SPM 8-3.ppt
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Transcript of SPM 8-3.ppt
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Dairy Pak
A Value Chain Perspective on
Product Line Strategy
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Dairy Pak
The year is 1988, and the Vice President of the Dairy-
Pak Division of Champion International has to make
some tough choices. This is what he is facing:
The fastest growing segment of the carton market is wheretheir business is declining
Their manufacturing system is old
Limited production capacity; no growth
Rapidly expanding international market offersopportunities, but could bring more problems than
opportunities
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Dairy Pak
Competition came early from the plastic
carton manufacturers
The market for poly-paper cartons shrank, but
stabilized. Champion DairyPak survived and is
#2 in the industry
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Dairy Pak
As customers demanded more convenience
and variety, the market for prepared ready-to-
drink fruit juice grew quickly.
This segment of the carton market is growing
rapidly as more beverage companies are
entering the juice market.
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Dairy Pak
OK.. So lets take a look at the company.
Champion has not expanded capacity since the1960s. They can produce 250,000 tons of poly
coated paperboard annually. The machines
that coat, wrap, and print the board for use
have not been updated for decades.
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Dairy Pak
When the juice market exploded in the 1980s,
Champion was not prepared to meet the
needs of these customers.
They chose to compete on price alone rather
than quality and diversity.
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Dairy Pak
Looking at the market, we can learn the
following facts:
1. Champion, as well as other manufacturers, have
no growth in the dairy product carton market
2. Non Dairy & specialty juices are the leading
growth area
3. The export market is growing rapidly
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Dairy Pak
Domestic Consumption of Pure-Pak Cartons (000)
1980 (tons) 1987 (tons) % change
Dairy 506 374 -26%
Non Dairy 66 120 +82%
Total 572 494 -14%
Champions Domestic Pure-Pak Cartons
1980 (tons) % share 1987 (tons) % share
200 39% 150 40%30 46% 30 25%
230 40% 180 36%
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Champions Paperboard Production
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U.S. Folding Carton Stock Export for Liquid Packaging by
Destination (000 tons)
1985 1986 1987
Far East 214 233 248
Europe 50 56 59
Australia 30 35 36
Africa 30 28 35
Canada 9 17 33S. America 30 29 29
C. America 13. 8 14
Caribbean 3 5 7
Middle East 2 10 6
Other 14 11 14
Total 395 432 481
Uncoated Rolls 94 103 116
Coated Rolls 272 313 336
Converted Cartons 29 16 29
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U.S. Folding Carton Stock Export for Liquid Packaging by
Destination (000 tons)
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1988 Domestic Share of Market for Ready to Serve Orange Juice
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Orange Juice Manufacturers Use of Paperboard Cartons
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Q1: Dairy Pak Value Chain
Paper mill
customers
OJ
Manufacturers
Extruder
Conversion
Regional
Dairies
Supermarkets &
Distributors
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Value Chain
Regional Dairy & OJvs- Branded Orange Juice
(per carton) Milk Regional OJ Minute Maid Tropicana
Consumer Pays $1.16 $1.50 $1.89 $2.26
Store Pays 1.04 1.20 1.42 1.79
Store Margin 0.12 0.30 0.47 0.47
Store % 10.3% 20.0% 24.9% 20.8%
Distributor Cost 1.04 1.20 1.42 1.79
Processor Cost .75 .80 .64 ?
Pasteurization .06 .06
Distribution & Shrinkage .06 .06 .11
Carton Cost .08 .08 .06
Advertising - - .36
Dairy/Juicer Margin .09 .20 .25
Dairy/Juicer % 8.65% 16.7% 17.6%
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Value Chain
millextruderprocessor
(per ton) Dairy Branded Juicer
Price to Processor (14400*.08) 1152 (14400*.06)864
freight 10.00 10.00
processor margin 231.00 231.00
cost to converter 663.00 663.00
converter margin 248.00 -40.00
CM % 21.5% -4.6%
sale price to converter 663.00 663.00
freight 35 35
conversion cost 94 94
cost to extruder 540 540
extruder margin0% 0%
sale price to extruder 540 540
transport 3 3
papermaking 105 105
cost of pulp 319 319
paper mill margin 113 113
paper mill % 21% 21%
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Q2
Percentage of value chain profits by each segment:
Dairy Regional OJ Branded OJ
Champion 10.7% 4.7% .7%
Processor 38% 38% 34.5%
Market 53% 57% 64.8%
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Q4: Analysis of Value Chain
What do we do now with this data?
Champion has the opportunity to expand or
maintain status quo
What areas can be exploited for more profit?
Should Champion invest in new equipment to
produce higher quality product?
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Q4
Buyer Power AnalysisDairy Branded OJ Producers
Number of buyers 1000 3
Size of buyer Small LARGE
Avg. order size 375 tons (375,000) 30,000 tons
Buyer switching costs Low. Dairy buyscommodity board
High. OJ needsdifferentiated board
Cost of carton/total cost 8.5% (8/95) 5% (6/117)
Buyers Margin 8.6% (9/104) 17.6% (25/142)
Value by Segments
Total Margins: 10.7% .7%
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Results
What should Champion do based on this value
chain analysis?
Invest in new equipment to produce cartons for
the branded OJ companies?
Focus on leveraging their existing products for
their existing customers?
Focus on the export market?
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Our Opinion
We feel that Champion should leverage their
relationships with dairies, as this is where their
greatest margins are. To invest in new equipment to
service the OJ companies, they would need to investover $65 million.
Focusing on the dairy customer could lead to a stronger
relationship and potentially the development of new
carton designs for new milk products. These newpremium products could produce higher margins and
more profits.
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Q&A