The Forest Hill Paper Company (FHPC) is a small, closely held paperboard manufacturer that produces “parent rolls” which are then distributed to converters for further processing. Due to their small size in comparison to many of their competitors in the industry, FHPC would be classified as a niche company as stated in the case. Part of FHPCs strategy, which will be looked at further below, is to create a niche based on service and rapid customer response that the larger manufacturing companies are too large to be able to do successfully.
The environment in which Forest Hill Paper Company operates in is a cyclical environment with upswings every three to four years. Due to the cyclical nature of the industry, customers try to anticipate times when they would not be able to get paper by ordering large quantities of paper at certain times and none at others. Because of this, FHPC has times when they are flushed with orders and cannot meet them with their production capabilities, and times when they are not running at optimal levels due to lack of demand. Along with this issue, the market share for domestic paperboard has been steadily declining. The most significant reason there is a decline in market share is the moving trend toward plastic and more environmentally friendly forms of paperboard. In general throughout the industry, companies have made little effort to expand capacities of the production facilities. At times the demand greatly exceeds the capacity of any one production plant. In boom times the industry as a whole experiences great increases in selling price for the paperboard products for most of the grades of paper.
Forest Hill Paper Company’s strategy is to provide a full range of products and services so they are able to compete with the larger manufacturers in the industry. Their competitive advantage comes in with their ability to provide rapid response to customer needs. The relatively small size of the company allows them to do this successfully as their customer base is a great deal smaller than that of the large manufacturers in the industry. In line with their strategy to provide a full range of products, FHPC produces 20 different grades of paperboard. These various grades of paperboard have different production run times and therefore there are variations in quantity produced and the time it takes for production. Some managers within the company have questioned the strategic policy of producing a full product line. Throughout the product mix of FHPC there is a variance of selling price and profit margin which needs to be analyzed further to decide if the full product line strategy is the most profitable strategy for the company. Another strategic point that needs to be addressed in further detail for the managers of the company is the various costs associated between grade changes and slitting. Further understanding of these input costs will help managers to effectively manage the business during boom and bust times in the very cyclical paperboard industry.
Table 1: Current systems method of allocating manufacturing costs. Product (Grade)# of Reels / BatchMaterial Cost / ReelMaterial Cost/Batch A50$4,800.00$240,000.00
Table 2: Traditional Volume Based cost per reel
Product# of Reels / BatchMaterial Cost / ReelMaterial Cost / Batch% of total Mat CostOverhead * % of total material Cost A50$4,800.00$240,000.0013.78%$252,000.00
Table 3: Calculation showing the cost per reel for a grade change Cost / Grade Change=Total Cost per Grade Change / Number of Grades
=$47,000 / 4