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UPM, the big Finnish paper manufacturer, controls 2.3 million acres of forest in its home country alone. But the fastest-growing thing at UPM over the past 10 years has been the company itself.
Between 1995 and 2003, a slew of mergers and acquisitions, coupled with organic growth, drove UPM's revenues from $1.2bn to nearly $12bn, a tenfold increase. Today, the company has 100 production facilities in 16 countries, and is one of the world's top producers of magazine papers, newsprint, specialty papers, converting materials and wood products.
There was one major obstacle to continued growth, however. Like many companies that embark on an acquisition spree, UPM became saddled with dozens of different legacy systems for managing its business processes. It lacked continuous visibility of product moving through the many stages of order fulfillment. As a result, the organization was rife with inefficiencies. For UPM to become truly global in scope, it would have to adopt a single, coherent approach to sourcing, manufacturing, sales and logistics.
The need for a new strategy became even more critical as demand for paper began to weaken, caused by a drop in the consumption of magazine paper and newsprint. Cost increases were exceeding revenue increases, and new challenges from emerging markets were placing additional stress on the supply chain, says Frans Verwimp, logistics development director of business processes with Helsinki-based UPM.
The answer lay in Chain 2000, an initiative to develop common supply chain processes throughout the organization. Elements to be affected in some fashion included demand forecasting, sales planning, order fulfillment, logistics, and information systems.
The program's effects would be felt first in the paper division. That unit consists of three parts: newsprint, primarily made up of recycled fibers; magazine paper; and wood-free specialty papers. Plans called for the initiative to be rolled out gradually to UPM's production facilities in Finland, Germany, France, the United Kingdom, China, Canada and the U.S. Many locations were picked up on the acquisition trail, and had developed their own ways of dealing with carriers over the years. (UPM's current structure dates back to 1996, following the merger of Kymmene Corp. and Repola Ltd., including the latter's United Paper Mills subsidiary. At that time, the organization became known as UPM-Kymmene Corp.; it recently shortened the name to UPM.)
The effort would require multiple vendors to address pieces of the puzzle, but UPM needed one strong provider to help it implement a global logistics planning and execution system. Improvements in logistics were expected to deliver about one quarter of the expected business benefits of Chain 2000, Verwimp says.
Logistics is also a key element of customer service. UPM doesn't keep a lot of buffer stock of finished goods on hand to protect itself against supply chain snags. On the contrary, says Verwimp, most product is made to order, moving out of plants directly into the marketplace.
G-Log Gets the Nod
UPM's choice of a software vendor for a new logistics system was Global Logistics Technologies Inc. (G-Log), based in King of Prussia, Pa. It was expected to furnish a package that would supplant various "best practices" that had been developed at the local level. (The current system will remain in place until the new software is fully implemented, Verwimp says.) The ultimate goal is to create "a unified, single system with centralized control to manage the supply chain," says Srinivas Rajagopal, director of planning, optimization and solutions with G-Log.
The initial focus, says Verwimp, is on the planning and execution of ocean transportation, along with distribution to end-users. UPM relies on numerous short-sea and deep-sea carriers to move product from Finland into the European continent and beyond. Much of its product requires specialized services such as roll- on/roll-off and breakbulk carriers. Self-billing and damage handling are among the specific processes that needed to be addressed from the transportation end.
G-Log wasn't selected for its broad scope of functionality. No software vendor had all of the capabilities that UPM desired, says Verwimp, although G-Log "had the highest fit." What it lacked was much of the functionality required to support European logistics processes, including damage handling and invoice management. What it had in place was a basic package for load planning, short-term capacity planning and shipment execution-"about 60 percent of what we required," says Verwimp. The rest would come through further development of G-Log's systems, as well as middleware crafted by UPM in partnership with another provider.
"We made a good agreement," says Verwimp. "We got functionality as part of G-Log's standard solution, and they learned about what the customer wanted."
When it comes to logistics, the forest-products business has its unique set of requirements. Verwimp says UPM wanted to cut costs through self-billing. Damage control was important because the often-delicate product must withstand multiple stages of handling. In addition, finished goods move in a variety of forms: rolls, rolls on pallets, sheets on pallets and bales, to name a few. The biggest rolls can weigh up to 8 metric tons, Verwimp says.
Cycle times vary, depending on the division. Fine paper products operate on a short turnaround, with frequent, small orders. Newsprint is purchased for a longer term, in periodic bursts of activity, during which buyers will place orders with several suppliers.
