Innovation in Manufacturing – Domtar’s view on the Innovation Imperative. An interview with Mr. Andrew Tremblay, Business Development Manager, Domtar EarthChoice, Corporate Markets Canada, Domtar Corp. Mr. Tremblay says that in capital intensive businesses, innovation needs to be seen as a way to increase the return on capital employed.
Arcus research indicates that executives are focussed on revenue growth is the primary driver of shareholder value and the main challenge for companies around the world. Yet, at this time, the industry’s growth objectives are often tempered by a continuing focus on cost containment. No surprise, then, that the topic of innovation has been gaining ground as CEOs seek to incorporate concepts like “rate of innovation” into their assessments of a company’s long-term value.
Business leaders need to evaluate the role of innovation in both creating and sustaining revenue growth. Defining innovation in its broadest terms — product, process, services and breakthrough strategies — we propose that lasting revenue strategies come from process and service innovations. The size of the prize for those that succeed in this process is likely to be significant.
What is the biggest challenge with Innovation in Manufacturing?
In our business, we see innovation as a way to get a better return on the capital we employ. Domtar is in a capital intensive business. One of the areas that is very important to us is natural resources. We need to constantly evaluate our costs and find ways to use as much of the raw materials we procure as we can. Consider what we can derive from tree fiber, for example.
When Domtar separates fiber in the pulping process, we get both fibre for paper and biomass that can be used to make energy. We try to recoup costs from everything we do in the whole process, including using the chemicals and steam from production. We try to close the loop; we are always innovating new ways to do things that will reduce cost and also go beyond compliancy, do more than the minimum required by law. So, the innovations you are putting in place seem to touch on three areas: Product, Process and Organization – where do you feel most of the innovation occurring today is taking place?
It is probably in the product area. Well, process and product. First, you have to bring the product the consumer wants to the market. People want high quality products, that’s a given, and they also want it to be environmentally and socially responsible, but they don’t want to pay a lot for it. We look at several things when seeking to innovate – whether it be more efficient turbines or using the solid waste from our manufacturing process for fuel. We have a continuous improvement process, Kaizen, which we use, too. We bring different stakeholders in from within the company to look at things. We could have someone from customer service come look at a production process in a mill.
They may know nothing about production, but they look at everything and everyone involved and they may see something – a simple idea from somewhere else within the company. We’re constantly using that kind of process to increase what we do and lower our cost. We want to use less water/fiber/energy – we’re a cost-driven business. The bonus is that reducing our consumption of those materials is great for the environment. Domtar has been an innovator for years – the market keeps challenging us to “go beyond”.
Arcus: So that’s the product side. What about on the actual production process, your footprint around production and sustainability?
Mr. Tremblay: That’s all put into one – it’s all part of the whole thing. You don’t want to use any more resources than you actually need and you want to use the resources you have as much as possible and keep them in good shape so you can come back in the future and reuse them. For example, we have hybrid poplar trees planted in southern Quebec. They’re planted in areas that have been deforested or where other species won’t grow. This is helping the environment by absorbing CO2 and improving air quality. They also grow faster so, while helping the environment, provide a good solid fiber for paper making… and it is still good for making a 2×4 if need be.
Arcus: Is Domtar planting and choosing certain kinds of trees?
Mr. Tremblay: Yes, Forestry is very complex and the first thing you want to do with a forest is grow it so that when the trees are grown and the volume is ready to come out, that timber will bring the most money for the cost put into growing it. And that’s true whether it is a maple forest or pine forest or conventional lumber. Every time you touch a piece of wood further down the line, there is more cost. It has to be refined even more.
During the growth phase, you have to go in and pull the species that aren’t going to help the trees, just like pulling weeds in the garden. Domtar uses those otherwise ‘waste’ trees for something – usually for fuel or to make paper with. That’s why the poplar I talked about is significant, they’re a low quality tree, used primarily for paper or fuel, but we’re looking at hybrid trees that grow faster and help the environment and is a win/win for us because we can grow and replant faster.
Arcus: What would be other areas of innovation, apart from product and process?
Mr. Tremblay: We’re concerned about ensuring our corporate image reflects the work we put into being environmentally responsible. When it comes to product, for example, we partner with environmental groups, such as Rainforest Alliance and WWF Canada and WWF US, on different projects and marketing. They get the benefit of having a big company on their side and we get the benefit of having them stand by our products and what we do as a company. These trusted organizations will not take money from a business unless they’re sure you’re doing what’s right. We have open discussions with them. They don’t like everything we say, and we may not like everything they say, but we talk and everyone benefits.
Arcus: How has collaborating with NGOs benefited Domtar?
Mr. Tremblay: I think it is and smart companies will work with NGOs. The average person trusts what they [NGOs] say, over industry or government. It’s a credibility issue and in the long run, it’s a marketing issue, too. Once you brand associate with something that’s positive, your product shares that image. On the corporate end of it, people will migrate to your product because you’re working with these people and learning from them. In the long run, it also helps us not be protest targets because they know we’re working towards environmental responsibility.
Arcus: How have customers changed over the last 5 – 10 years?
