't make the plunge. You have so many other things to invest in without tying money up in a large supply of paper. Don't do it, no!"

OK, so it's highly doubtful that the "paper police" would ever have to talk a print customer off the ledge of paper stockpiling. Admittedly, there's no such thing as the paper police or a ledge of stockpiled paper. But there are interested parties within the commercial printing industry who are patrolling the streets in an effort to see that Y2K paper stockpiling does not become an epidemic.

The prevailing theory among pundits and so-called Y2K experts is that should problems arise resulting from millennium bug damage, there may be a shortage of consumables, including paper. The same people fear that the electronic sliding doors at the local supermarket won't open, so they have taken it upon themselves to stock up on gallons of Deer Park water and Chips Ahoy cookies.

Paper, publishing and printing members of the Graphic Communications Association (GCA) met March 10th in New York to discuss, among other things, the prospects of paper stockpiling to avoid breakdowns of deliveries. The GCA revealed that a report by Gerry Galewski, information systems director at Perry Judd's Inc., points out that most larger printers have already investigated, identified and replaced any potential Y2K problems. In the process of compiling information for his report, Galewski has learned of print buyers who plan to stockpile anywhere from one to four months of extra paper, "just in case."

The GCA report quotes Herb Krupp, a statistician with the American Forest & Paper Association, as stating that stockpiling would push most North American mills to their limits for groundwood grades.

Inventory Know-how
Keith Pratt, vice president of purchasing for Mail-Well, believes that talk of paper stockpiling—either by printers or their customers—is inevitable. He feels printers are less likely to stockpile, given their experience in inventory management.

"Management systems are more efficient today than they've ever been," Pratt remarks. "We tell customers that there's no reason to [stockpile]. We have no indication at this point that our suppliers will do anything different in the supply chain as a result of Y2K. Our internal capacity will support flexing production to support any Y2K-related demand,"

"We have, with our suppliers, supplier-managed inventory or vendor-managed inventory. We bring paper in to meet our demand. This enables us to keep in-house inventories at the lowest possible levels," he adds.

Pratt remarks that Mail-Well is entering relationships with paper suppliers that stress supply-chain management and can understand Mail-Well's business and demand, particularly its need for delivery on a just-in-time basis. Mail-Well will, in kind, return the favor to its customers by listening to—and understanding—their needs.

"We want to make sure that we continue to educate our customers, to stress that there's no need to do anything different," Pratt says. "It's important that we continuously assess demand patterns throughout 1999 and be prepared for any changes that might occur."

It is the fear of the unknown that has many members of the business community fumbling around in the dark. What does seem certain is that if there is any substantial damage—delivery disruptions, for example—a shortage in paper may be the least of the printers' or print customers' problems.

"Whether it's paper or financial deposits, people are at least thinking about taking precautions," says Andrew Paparozzi, chief economist for the National Association of Printers and Lithographers. "I haven't heard a lot of reports of printers stockpiling paper, but that's the kind of concern that this nebulous Y2K problem is creating.

"I would not be surprised, given what we've heard about the Y2K problem, that there is some of that, just as a precautionary," Paparozzi adds. "God knows the price is right for doing it."

Stockpiling seems quite unlikely given the rock-bottom prices currently seen on coated and uncoated free sheet and groundwood. The good news is that, from a price standpoint, the readily available paper supply and a lack of across-the-board hoarding should prevent the millennium bug from artificially stimulating paper prices.

Artificial Market?
"Let's assume printers are stockpiling, as I'm sure some are, in preparation for a possible Y2K disaster," Paparozzi remarks. "The question becomes: Is that a marginal occurrence that's not going to affect the market substantially, or is it something that would be so significant, it could cause an artificial increase in prices? I haven't seen that issue come up enough to make me believe it's anything that will affect the market more than marginally."

R.R. Donnelley & Sons is another printer that believes in not allowing large quantities of paper to sit in its warehouses for long.

According to Brian Kullman, Donnelley's paper supply chain strategist, North America's largest printer takes delivery of paper within three to seven days of the job run. Also, its supply chain management financially discourages excessive inventory.

"We're quite aggressive in the management of inventory, generally speaking—and much more aggressive than customers who furnish their own paper," Kullman explains. "The systems are basically based in the plant, so they're closer to the point of need. We've been on an EVA-type of financial reporting and controls, which means that the capital tie-up of paper is directly charged to the P&L of the manufacturing plants. That really puts them on guard to avoid building up large amounts of paper."

Bigger Fish to Fry
Kullman also feels a paper shortage, or the unavailability of paper, would not rank among the most critical factors should Y2K cause significant problems for paper supplies. He believes delivery systems, particularly railroads, as the chief concern, although the railroad is only one mode of transportation.

Kullman says Donnelley is currently huddling with paper suppliers who, in turn, are studying the issue with the railroads. He thinks there is concern on the part of the paper manufacturers—and Donnelley as well—that print buyers will stockpile paper unnecessarily.

"If they [forward buy], they'll likely do it during a time of year when the mills are often straining to get all of the paper out the door that's needed to satisfy current consumption," Kullman says. "This would put an extra-heavy load on all the systems. Combined with the highly probable outcome that the excess paper won't really be needed, it will result in a collapse of orders in the first quarter of 2000."

By manufacturing an extra month's worth of paper, Kullman explains, there would only be 11 month's worth of orders for the following year, which would drive up costs on all sides—the variable costs in a 13-month year and the problem with fixed-cost absorption in an 11-month year.

While Kullman is adamantly opposed to stockpiling paper, he believes sooner, rather than later, should be the motto. By waiting until October—generally the busy season—publishers could be catching prices on an upswing, leaving them with high-cost inventory in a falling paper market.