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Hard Strategy Re-investment Profitability

A Sticky Paper Situation

#Manufacturing #Paper and Pulp
ProHub Comment

This case requires candidates to build a detailed financial model comparing profitability and ROI across three customer segments with different economics. The key challenge is organizing disparate data (customer counts, usage patterns, unit economics, capacity costs) to make an informed investment decision. Strong performance requires both mathematical accuracy and strategic insight about longer-term dynamics.

Estimated Time 15 minutes
Difficulty Hard
Source NYU
50 / 100
Your client is PaperCo, a manufacturer of specialty papers which are sold to commercial printers in the US. PaperCo produces self-adhesive sheeted papers that are ultimately used in a variety of labeling applications – often, eventually, to service CPG firms and for billboards. PaperCo’s operations are profitable, but the business has failed to grow over the past few years. The client would like to invest in the business to restore growth and you have been asked to identify opportunities.

Clarifying Information

Products and Pricing:

  1. Raw materials for the products include rolls of paper, adhesives, and a non-stick coating. They are then layered. Finally, they are cut to specification for the customers – this process is called “sheeting”
  2. The client has a range of products that is broadly the same for all customers and that it does not wish to change
  3. Margins are acceptable, but management is averse to price-cutting because of a fear of initiating a war with competitors that would leave everyone worse off
  4. Unit price differs according to customer segment

Market/Customers:

  1. PaperCo sells to 24,000 commercial printers in the US (20,000 are small, 3,000 medium and 1,000 large)
  2. The company has 30% market share in the small printer segment and 10% in the medium and large printer segments
  3. Your team-mates recently completed a study that showed that if PaperCo expanded production it could increase sales to the medium-sized or large-sized printer segments by 20%
  4. Printers (the customers) prefer to receive the product in different forms according to the size of the customer: Small prefer boxes; Medium prefer cartons; Large prefer pallets
  5. Current sales volumes: Small segment (20,000 customers, 100 annual units per customer); Medium segment (3,000 customers, 500 annual units per customer); Large segment (1,000 customers, 3,000 annual units per customer)
  6. The company has the capability to expand production
  7. Any additional production would require an increase in the client’s fixed costs (e.g. new packaging equipment, expanded facilities, increase in permanent labor force)
  8. An expansion in carton distribution capacity would constitute a one-off cost of $675K (for medium printer segment)
  9. An expansion in pallet distribution capacity would constitute a one-off cost of $1.3M (for large printer segment)
  10. Variable costs consist of materials, sheeting, coating and packaging
  11. Unit costs differ by segment: Small ($20 price, $5.5 materials, $1 coating, $0.5 sheeting, $3 packaging); Medium ($18 price, $5.5 materials, $1 coating, $0.5 sheeting, $2 packaging); Large ($15 price, $5.5 materials, $1 coating, $0.5 sheeting, $1 packaging)

Industry:

  1. This is a mature industry, with low growth across the board
  2. There are no significant competitive or regulatory trends in the industry to be aware of