CASE 14

ULTIMATE GLOBAL PAPER CORPORATION1

Ryan has a mission, and it is proving to be more complicated than he expected.

Ryan Suarez was promoted as logistics manager of Ultimate Global Paper Corporation

(UGPC) a month ago. In a short amount of time, he was able to identify some problems

about the company’s resource planning system, such as inaccurate forecasts leading

either to high stockout or excessive inventory levels and lack of integration among the

various departments’ database systems. He has to go from one department to another to

gather information which is time consuming and inefficient. Ryan knew that something

had to be done.

Company Background

UGPC is a leading manufacturer of newsprint, printing and writing paper in the

Philippines. The firm operates six days a week on a three eight-hour shifts, and has a

production capacity of 750MT per day. It supplies roughly 40% of the newsprint

requirements of major local daily newspapers, both broadsheets and tabloids. The

company also supplies publishers of magazines and books and local converters that make

____________________________
1
This case was prepared by Eufemia B. Bautista and Jeanette Angeline B. Madamba. The name of the
company, the characters portrayed, some of the events and the time context of the case have been
disguised. This case is not intended to illustrate correct or incorrect handling of business issues. This case
was prepared for classroom discussion only.
school pads, notebooks and office paper supplies. Around 60% of the company’s

production capacity is exported to countries like Singapore, Taiwan, Thailand, India,

Vietnam, South Korea, Myanmar and Brunei in Asia and to Kenya, Ethiopia and Nigeria

in Africa. To cater to the needs of its various clients, the company produces paper in

varying grammage and dimensions.

The company uses 100% recycled paper as raw materials. To produce one metric

ton (MT) of paper, the company needs at least 1.3 MT of raw materials which means that

to produce at their full capacity, UGPC needs almost 1,000 MT of recycled paper. To

satisfy this requirement, the company imports about 80% of its waste paper demand from

the United States of America, Europe, Hong Kong, Japan and Australia. The raw material

conversion involves several processes which include: sorting, pulping and conversion of

the paper into fibrous cellulose mass, de-inking and separation of contaminants, forming,

pressing, drying, calendaring and winding. Finished products are rolled, wrapped and

either shipped to customers or stored in the warehouse for future delivery. As part of its

service, UGPC has agreed to deliver ordered paper rolls needed by its customers such

that its customers avoid incurring unnecessary storage and other inventory carrying costs.

Supply Chain Management: An Array of Challenges

The network of diverse and dispersed suppliers and customers of UGPC make

supply chain management a challenge for the company. On the customer side, the

company has to deal with various clients from different places, each requiring different

paper specifications. The geographical locations of clients also require different lead

times and transportation and shipping methods. On the supplier side, UGPC has to deal
with both local and foreign suppliers. The company’s biggest challenge is the high cost

and inconsistent supply of raw materials. Competition for raw material is also tough as

suppliers tend to sell to companies with the best offer. UGPC needs to ensure that they

always have enough raw materials in stock to meet customers’ needs. This entails

accurate forecasting of demand and careful scheduling of order releases and material

receipts, which is tough given the different supplier lead times. Constantly changing

demand for paper, on the other hand, not only makes forecasting difficult but also

increases the level of stockouts which in turn ties up a large portion of the company’s

working capital.

Resource Planning at UGPC

Currently, UGPC is using a combination of manual and automated resource

planning systems. For the automated system, the company is using a software called

LS10, which was developed by Infrontier. The software was installed more than five

years ago to keep track of the company’s inventory levels. However, the system is

vulnerable to demand fluctuations and has high maintenance requirements. As a result,

UGPC often experiences problems with high inventory. Another weakness of the system

is its inability to integrate the different departments. Each department, such as raw

materials, production, sales and marketing, and shipping uses a separate database and

reporting system. This arrangement prevents collaboration between the different

departments. The lack of supply chain visibility also increases response times and often

leads to production delays.

 Ryan knew that a lot of inroads have been done in the field of resource planning.

A quick Internet research convinced him that an Enterprise Resource Planning (ERP)

system could resolve these issues and provide the company a competitive advantage. An

ERP system gathers information from all departments and places these information into a

shared database, allowing multiple users access to the information. The integration of

data into a centralized database can improve information sharing and collaboration across

and among various functional units. ERP is foreseen to enable management to track its

supply chain activities from inventory purchase to production and then on to final

shipment to customers. This allows management to make more efficient and timely

decisions.

Ryan brought up the issue to his boss, Mike Yaptinchay. Though Mike agreed

that the current system is problematic, he expressed reservations about Ryan’s proposal.