Mr. Tremblay: One of the biggest changes is that we’ve seen items that were traditionally produced in print move to other media such as the internet, electronic payment systems etc. People are not printing massive numbers of brochures anymore. They’re being more careful. Even here at Domtar we are using an SAP driven system; if I want to get a copy of my paystub, I just go to a website to pull down a copy. Electronic payments are a big trend. We even EDI our customers in big payment batches – it’s just a way of doing business. Also consider the publishing business, there are many more book titles being published, but I think the total volume being printed has gone down. People aren’t reading as much as they used to. It’s the same for magazines and other traditional printed material. People are getting their information from the internet as often as possible.
Arcus: What about the digitization of knowledge and reduction of paper consumption? Do you see a drop or is it likely to happen?
Mr. Tremblay: Yes. I’ll give you an example- copy paper. We’re seeing a drop of 4 ½ to 6 % every year. The banks are exactly at that trend. With an increase in capabilities for scanning and electronic filing, people thinking twice before they actually print things now.
Arcus: Is the trend in e-billing in its early stages?
Mr. Tremblay: Well, for now, but it will grow quickly. It’s a small percentage of the total number of people, about 5% for e-billing. For internet banking, most people go online to see their account activity, but they do not receive the statements online, still receive them from the mail. There’s some comfort in the printed statement. But if someone wanted to opt out, most banks will let you. Just say you’ll get it online and they’ll stop mailing. It is a security and peace of mind issue. I think more people are environmentally aware. They think they’ll be using less resources if they stop using paper but they forget that we’re still going to manage the forest and trees for other purposes and the trees will be used for energy if not paper. We do find people are asking us about our energy platform and renewable energy and we’re providing information on that. Usually on how we make our power, particularly they ask, “Is it green power?”
And it is a byproduct of the pulping process, a biomass. They say that’s very interesting. These are primarily B2B, Purchasing Managers and Environmental Risk people in particular. Often they think of environmental as solar or wind power, but when they learn we’re using tree fiber, which is biomass, organic, then they think “wow, we never thought of that.”
Arcus: Are there significant trends taking place in sustainability in B2B business?
Mr. Tremblay: Yes, you can see all the banks have statements about sustainability and most corporations have policies in regards to paper products. Everyone’s keeping an eye on their carbon footprint. I find it’s especially true with Canadian banking.
Arcus: What about the consumer side?
Mr. Tremblay: We’re affected indirectly – we don’t sell directly to consumers. You can go to Staples and buy our paper, but Staples usually manages that relationship with the end consumer. Staples does say they are seeing growth in the small office/home office, but the growth is in the higher end quality paper. People want whiter, smoother paper to use at home.
Arcus: Is there understanding in the consumer market about what is environmentally friendly?
Mr. Tremblay: There is definitely an understanding, people look for the best options. People appreciate that stores like Staples have environmentally responsible options available at the store, and know that it will cost a little more for recycled or forest stewardship council certified paper that’s smoother.
Recycled paper has a limit to it, there is a limited amount out there, but a certified non-recycled product is just as good for the environment. Stores and consumers are both doing research and educating themselves. Another area where we see growth is in the SOHO (Small Office, Home Office) segment, but not as much as it used to. The big area that is growing now is digital printing. The real time, customized option is appealing to many businesses.
Arcus: How rapidly is it growing?
Mr. Tremblay: About 15-20% per year. We see it used primarily for direct mail and marketing projects. Say somebody wants 500 brochures now and don’t want to print the 10,000 they would have in the past. That option is available to them. People probably won’t choose it if they actually are going to do a large print run, say of 100,000. They’d stick with a traditional print product for that. Digital printing is ideal for a limited print run of a good quality. Some of it is used for direct mail with individual names or personalized statements.
Arcus: So you do see a trend towards efficacies like environmentally branded products in the home office. Are people willing to compromise on quality?
Mr. Tremblay: There’s no room for compromise on quality, or paper brightness. Sometimes I hear people ask if consumers would be willing to pay 15-20% more, but at that kind of premium, I would say no.
Arcus: In terms of looking forward, over the next five years in your industry, what do you think is really going to drive business? If the business is shrinking in some areas, what will drive growth?
Mr. Tremblay: With Domtar, or any North American company, our biggest competitors are International. International paper companies are not making any investments in North America. It’s all in Asia, China, Europe or South America. Because of our biomass platform, we’re going to see paper companies go into producing energy for the local grid more than we are now. That’s the future. I think we’re going to be more a cellulose fibre company that does many things with it. We won’t be entirely out of the paper production business, but will see expansion into other goods. I have seen towels made from tree fibre that are just as soft as traditional cotton towels. Whether it be fuel or other things, it’s very interesting.
Arcus: Why is the competition moving out of North America?
Mr. Tremblay: People are moving away from paper here. The growth is in Asia and South America, the European market is steady. The growth markets are particularly India and China. That’s where the buying is happening. Some people are investing in mills there, local production, versus shipping. In South America, they use a lot of Eucalyptus fibre, they can be full grown in less than 7 years.
Arcus: Please describe trends around Marketing and Branding?
We anticipate more co-branding with environmental groups or big users like Xerox and Staples. I can see us gaining credibility through the environmental groups. We have already changed and moved to sustainable practices; it’s just about getting that message out there. We’re only going to talk more about the energy platform. There is also the social aspect of how you treat your workers and your community. “Tell us more about the community you work in” is something we hear from our customers.
Arcus: A lot deeper decisions around procurement, then?
Mr. Tremblay: Yes, they look at everything – it doesn’t stop at price and product quality. They want to know how you engage with the Aboriginals, what our footprint like, how are community interactions, does the community have a say, what are the benefits for the global community, etc.