Procurement Leaders’ category research has found that most large paper packaging manufacturers operate their own paper production, own their own pulp mills or even manage their own forests. One of the most famous examples is probably international paper, which manages its entire upstream supply chain, beginning at almost the lowest granularity, the forest management.
Vertically integrated companies tend to be more profitable than their competitors that do not possess access to their own upstream supply chain. Historically, producing paper packaging reached a point at which converting paper into paper packaging did not yield the expected profits. Rising paper prices has exacerbated the situation and as a result paperboard converters started to buy off paper and pulp mills.
Vertical integration, the report shows, has several advantages that businesses are taking advantage of. Firstly, it reduces the exposure to fluctuations of paper and pulp prices and also secures its paper supply. This strategy has already made headlines in other industries, such as the airline industry. Secondly, all profits that the paper packaging company had to pay to their suppliers if they were not vertically integrated are simply being cut off. Thirdly, the organisation is in control of the entire upstream part of their supply chain.
The report found that companies have been able to actively implement their own CSR policy throughout all lower stages in the supply chain. Furthermore, innovation can be triggered already at the paper production process, leading to potentially stronger and lighter paper board material.
However, vertical integration requires huge investments. Paper and pulp mills are massive industry facilities that are highly capital-intensive giving smaller paper packaging manufacturers no chance. Moreover, vertical integration to this extent requires organisational changes within the company.
Peter Lückert is research analyst for Procurement Leaders.