Either way, time is of the essence. Many customers only purchase paper after their own print orders are in hand. And the specifics of magazine orders often aren't known until late in the process. Throw in the lack of buffer stock, and UPM faces a marketplace in which carriers must perform at the highest levels of consistency.
Setting the Stage
UPM set the stage for selecting G-Log by acquiring demand forecasting, sales forecasting and logistics capacity planning tools from Dallas-based i2 Corp. Then it turned to IBM Global Services for help with integrating the G-Log Global Command and Control Center (GC3) software into its supply chain.
In addition to automating collaboration with carriers, UPM wanted a means of optimizing shipments from a centralized point of control. GC3 would provide a single repository of data to support instant decision-making based on clearly defined business rules. In the execution stage, UPM would have real-time visibility of shipments from the moment a purchase order is received, all the way through freight settlement. That would allow the company to take action in the event of any variation from the norm, as it sought the most cost-effective means of getting product to the customer.
UPM had done its homework by the time G-Log was brought on board. The company had put together documents describing in detail its business processes and requirements, Rajagopal says. In addition, it formed a multi-disciplinary project team to shepherd development based on a global blueprint for implementation. One of the group's jobs was to identify functions not contained in GC3. Top managers also oversaw an extensive process of testing and integration with other UPM information systems, such as order fulfillment and mill operations.
G-Log spent November 2003 converting UPM's requirements into extensions of the basic GC3 package. It worked for a full year on filling gaps in the software, Rajagopal says.
Among G-Log's biggest challenges was devising a transportation system that could oversee the movement of finished product direct from paper mills in Finland, where there was no room for storage, to distribution centers and customers in the U.K. and European mainland. The software's planning component would have to assess demand over the coming year, then calculate how much space on ships was needed to fulfill it, Rajagopal says.
Reserved space was a must for UPM, which had to account for each shipment's physical characteristics and stowage needs. Thus capacity is assured, whether for containerized goods, giant reels of paper, or other forms of finished product, at the time freight is booked.
GC3 can optimize loading based on a shipment's size and shape. For the cylindrical reels, it figures out the most efficient geometric pattern for movement by truck, as well as the total number of trucks required. It can even handle a complex mix of reels and pallets, fit together in the trailer like the pieces of a puzzle. Then, on the execution side, the system transmits key messages such as booking notifications and settlements.
UPM also works closely with European rail carriers. Together they have designed specialized railcars with curved roofs, better to accommodate the big paper reels. Again, says Rajagopal, GC3 can help to determine the optimal loading plan for rail movements.
G-Log doesn't supply UPM with warehouse management system software, Rajagopal says, but it does offer an interface to the customer's production lots and delivery lines. That will allow UPM to keep track of inventory throughout the chain.
GC3 will also link up directly with UPM's paper mills, tying orders to production lots generated by their common planning system. It's essential to know when finished product is available for shipping, Rajagopal explains, because shipments must meet carriers' cut-off times for loading.
Plan Versus Reality
The best-laid plans seldom are realized as conceived. G-Log must cope with the vagaries of the paper industry, where production plans are constantly changing. For that reason, says Rajagopal, an interface with UPM's production systems is essential. Managers must understand exactly how much of an order is being produced, and where. When reality deviates from the plan, alerts are triggered so that production and logistics managers can make adjustments without hindering the flow of product to customers.
As with many manufacturers of industrial goods, paper producers often operate on the fly, switching modes of transportation to meet customer requirements. Delivery lines can change as well, forcing the supplier to alter the quantities being distributed among multiple destinations.
The system doesn't take people out of the equation altogether, Rajagopal says. It merely alerts them to when action is required, based on parameters set by programmers. Minor changes in production flow can be handled automatically, but anything that exceeds pre-set thresholds is reserved for a human response.
Implementation of GC3 will be in phases, starting with the sea leg for product made in Finland and shipped to the U.K. Taking a "big-bang" approach would entail unacceptable risk, Verwimp says. UPM has too many production and sales sites to make a widespread adoption feasible. And the logistics element must be coordinated with order fulfillment, sales planning and other aspects of the Chain 2000 program.
