Box-It, LLC

Barry Norton was passionate about his business. He firmly believed that to survive and thrive in the
folding carton industry, Box-It needed to be the leanest, most agile, and most efficient enterprise of its
kind. This unyielding commitment was apparent in every aspect of his companyfrom the engaged and
enthusiastic employees to the state-of-the-art seven-color Heidelberg printing press that was the
centerpiece of his operations. Victory for Snow was not so much being a better company than others as it
was simply ensuring that Box-It was the very best company it could possibly be.
Box-It was a modest-size competitor in the $160 billion U.S. folding carton industry and specialized in
smaller and highly customized orders. Manufacturing folding cartons was not a complicated business, and
the small-order niche was quickly being dominated by those that could provide a seamless information
infrastructure linking client specifications to final products. Speed to market and quality were essential
dimensions of competition since competition virtually eliminated price differences.
Despite the growing importance of technology, paper was still at the heart of the folding carton business.
Virtually every process was focused on paper, and virtually all the inventory was paper in some stage of
processing. The very first step of the carton-making process was called sheeting, or leaf-making in
which paper was cut from multi-ton rolls into appropriately sized sheets for the printing press. A
significant decision facing Box-It at the end of 2009 was whether to replace the current Leaf Maker with
a newer and higher-capacity machine.

Folding Carton and Paper Industries

Until the late 19th century, product packages were made by hand, held together with tacks and string, and
used only for expensive items such as jewelry. With the introduction of mass production, cartons could be
cheaply printed, cut, glued, and shipped flat to purchasers, who unfolded the cartons and filled them with
their chosen final products. By providing an inexpensive package that displayed information, protected
products, and extended shelf life, the folding carton gave rise to the modern packaging industry and
became a ubiquitous part of the consumer landscape.
Demand for cartons was driven by commercial activity and population growth. Efficiency of operation
was essential given competitive pressures on prices. Generally speaking, there were few economies of
scale in manufacturing: Large and small producers operated similar kinds of plantslarge producers just
had more of them. The exception would have been firms that specialized in extremely large ongoing
orders and that achieved efficiencies by eliminating flexibility and fully integrating the carton production
process.
Because the paper used to make cartons and the completed folding cartons themselves were bulky but
inexpensive, transportation costs were a significant part of the total delivered cost. The effective sales area
for corrugated boxes, for example, was only about 150 miles from the production plant. The industry was
fairly capital-intensive, with the average revenue per worker close to $300,000. The technology for
making paper products was well known, hence most R&D focused on greater production efficiency.
Recently the focus had shifted to information management solutions that would allow carton
manufacturers to integrate their production processes with their clients. For example, software and
hardware systems directly linked client graphic specifications to the printing, cutting, and quality
management systems. The best companies no longer fit the noisy and dirty industrial stereotype. Small
companies could also compete successfully by making specialty products or serving smaller geographical

markets.
Typically, paper made from reprocessed scrap paper was used in most cartons, while food containers were
made from a lighter and higher-grade sulfate board. The thickness of the board was generally limited to
0.032 in. (0.81 mm), and folding cartons were limited to holding a few pounds or kilograms of
1

material .

Different types of paper were produced by altering the type of raw wood used, the pulping

process, the chemicals used and added, and the rolling process. The kraft (strength, in German) chemical
pulping process was the most common manufacturing process and used soft woods such as pine to
produce paperboard and heavy paper.
About 4,000 companies manufactured paper products in the United States at the end of 2009, with
combined annual revenue of $160 billion. The folding carton industrys estimated revenue at the time was
$10

billion .2

The industry was only moderately concentrated as a whole, but it was highly

concentrated in specific product segments, where the largest 50 companies often held close to 70% of the
market. A typical manufacturer of paper products had a single plant with 150 employees and $40 million

revenues .3

in

A major concern in the industry was the cost of inputs, specifically energy and paper prices. Even though
oil and gasoline prices had plummeted in 2009, manufacturers were facing a general trend of rising
energy costs, particularly for transportation. New forms of electronic communication and commerce were
having a significant impact on demand for many grades of paper. In particular, the newsprint segment had
been affected by the switch from traditional newspapers to television and Internet as sources of news and

information .4

this had caused a decrease in the demand for paper. This phenomenon was

counterbalanced by a general increase in demand for pulp and paper from the developing world.
Furthermore, according to the American Forestry & Paper Association, U.S. paper and paperboard
production capacity declined nearly 1% per year on average in the period from 2000 to 2008, and this
trend was expected to continue. The industry consensus, however, was that in the medium term, pulp and
paper prices were expected to remain unchanged.
Within the paper product market, the folding carton industry remained relatively strong for a number of
reasons. First was the environmental appeal of cartons. The availability of timber resources (virgin wood
pulp) had generally been declining. Thanks to the U.S. governments environmental protection efforts, the
industry had dramatically increased its use of recycled fiber. Paper and paperboard recovery was 56% in
2008, up sharply from 39% in 1993. While flexible packaging in the form of plastic films had
increasingly been chosen over more rigid materials such as folding paperboard cartons and corrugated
containers, for cost reasons (plastic films weighed less and occupied less landfill space at the end of the
products life cycle), consumers still favored recyclable materials.

