Longwood Woodyard Plant
For doing this process there were two way: 1. Using modern chipping machinery that called longwood 2. Using old style chipping process, used at Redding, which called shortwood. Most of Redding’s shortwood was produced at the Regefield woodyard that located one mile from Redding. . In 1996, controller Bob Pescod and analyst expert Ray Buckley check some troubling trends taking place at Redding Mill. 1. The cost of shortwood & open market chips were rising faster than the cost of long wood Buckley’s analysis showed.
Ridgefield facilities were outdated & less efficient 3. The cost of shipping shortwood was becoming increasingly volatile and difficult to manage 1. Considerable cost savings could be realized by replacing Pescod & Buckley concluded: Shortwood process system with longwood process 2. The cost of shutting down Ridgefield would be offset by: the proceeds from selling the replaced shortwood equipment + recovery of the on-site wood inventories at Ridgefield According to Exhibit 1: Net sale: (1994) $ 14. 6 billion 32% (1995) $19. 79 billion (1995) $2. 52 billion Operating profit: (1994) $ 1. 06 billion 136% Net income: (1994) $ 0. 35 billion 223% Total asset: (1995) $ 24 billion (1995) $1. 15 billion.
Security analyst asked from industry, by increased dividend or through stock- buyback programs return cash flow to investors and cut capital spending. In 1995: IP’s capital spending ($ 1. 52 billion) = depreciation & amortization ($ 1. 03 billion) + nondiscretionary spending (approximately $ 0. billion) The treasurer stated that keeping the A rate bye decrease the amount of debt-to-capital. It was very important because it gave the company enough financial flexibility to react to unexpected investment opportunities in the future. The Capital- Budgeting Process: Due to capacity expansion company’s operating unit should prepare a facility plan yearly. They started To make the wish lists then after reviewing facility plans and related strategic plans, the management would indicate an approximate level of capital spending for the annual budget.
The funds were allocated based on each business’s unit needs. Individual projects were still required to go through a capital- approval process. Project’s viability was measured by hurdle rate. Increasing the company’s overall return on investment was the objective that should be met by discretionary spending and restrict the amount of capital requests.
The 15 percent of hurdle rate had the advantage of being easier to understand than a cost of capital that changes whenever interest rates or company’s specific risk changed. Hurdle rate: the minimum rate of return on a project or investment required by management or investor) (Return on Investment= (gain from investment – cost of investment) / cost of investment) In December, Board of Directors make a decision about capital budget, Also an appropriate management level approved individual project. At facility level, small projects were developed and managed. Technology group designed and engineered larger projects.
The Forest-Product Industry From 1990 to mid-1994, the pulp prices decrease more than 50 percent, but in the mid- 1994 the industry regain pricing power. After restructuring in the forest- products industry, they appointed new CEO in 1993 and 1994 with the goal of creating shareholder value. International Paper hade come through the early 1990’s relatively intact, with the same CEO and with a respectable 10. 95 percent compound annual growth rate in share price for the years 1990-96.
New Longwood- Processing System at the Redding Mill: The Redding Mill Woodyard currently: On-site storage capacity = 30,000 tons (23,000 tons shortwood storage + 5,000 tons chips purchased + 2,000 tons chip storage in the four chip silos) (9days) Two off-site storage capacity = 80,000 tons The new on-site longwood woodyard: On-site storage capacity = 32,000 tons (25,000 tons longwood storage + 5,000 tons existing purchased – chip storage) (10days) Two off-site storage capacity = 80,000 tons (25days) (25days)
Shutting down Ridgefield would allow IP to eliminate 3 days of storage kept at the Ridgefield facility. Analysis: During two years, cost of the new system should be incurred: $ 17. 7 million $ 9. 7 million 1996 Market value of the extra chip storage at Ridding in 1998: $ 800,000 Labor saving in 1998: $ 3. 3 million Reduction transportation and handling cost in 1998: $ 1. million $ 8. 0 million 1997 The only offset to these savings was the MPA costs which were expected to run $ 380,000 in 1998 Apart from the cost consequences, the new longwood facility bring new opportunity: $ 1. 5 million starting in 1997 Final Consideration.