The whole process of development, testing and piloting has already taken two years. The initial implementation phase was due to launch in July, to be followed by a gradual spread throughout UPM's paper divisions. By the end of July, UPM was planning to have the system linked to a pair of mills in the U.K., according to Verwimp. The Iberian peninsula, Belgium, Germany and France will follow. By 2007, the company hopes to have the system up and running in all production sites and markets.
Deployment of GC3 has been divided into four phases: software design, training, integration testing and pilot implementation. When the software is fully implemented, Verwimp says, it will help UPM to manage transportation for more than 10 million tons of paper shipments per year.
To bolster the functionality of GC3, as well as link it to other UPM systems, the company set out to create extensive middleware programs. Its partner in that effort is TietoEnator, a Finnish information technology services company with deep experience in the paper industry. Functions of the middleware include warehouse rental and per-leg voyage calculations, which are important factors in identifying prime shipping routes.
TietoEnator has also played a key role in installing IT systems at various UPM production sites. The relationship dates back to 2002, when the two companies came together to standardize manufacturing execution systems at UPM's mills. Since then, the vendor has been implementing a global MES template, built around its TietoEnator Integrated Paper Solution (TIPS) software for pulp, paper, board and tissue makers. The package includes production planning, tracking, warehouse management and quality control.
More recently, TietoEnator added monitoring and management services to its suite of applications. The new functionality was tested in a pilot project at UPM's Kajaani mill in central Finland. The system can accommodate rapid growth in production and number of users, developers say. It can also be easily replicated at other mills.
In another program of equal breadth, TietoEnator recently implemented a new information system for UPM's Forest Department in Finland. The tool manages the procurement of wood for all of the company's mills.
A Focus on Outbound
The new middleware, however, was geared toward streamlining UPM's outbound logistics program. Verwimp says it had to be able to integrate with each mill's order-fulfillment system. "Nobody said this was an easy task," he says. "It's just a consequence of being a large multinational."
UPM has high hopes for the GC3 software, and Chain 2000 program in general. The company expects benefits to come from a higher degree of business-process automation, greater transparency, better cost management and, most importantly, improved customer-service levels. Other positive side effects include less IT development and maintenance costs, improved visibility into company systems, and integrated damage management, Verwimp says.
Over the long term, UPM expects to reduce working capital through more accurate demand forecasts. It will also do a better job of contracting with its many logistics service providers, thanks to the availability of better shipment data, Verwimp says.
Technology software won't solve all of UPM's problems, especially those that seem endemic to the paper-products business. Declining revenues for print advertising, along with falling prices and rising materials costs, continue to threaten the industry. In the second quarter of 2005, UPM suffered a 10-percent drop in sales. A labor dispute caused roughly half of the company's Finnish paper-production capacity to lie idle. The issue was settled in July, and production at UPM facilities has returned to normal levels.
There were some positive trends. Demand for paper remained strong in the first half of 2005, and prices are expected to rise in the latter half. Profitability has been enhanced by cost cutting, the company said earlier this year, just prior to launching the logistics portion of Chain 2000.
Future versions of GC3 could bolster UPM's global operations. Verwimp says the company wants to streamline customs clearance through better reporting, although it hasn't decided how to acquire the capability. Meanwhile, says Rajagopal, G-Log is tweaking its system for further enhancements, such as the inclusion of location capacity constraints in the planning process. Such a tool would allow UPM to stagger shipments across its network, to achieve the most efficient flow of product.
G-Log is also working with UPM to obtain a better view of the way in which shipment plans are actually executed. For example, did the carrier load and move the freight in the manner laid out by the shipper and its optimization model? With the amount of product generated for shipment by UPM on a daily basis, such variances are entirely possible.
G-Log will continue to search for refinements to a system that has barely been implemented. Says Rajagopal: "That's something we're committed to working with UPM to do."
|UPM at a Glance|
|The company: UPM, formerly UPM-Kymmene Corp., one of the world's largest producers of magazine papers, newsprint, fine and specialty papers, converting materials and wood products.|
Headquarters: Helsinki, Finland
Chief executive: Jussi Pesonen, president and chief executive officer
Financial results: Sales of 9.8bn euros in 2004 (US$11.8bn), profit of 920m euros (US$1.1bn)
Number of employees: approximately 35,000
Production network: manufactures in 16 countries with more than 170 sales and distribution companies
Supply-chain challenge: Creating a single, centralized system for logistics management, to replace many disparate systems acquired through a spate of mergers and acquisitions. Part of a larger program, known as Chain 2000, to standardize all business processes on a global scale.
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