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So, what do you do now?
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What is my second favorite thing after making paper? Lavish efforts on maintenance. You should know that by now.

The economy is in the tank, and nearly universally, paper has hit a soft spot.

For those of you who used the excuse in the good times that "we'll do more maintenance when things slow down" that time has come.

This is where the privately held companies hold a superior position as compared to the publicly held companies.

For in times like these, the private companies generally concentrate on maintenance for they own the assets, and they care about keeping them in great shape.

The managers in the publicly traded companies focus on propping up their stock price. That does not include doing the maintenance that was neglected. Managers in publicly traded companies own the stock price, not the physical assets.

I think GAAP (Generally Accepted Accounting Practices) should include a set aside for appropriate maintenance continuously, good times and bad. Then when times are tough, you would have the money in the piggy bank to do proper maintenance.

Claiming all money beyond expenses as profits in the good times is a fiduciary failure, unless you are doing serious maintenance in good times.

We have several mills on strike at this time. If the unions were smart, they would negotiate a maintenance expenditure clause in their contracts. For besides the physical asset suffering with poor maintenance, the human asset (the workers) suffers when they have to run poorly maintained equipment. Sometimes, it is even dangerous (see https://www.globalpapermoney.com/section/reported-risk).

It used to be that the financial formula for running an industrial facility was always make depreciation plus maintenance add up to a constant number. Thus, as the asset declines in value, more money goes into maintenance.

This went away back in the '90's when the internet started eating into our business. Leading companies "discovered" that maintenance plus depreciation did not have to be a constant number, that they could cut maintenance to 70% or 60% of what it had been. Soon, this silly idea spread throughout the industry.

Actually, I think the number should rise to account for inflation. Let me explain.

A mill where I had direct and up-close experience shall serve as an example. Built in the midwestern United States in 1969, this fully integrated pulp and paper mill cost around $25MM in those days. In the early 1980's we rebuilt the sole machine at this mill for $40MM (not touching the woodyard, power & recovery island, pulp mill or bleach plant). Today it would cost at least a billion dollars to build that mill.

I talk to many financial analysts, and they tell me you maintain your mills, for you have told them so. I walk through your mills, and I know conditions are nowhere close to this.

So, I have given you an assignment should you choose to take it. Clean up your accounting and you will have the money to properly maintain your equipment. You will be able to hold your head high fiduciarily.

Jim Thompson is CEO of Paperitalo Publications.

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Get Jim Thompson's "Monograph on Purchasing." Available here.

 


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