Deirdre S. Blanchfield, How Products Are Made: An Illustrated Guide to Product Manufacturing (New York:

Gale, March 2002)

2

Hoovers, Paper and Paper Product Manufacturing Industry, http://industries.hoovers.com/industrial

manufacturing/paper-and-paper-product-manufacturing (accessed October 22, 2009)

3

PriceWaterhouseCoopers, Global Forest, Paper & Packaging Industry Survey, 2009 EditionSurvey of 2008

Results.

Standard & Poors, Industry Surveys, Paper & Forest Products, March 2009.

Second was that the surface of the carton provided bill-boarding opportunities. Graphics and printing
were bold and vibrant, and they allowed for enhanced visual effects such as embossing, foil stamping, and
holograms. The ability to attract consumers at the retail level remained strongly dependent on the use of
color and other eye-catching elements. In fact, a substantial portion of the folding carton market included
product displays. Folding carton manufacturers were becoming a critical part of a dynamic and complex
supply chain. Doug Rawson, president and CEO of Supreme Lithographic, said that with the growth of
Sams Club, Costco, Best Buy, Home Depot and Wal-Mart, the demand for high-quality graphics and
great looking packaging is exploding. Today, the package is the display and the product brochure is on
the

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box

Box-It, LLC
Box-It provided cartons primarily to the food, medical, and consumer electronics markets. The company
operated in a 125,000-square-foot facility with 90 employees just off the major NorthSouth trucking line
that flowed along U.S. Route 81. Snow acquired this facility in 2006, and he consolidated his Carolina
Paper Box operation into this single location shortly thereafter. Financial reports for 2007, 2008, and 2009
are presented in Exhibit 1 (income statement) and Exhibit 2 (balance sheet). Box-It experienced little
growth from 2007 to 2008 and saw a tightening of margins that resulted in a loss for the year. The results
were due to the slowing economy and the costs associated with bringing new capacity online. In contrast,
sales for 2009 exceeded 2008 by over 30%, and operating margins had returned to the 2007 level. Due to
increased interest expense, however, net income had not improved at a level commensurate with sales,
though profits had returned to nearly their 2007 level.
Driving much of the expected future success of the company was the purchase in 2008 of a seven-color
Heidelberg printing press with aqueous coating capabilities. The ability to switch between ultraviolet inks
and water-based inks dramatically expanded the companys range of possible graphics and printing
substrates, which provided an important competitive edge. The press gave the firm a value-added sales
opportunity for customers looking for higher gloss and different printing substrates, Snow

explained .6

The press was capable of printing 18,000 sheets per hour. Box-It ran the press in two

eight-hour shifts, five days a week. The process was so completely automated that the operation required
only two people: one to position pallets of blank sheets at one end and to remove pallets of printed sheets
at the other end, and one to prepare inks and manage quality control.
Of particular importance to Box-It were the efficiencies associated with the make-ready phase of
printing: all the activities that prepared the press for printing. This included the preparation of paper,
setting up necessary inks, preparing the printer for a given substrate, and ensuring proper color control.
The Heidelberg was an exceptionally flexible machine. One could completely change from one multicolor
print job to another in 15 to 30 minutes, depending on the number of colors and type of ink and in much
less time if the same inks were used. The press also facilitated exceptional control over the printing
process to ensure quality. In fact, Snow often emphasized operating flexibility and quality jointly: The
Heidelberg allows us to swap inks easily, which facilitates smaller jobs, and the integrated Heidelberg
image control and inspection systems ensure consistency throughout the

. } ^ {7}
process This emphasis on

quality was readily apparent from the newly constructed room (part of a 60,000-square-foot recent
expansion) dedicated to the printer: Clean, bright, and temperature-controlled, the room was the only one
in the United States at that time built to Heidelberg specifications.

5
6

Mark Spaulding, Superior Litho Print Now an Everyday Commodity, Converting, May 22, 2009, 34.
Folding Cartons: Box-Its Buys Heidelberg Speed master XL-105 Hybrid Press, Film & Foil, May 1, 2009.

