Optimization strategies determine the financial future.

Engineering groups take similar approaches when analyzing mill optimization strategies, but final recommendations can vary greatly.

It is often said in the industry that old paper machines never die. For some machines in the past, this meant getting shipped off to a mill in some faraway developing market when the unit became uncompetitive. For others, their fate was to lie idle in some dark corner of the mill waiting for prices to peak so that they could churn out a few tonnes before the market started heading south again.

The situation today is slightly different from that even just a decade ago, though, and arguably machines are now dismantled more often than in the past. There is still a healthy market for second-hand equipment, of course, but modern management techniques and tighter cost controls leave less room for old, underperforming assets to survive into their dotage than in the past. Also, Asian companies are not half as interested as they used to be in paying for creaky old machines, and the pursuit of stakeholder value in North America more often than not means running machines into the ground and then abandoning them.

But just because the competitive environment has changed does not mean that companies can afford to let a "veteran" machine wither and die just like that. If there's any chance of squeezing some remaining profit out of the asset, that's what management will ask for.

Whether it's Europe, North America, Asia, or anywhere else for that matter, there are still plenty of "veteran" machines that need to earn their keep. The question is how to keep such machines optimized and competitive.

BALANCING UP

Unfortunately, determining the balance between sound investment and machine optimization has been an issue that financial managers and engineers alike have long wrestled with and there are no simple answers. Ask anyone to define the "right" approach and they will usually say, "it depends."

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Jaakko Poyry President John Lindahl highlights the multitude of issues that companies have to be aware of before they even start thinking about how to optimize a mill or a machine. As he points out, considerable long term planning, judgment, and experience are needed to make the best decisions and ensure the effectiveness of each investment. For example, a company must decide:

* whether or not to invest based on a required return

* where to invest and which parts to replace

* the magnitude of the investment

* quantitative and qualitative objectives

* and, of course, identification of all the risks.

In any company, some individuals will point out the productivity benefits of an investment and others will point to benefits of using the cash elsewhere. Such discussions are, in fact, essential elements in managing paper companies. This is the coalface where corporate strategy is put into practice, but like people, companies all have their own way of looking at what's best for the future and this is a key element in any investment decision--or lack of it.

In fact, according Uwe Knotzer, head of optimization for board and packaging, Voith Paper, the distinctions are so marked that there is even a clear gap in management approaches between Europe and North America. "I would say that in my experience, there is a certain difference between European and American systems regarding if and when to invest in a production line and when to leave it as is."

Knotzer points out that his company has taken five major machine orders and major rebuilds in Middle Europe alone in the past two years, while the United States has lagged a long way behind. Of course, some paper industry analysts would argue that this is great news for shareholders, while others might argue that without investment long term competitiveness will be compromised and the business will ultimately fail anyway.

All of which takes us back to how to define "optimization." According to Magnus Diesen, head of corporate strategy, investments and business planning at Stora Enso, Helsinki, Finland, there is really only one measure that matters. "One of the main criteria for us is historical financial performance. If that's been bad for a number of years then we know that we have to do something," he said. "Another thing might be if there's a big investment required to keep a line profitable. For example, if the investment is in a non-profit area, such as new infrastructure needed in the form of a new steam boiler, then obviously we'll look very closely at whether we want to keep that machine going or do something else. After all, what is the point in putting new tires on an old car?"

As Diesen explained, these factors are some of the tangible elements that go into the decision-making process. There are also intangibles such as whether the machine's capacity makes it suitable for the company's long-term strategy, and other considerations such as the potential political fallout if a mill has to shut down in rural Norway or Canada.

"There's also the possibility of going into higher value grades," said Diesen, "which, for a company like ours operating in so many areas, can be a real possibility. This has been done successfully quite often in the past and can be quite effective in making an older machine competitive again. For example, you could be talking about moving a bulk coated woodfree machine into a more specialized grade. We've found this strategy useful, especially in North America with the rebuild we did on PM 14 at Wisconsin Rapids."

GETTING CONFIRMATION

Harri Kuosa, vice president of sales, Metso Paper, Helsinki, Finland, is definitely among those who believes that changing grades is always an option, although as he points out, it is just one weapon in the mill optimization armory. "Sometimes, completely changing the grade will come up as a suggestion," he said. "Some customers are open-minded while others have a very firm idea of what they want. Then there are others who cover everything in between those two positions. I'd say that the majority who come to us have a problem on some part of the machine where they know that they have to improve the productivity. But different regions and different customers vary in their approaches."

Knotzer echoed this view, adding, "Mill managers are mostly aware of the problems and they're looking for a third party to confirm what they know."

As Kuosa and Knotzer both confirm, while the specific techniques may vary--and the paper machines certainly do--engineering companies tend toward the same general approach when analyzing optimization. Studies rely on gaining a thorough understanding of the machine from raw materials, approach flow, alignment, detailed component specifications, and right on through to the foundations that the paper machine rests on.

For many mills, suppliers will already have a good idea of the setup of each machine. However, a full-scale process analysis from scratch can take up to 15 weeks if little is known about the mill beforehand. The price tag for a study of this magnitude can go to US$250,000 or more.

Of course, that figure is only for the study. According to Jaakko Poyry, replacing a specific machine section can cost from EUR 10 million upwards and the mill will be targeting an internal rate of return (IRR) of at least 20%. A large-scale rebuild will typically cost EUR 100 million or more and the management will be asking for an IRR of at least 18%.