Implementing an ERP system had been proposed five years ago, but it was not approved

by the Board of Directors due to the high cost associated with the system. A new ERP

system is expensive. It is complicated considering the extent of training employees that

would need to be done which might disrupt the firm’s operations. ERP system’s

compatibility with their current software is also a concern. On top of the switching cost

associated with database conversion, the company might need to invest in high-end

computers to run the system. Nevertheless, Mike agreed that ERP systems might have

changed, in terms of capability and cost efficiency in the past five years. He asked Ryan

to prepare a detailed proposal about ERP so that he can discuss it with the Board of

Directors.
 From his research, Ryan found that not all companies that implemented ERP

systems were successful. If the company decides to adopt an ERP system, they could fall

under any of three categories: the best in class, middle and bottom (Table 1).

Table 1: Benefits obtained from the implementation of ERP systems under three
scenarios

BENEFITS BEST IN MIDDLE BOTTOM

CLASS (50%) (30%)
(20%)
Reduction in inventory costs 22% 11% 2%
Reduction in manufacturing operational 19% 6% 0%
costs
Reduction of administrative costs 22% 8% -1%
Improved complete and on-time 94% 91% 77%

shipments
Inventory Accuracy 93% 91% 84%
Source: Aberdeen Group, Inc., July 2009 2

After checking some ERP vendor websites, Ryan realized that Mike’s

reservations might be justified given the high cost of ERP systems. For example,

____________________________

2
Based on average performance improvement of Lawson, Epicor, Infor, QAD, SAP, Oracle and other ERP
softwares. Figures were obtained from a survey of 1,680 companies of all sizes. Aberdeen Group, Inc.
(2007). The Total Cost of ERP Ownership in Mid-Size Companies. Retrieved March 2012 from http://
www.aberdeen.com
software licensing and implementation cost of SAP Business One starts at $7,000 3

(equivalent to Php 280,0004) for a single user. For a system with 50 internal and 10
external users, the start-up cost could range from $30,000 to $150,000 (Php 1.23 million

to Php 6.1 million).5 A complete ERP implementation would take 6 to 12 months. No

accurate report regarding return on investment or ROI nor payback period from the

implementation of ERP has been filed. According to the Aberdeen report, only about

25% of the companies surveyed measure ROI. Most companies find ROI not only hard to

measure but also irrelevant since they had already purchased the system.

Despite these barriers, Ryan found some options that could make the cost more

manageable. One alternative is through financing. SAP, one of the most popular and

expensive ERP vendors, offers a financing program which allows clients to pay using

flexible payment terms and even postpone their first payments and maintenance

payments up to one year. Other vendors do not seem to have the same program which

somehow limits Ryan’s options. Another alternative Ryan identified is that, instead of a

complete ERP system, the company could opt for a module-based implementation. On

the average, a middle-sized company implements 11 ERP modules. With this alternative,

the company can start with only one or two modules, such as inventory management and

logistics and distribution, and see how the system goes before deciding whether to

implement more modules or not. However, this could prolong the implementation period

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3
SAP Business One. Retrieved March 2012 from
https://www36.sap.com/sme/solutions/businessmanagement/businessone/index.epx
4
Dollar to peso conversions throughout the case are based on U.S.$1 to Php 41 exchange rate.
5
Ramco on demand. Retrieved March 2012 from http://www.ramcoondemand.com/erp-roi-calculator.aspx
which might affect the company’s productivity. Given all these information, Ryan

wonders if a new ERP system would really be worth the cost and the trouble. There is
just too much to consider and he does not have all the data to make accurate

computations. Another consideration is compatibility of available ERP systems to the

company’s current database. Ryan knows that a high switching cost would be an

additional barrier to his proposal. Improving the current system is another option.

Infrontier might be able to help them in this respect.

GUIDE QUESTIONS:

1. Assuming that the desired payback period for a fully integrated ERP system with

an initial cost of Php 3 million will take one year to attain under the best in class

scenario, would it be feasible for the company to invest in such system given the

fact that only 20% of companies implementing ERP systems fall under this

category and the rest are either middle (50%) or bottom (30%) performers?

Consider only the cost savings from reduced inventory, operating, and

administrative costs in the computation. What does your analysis imply?

2. Using the information provided and based on your knowledge of ERP, further

expound on the advantages and disadvantages of the alternatives Ryan

identified. Are his assumptions accurate?

3. Put yourself in Ryan’s shoes and write a recommendation to your boss.