Should You Purchase Your Own Paper?

by Stephen Lett

Purchasing your own paper through a paper merchant might be a way to save money. However, not every company can or should purchase paper direct. Many should continue to have their printer supply the paper. This month, I want to help you determine if you are a candidate to purchase your own paper and what it can mean in terms of savings. I also want to point out the risks and common misconceptions associated with buying your own paper.

I have never been in favor of small and medium sized catalog companies buying paper direct. I have always felt the printer was much more qualified to purchase and manage the paper. Paper can be bad, there are butt rolls leftover to deal with and if you change printers, what do you do with the remaining inventory. All of these points are valid but the management and economics of purchasing paper have changed the past few years. That’s why it probably makes sense to consider buying your own paper if the circumstances are right to do so. Paper merchants have made it easier to purchase paper direct. They can often put price caps in place (which we do not always recommend for reasons explained later); negotiate payment discounts and manage the inventory for you which have always been issues in the past.

WHEN IT MAKES ECONOMIC SENSE TO BUY YOUR OWN PAPER

Whether or not you should be purchasing your own paper is based strictly on your tonnage requirements, i.e., volume. Small catalog companies may not want to purchase their own paper if they print low quantities once or twice a year. The paper mills do not ship the exact amount of paper required since they round to the nearest roll over (sometimes more) and this can be significant to a smaller company. If you purchase less than 80,000 pounds (about two truck loads) of paper at a time, it is probably best to continue buying paper through your printer. This would be the equivalent of printing approximately 300,000 catalogs, 64 pages with a trim size of 8” X 10 ½” on 40 lb., paper as a guide. If your requirements exceed these minimum standards, perhaps you should consider supplying the paper to your printer. In summary, I would not consider buying your own paper unless you

  1. Print at least 3 or 4 times per year.
  2. Purchase a minimum of 80,000 to 100,000 pounds of paper at a time.
  3. Are certain you will not be changing grades or the basis weight of the paper you are using. No one wants your excess inventory.

THE POTENTIAL SAVINGS

Paper and freight are two large profit centers for printers and something catalog companies understand the least. Reasonable savings resulting from purchasing your own paper range from 4% to 6% or more. Informing your printer that you are considering buying paper from a merchant will often result in a cost savings for you, the mailer without changing a thing. This can spark lower paper consumption requirements and a lower cost per hundred weight (cwt). Most of the savings results from paper consumption percentages. Typically, I see under consumption in the range of 2% to 3% which will go back to a companies inventory if the purchase their own paper. However, if the printer purchases the paper, any overage will be put back into their inventory to be sold again to another cataloger. Again this is a potential profit center or cost saving opportunity depending on your perspective. A merchant might offer you a price cap which is not something I recommend taking advantage of. Often the merchant will set the cap high to be certain they are price protected. This can be an expensive insurance policy. It sounds good but it’s not really practical or necessary.

A FEW MISCONCEPTIONS

There are several misconceptions with respect to purchasing your own paper. I would like to review the more common objections often raised by printers (and by consultants) over the years as follows:

  • Printers have more purchase leverage – Most paper merchants have a great deal of buying leverage too. Therefore, if you are working with respected paper merchants, you will most likely enjoy the same leverage afforded by your printer. Some printers will often move you from sheet to sheet based for various reasons. When you purchase paper direct, you will have more control over the exact paper you are buying and the mill you are buying from. Word of Caution: The merchant may have the buying power of the printer but the actual orders are placed individually by the mill. Often printers “gang” paper orders in order to obtain the best price which is something that is more difficult for a merchant to do.
  • What happens if the paper is bad – It is highly unlikely the paper you supply your printer will be bad on press but it can and does happen on occasion. The mill guarantees the paper and the merchant will stand behind you. What’s more, your printer will not abandon you simply because you supply your own paper. The printer wants to resolve any and all problems with the paper as quickly as possible. Therefore, they are likely to call your merchant first in order to resolve any issues. They will replace the paper for you but usually not in time for you to make your press date. Some printers could elect to invoice you for the press time.
  • Supplying paper creates more work for you – This was more of a concern a few years ago than it is today. Managing the paper inventory and consumption is part of the service the better merchants provides. The merchant will work closely with your printer to manage all of the details. There are always butt rolls to manage which is important especially if you decide to change printers. You will want to be sure your merchant will see that any remaining paper is transferred to your new printer.
  • There is a cash flow impact associated with buying paper – Standard terms include a 2% discount if the invoice is paid within 20 days and net 30 days from the mill ship date. Paper generally ships one week prior to the press date (some printers require a 3 week lead time from press date because the delivery dates from the mills are not always reliable). You will have to pay for the paper 2 to 4 weeks before you would have to pay your printer for it. Printers often extended payment terms such as half due in 30 days from mail date with the balance due in 60 days. The chart below details the cash flow impact of buying paper direct vs. from the printer. Be sure your cash flow can support buying your own paper. Keep in mind that you will be issuing a large postage check on or about February 5 in our example below. You will be paying for the paper approximately 2 weeks before the postage check is due and up to 4 weeks before you will start to receive orders from your mailing.

Paper represents approximately 60% of your total printing and paper costs. Paper cost is a significant part of our total direct selling expenses. If you have the opportunity to save 4% to 6% or more it is probably worth considering. But again, your print quantities really dictate whether or not you should purchase your own paper. I am not trying to drive a wedge between you and your printer. Your printer performs an important function for you and they have your best interest at heart. It is simply a matter of economics. The more paper you use the more you can save. For a net savings of 3% or less, I would say it is not worth it. But, the greater the percentage savings to your company, the more sense buying your own paper can make for your business. Remember postage rates are increasing and purchasing your own paper can help reduce the cost impact to your bottom line.

TYPICAL PAPER CYCLE
PAPER.xls
LETT Direct, Inc.
Date: 11-09-06
PAPER
PURCHASED
BY PRINTER
PAPER
PURCHASED
DIRECT
Mail Date Feb. 05 Feb. 05
Print Date Jan. 22 Jan. 22
Paper Due to Printer Jan. 01 Jan. 01
Costs (est.):    
  - Manufacturing $80,000 $80,000
  - Paper $120,000 $114,000
Total Cost (Est.) $200,000 $194,000
PAYMENT TERMS:    
Paper Due Jan. 20 $0 $114,000
Terms from Printer:    
  - 50% due March 5 $100,000 $40,000
  - 50% due April 5 $100,000 $40,000

NOTE:

  1. Paper is 60% of total cost (est.).
  2. From Printer - No cash payments are due until
    30 days after the mail date which is when orders
    are beginning to flow-in.
  3. From Mill - A cash payment of $114,000 in
    our example is due 10 to 15 days prior to mail date.