A NEW MATH FOR CUTTING COSTS

A NEW MATH FOR CUTTING COSTS

As the global recession forces hard decisions, managers can learn a lesson from Norske Skog. The $4 billion Norwegian company, the world's second-largest newsprint manufacturer, has turned shrinking into a science.

By building a detailed model of its global operations, Norske Skog has been able to identify what to eliminate, right down to individual machines. Its tool fits into the field of applied math known as operations research. Originally harnessed in the 1940s to fine-tune logistics, OR is reaching into new fields, including corporate strategy. Norske Skog's analytical approach has even won the grudging approval of union workers. "They were able to convince us that the numbers were correct," says global employee representative Kare Leira.

Just four years ago executives used far simpler financial analysis in picking which factories to shutter. The result was a public-relations nightmare. The downsizing, which included 380 job cuts, was viewed as arbitrary. "We were criticized from the Prime Minister on down," says Rune Gjessing, senior vice-president.

So it was with a sense of foreboding that Norske Skog determined in late 2007 to rip out an additional 9% of capacity. Relying on two math whizzes in the New Zealand branch, it built a model of its global operations last year that included everything from changing costs on freight to currency fluctuations.

This enabled managers to study the business with a new level of detail. They picked out money-losing operations in plants that appeared to be well-run. A manufacturing line in Korea, for example, was selling expensive recycled stock from the U.S. at a loss.

Norske Skog managers ran simulations of different scenarios, from soaring oil to cratering economies, for board members and union representatives. This helped make the case for where to cut capacity and 300 jobs. The union hired numbers experts of its own and, says employee representative Leira, "found nothing to complain about."

Norske Skog is still struggling in a declining industry. Its chief competitor, Canada's AbitibiBowater, sought bankruptcy protection Apr. 16. More cost-cutting, say execs, lies ahead.