With such sums involved, each engineering group works hard to offer the best solution for every machine in every mill. But with so many different types of equipment on offer and so many other variables to take into account, there is plenty of room for interpretation. This is where real expertise and creativity come into play.

As Kuosa said, "We have a standardized approach in analyzing each portion of the machine, but the analysis will also cover other elements, because profitability is inter-related to factors such as web width, speed, raw materials, and so on. What we'll do is take the machine part by part and see where we can make the most difference."

Knotzer also pointed out that engineering firms will try to go further than offering just technical advice if the situation justifies such an approach. "Often, the customer will get a better result if they're clear about the targets they're setting for their investment. For example, they could say that they have EUR 12.5 million to spend and they want extra capacity as the main target. But we also try to be as honest as we can with the customer as well, so if we don't think it's worth investing then we'll say so. This happened recently at a mill where we found that the foundations were going to break down, for example."

Among other factors, the engineering analysis might also cover issues such as whether to carry out a rebuild as one big project or as a series of smaller shuts. As Kuosa pointed out, "There's no way to say whether lots of smaller projects will be more profitable or just one large change. It depends on different factors. Each company will be different in not just the payback period, but also the cost of money and whether the company will pay for the upgrade with its own money or whether it will need external financing. Then you have to look at the cost of lost production during the shutdown."

The market itself is another area companies will look at, as Kuosa explained. "The products and grades in demand do not change all that rapidly, but they do change over time. If we're doing a project, the mill should certainly look at the possibility of converting to another grade--especially for the smaller, specialized paper markets."

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Here again, Knotzer is happy to agree. "Before you embark on a study like this, it's best to be aware of the targets you want to achieve and of course we can help our customers define what the targets might be. A mill doesn't just want a 1000 page report from us--they often want ideas."

Of course, getting a massive report on a paper machine with a lengthy list of widely varying investment alternatives can leave mill managers as confused as they were before they started, so Voith, like other groups, also offers its customers a post-study service where they will help each customer understand the benefits and impacts of all the alternatives on offer, including making the switch into new markets.

"We do this day-to-day in our own research and development anyway," said Knotzer. "We have to develop our new machines to meet market demand, so we have to know what the market wants and we can help our customers here as well. For example, in my area-packaging-the market for corrugating medium is going toward 1500 m/min machines with basis weights down to 70 gsm. It's the oldest game in the business--getting more capacity out of a machine at lower basis weights."

GETTING CONFIRMATION

Ultimately, paper companies have to make money with every investment. As Diesen points out, mill managers should already know where the problems lie from the financial returns each machine makes, so mill optimization is always about greater issues than just engineering solutions.

"The first sign is always financial performance and if that starts to deteriorate, you have to look at whether you shut it down or do something else," he said. "The problem could be something quite specific or related to external factors, but if you're looking at an investment, we will always try to look at all the factors involved before any investment gets the go-ahead. If older machines are still making money, that means there's no urgent need to do anything. But at the same time, we do try to react in advance of machines becoming obsolete."

Of course, deciding when a machine needs investment is the trickiest task of all and is critical to a company's future. This is where the credibility and expertise of the management team is ultimately judged--but there are no easy answers.

WHAT YOU WILL LEARN:

* How mill optimization impacts the bottom line.

* How setting targets can help produce better results.

* How mill optimization is critical to corporate strategy.

ADDITIONAL SOURCES:

* www.poyry.com.

* www.metsopaper.com.

* www.voithpaper.com.

RELATED ARTICLE: SOME CHECKPOINTS IN A MAJOR OPTIMIZATION STUDY

* Are the financials already flagging up a significant or potential problem?

* Is the issue internal or external? For example, exchange rates, business cycles and raw material costs will all have major impacts.

* The mill manager may already know what the problem is, but will an independent study confirm that and secure investment funds?

* Do you already have all the data needed to identify the underlying trouble?

* Does your company have the expertise to do its own analysis, e.g. vibration testing, finite element analysis, vacuum assessments, geometric condition, etc?

* Do you have adequate knowledge of the latest technological concepts?

* Is there new equipment on the market that will make a difference to your bottom line?

* Is your machine setup consistent with the standards available from the latest technology?

* What targets are you going to define in the optimization study-extra capacity, higher quality grades, fewer breaks? Going for the right targets can help secure more accurate and relevant recommendations from suppliers.

* If you upgrade quality, will you make it to the next price band? If not, better quality rarely pays off in financial terms.

* What is your cost of money and where will the funding come from?

* Even if you are confident that one area of the machine holds the key problem, have you considered all the knock-on effects of "fixing it" down through the process flow? Will new equipment or infrastructure be required elsewhere?

* Is the proposed solution consistent with the direction of market trends?

* Is it more cost-effective to go for one big upgrade or phase the work out over a series of smaller shuts?

* If you decide to do nothing, how much longer will the machine be competitive?

* If you decide to shut down, what are the political ramifications and how will the unions react?

ABOUT THE AUTHOR

Jim Kenny is contributing editor/Europe for Solutions! magazine, and is based in Brussels, Belgium. He is the former vice president of editorial for Paperloop and today heads his own company, DSI. Contact him by phone at [phone], or by email at [e-mail].

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