Norske Skog Improves Global Profitability Using Analytics
The Problem
Many businesses are currently entering uncharted (and unwanted) territory, uncertain how the economic recession will affect demand for their services and products. For paper maker Norske Skog, however, this is a familiar situation, because the company has experienced declining demand for its products over the last decade due to electronic media replacing newsprint publications. Norske Skog has had some very difficult decisions to make as it has struggled to survive, including closing paper production lines and entire mills.
The Analytics Solution
The development and use of analytics within Norske Skog started with a pioneer project in New Zealand that used a mixed-integer programming model called PIVOT to optimize manufacturing, distribution, and sourcing of raw materials in Australia and New Zealand. Later, after the New Zealand operation became a part of Norske Skog—a global, Norwegian-based publication paper producer with operations in 12 countries on four continents—the methodology was further developed to be used in their global operations.
The core of the PIVOT model is a mixed-integer program (MIP). The data inputs to the model have been developed over time to reflect distribution cost, the true marginal effects of fiber and energy sourcing, as well as a complex representation of costs and savings accruing from temporary and permanent capacity curtailment. To obtain reliable results, much effort was needed to analyze and understand cost data in a form that was not easily extracted from company accounts, but required a thorough understanding of manufacturing processes.
The most recent application of PIVOT was to determine how to downsize the company, because global overcapacity became a crucial issue. Decisions on the closure of production lines and mills affect the lives of many hundreds of people and cannot be taken lightly. Legislated employee involvement in the management of Norske Skog makes the decision process highly political. The MIP model was used to study a large number of different market, cost, and currency development scenarios, making it possible to focus on the most critical assumptions and give confidence that the decision was optimal and impartial.
The Value
Analytics tools have become a vital part of the decision-making process at Norske Skog, helping the company to reduce costs significantly and enabling senior managers to make tough calls with the confidence that there is no better solution.
The estimated savings from implementing the solutions determined by the PIVOT model
are as follows:
- Australasia—freight cost reduction (from better product allocation), improved back-hauling of raw materials, and utilization of lowest manufacturing cost: US$ 8 million/year.
- Europe—similar cost-type savings, with extended cost modeling: US$ 10 million/year.
- Downsizing—removal of fixed costs, utilizing most efficient equipment, removal of business with negative margins: US$ 100 million/year.
Added together, the potential savings from this use of analytics is about US$ 120 million/year, equivalent to 3% of Norske Skog’s annual turnover.
