"As a business, what do you do now?"

Jim:

I was reading Nip Impressions and had a couple questions. When you are an integrated company, with mills and converting plants, there is always a struggle in terms of cost split. What is the best way to go in terms of the price of the board (roll stock) as transferred to converting. A couple of options are actual cost basis or a market price basis for the board cost? In many cases the converting uses both internally produced roll stock AND market purchased board. Obviously you would like them to use as much internal produced as possible. If you transfer from the mill to converting on a costs basis, the board looks very cheap compared to market. Then it looks like the converting facility is making a huge profit and the mill is a big loser. This may even result in the final product price (carton) to be lowered since there appears to be so much "profit" at the converting that could be given up in customer pricing. If you go with market price then the mill may look profitable and the converting is struggling to show any profit. Are there other approaches?

Mike Gillespie
USA

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Mike:

There are several approaches to this that I have seen:

(1) (and wrong) is that the side of the business that is politically most powerful dictates prices.

(2) To me the most fair is to use market pricing. This makes both businesses behave as they would in the market. Let the executive offices play games as to which side makes the most money in their own privacy.

(3) Sometimes I have recommended (only after checking with lawyers and accountants for their blessing) that on the tax books the profit be taken in the state with the lowest income tax rate. This does not have to be the internal transfer number that operators and managers use, but it is done solely for tax purposes.

If you use market pricing, one matter has to be clear to the mill: returns & allowances from the internal converters have to be treated with the respect, seriousness and consequences to the mill that they would have on the outside. Simply, if the carton plant pays market prices, they should expect to be treated just like outside customers when they have a problem. The reply to their tech service calls is NOT: "Aw, just work through it like you did the last time." On the other hand, if the converter is getting a special lower price, they should expect lower service and suffer on their own working through the problems. These little scenarios show why it is best to keep eveything on an open market pricing basis so expectations, quality and service are handled professionally and to the highest standard. Letting one's service and quality slip with one customer, even an internal one, will soon cause slippage with all.

Jim

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