Another important part of the printing process was prepress: the activities that occurred before the
printing process could be initiated. This included design, graphics, and the preparation of printing plates.
This part of the process, which was directly linked to the quality control systems of the printer itself, was
the most technologically focused part of the business. In general, one could visualize a folding carton
operation as two processes running in parallel: a manufacturing process that followed paper from its
arrival to its shipment as a carton and an information process that followed the cartons graphics and
design from the client to quality assessment of the final product. These processes are shown in Figure 1.
As a critical link between these two processes, Box-It had invested in a Heidelberg plate-setter that
generated aluminum printing plates directly from computer-generated graphics. Snow was proud of the
integration of these two streams: Every part of our process, from prepress to finishing, can now connect
and work seamlessly to create a finished product with faster turnaround and precise color

.} ^ {8}
management

The vast majority of the Box-It facility simply held paper in one stage of processing or another. As shown
in Figure 1. The major phases of the process were sheeting, printing, cutting, and gluing/folding. During
sheeting, paper shipped to Box-It on rolls was cut to size and placed on pallets for later input into the
press. Of course, not all the paper was cut into sheetssome was purchased already cut to size. After
printing, sheets were moved to the die cutter, where the cartons were stamped with a die that both cut out
the desired shape and added crimps to facilitate and organize later folding. The freshly cut sheets were
then folded and glued in a manner that kept the carton flat but allowed the customer to expand the carton
as it was filled. The speed of the printing press dominated other steps, and one could essentially view
every other operation as trying to keep up with the press.
Box-It was by definition a made-to-order operation; that is, materials were not ordered and work was not
done until an order had been placed by a client. This minimized levels of raw-material and work-inprocess inventory. But Box-It took on a level of finished inventory management for its clients. Whereas
Box-It favored larger production runs to minimize make-ready activities, the companys clients preferred
to take delivery in smaller quantities. The end result was that Box-It would often print the full orders
clients committed to, but would ship (and invoice for) smaller orders over time. This meant a fairly large
finished-goods inventory. Even so, since Box-It had substantial warehouse space at the time, it could
provide this implicit level of inventory management to clients at low marginal cost, which provided an
additional competitive advantage. In fact, Box-It had become a full-service third-party logistics provider
for its biggest client: The company not only maintained stocks of finished cartons, but it also packaged,
labeled, and shipped the clients products.

Case writer interview with Barry Norton and Tony Rossi, Staunton, Virginia, July 29, 2009; unless otherwise

noted, all subsequent quotations derive from that interview.

8

Folding Cartons: Box-Its Buys Heidelberg Speed Master XL-105 Hybrid Press.

Figure 1
Paper and information processes at Box-It

.
Note: All operations occurred in-house except for the creation of die-cutting plates.
Box-It worked closely with clients on concept development, beyond issues related to implementation of
client designs. Source: Created by case writer.

Leaf Maker Replacement

The decision facing Barry Norton was whether to replace the current Leaf Maker with a new one that had
higher capacity. Exhibit 3 shows a schematic of the proposed new Leaf Maker. At the time, the Leaf
Maker was operating at capacity and processing 10 tons of roll paper a

day .9

Snow estimated he

could probably increase his use of roll paper by 60% if he had additional capacity. Precut paper cost about
$1010 a ton, whereas paper from rolls cost about $915 a ton.
The new Leaf Maker machine would cost $700,000 installed and would be ready to operate in early 2010.
Snow estimated he would use the new Leaf Maker for nine years and then sell it for $120,000. Despite the
nine-year useful life, the new Leaf Maker would be depreciated over five years on a straight-line basis.
The new machine would take up more room than the old Leaf Maker (15,000 square feet versus 10,000)
and therefore incur an additional overhead fee of $22,500 (at the warehouse rate of $4.50 a square foot
per annum).
The old Leaf Maker would be sold for $25,000, which was below the current book value of $36,000. The
old Leaf Maker had had two more years of depreciation left at $18,000 a year. Snow recognized that
comparing a new machine with a nine-year life to an old one almost fully depreciated was not quite
appropriate since the old machine would not be expected to last nine more years. Operations Manager
Tony Rossi estimated that if he spent $125,000 in both 2011 and 2015 to refurbish the old Leaf Maker, it
would last another nine years.
The capacity of the new Leaf Maker would be 40 tons a day running two shifts at 20 tons a shift, more
than enough to handle current maximum sheeting

needs .10 Variable operating costs (excluding labor)

would be $70.25 a ton, which was lower than the current operating cost of $80.36 a ton. To the extent that
the new Leaf Maker could accommodate sheeting needs in one shift rather than two, Box-It would be able
to reassign one sheeting employee and thus avoid hiring a new employee, saving $60,000 a year. If
production required a return to two shifts, a hire would become necessary.
Rossi estimated that the new Leaf Maker would reduce waste in two ways. First, the waste produced by
the old Leaf Maker during sheeting was 3.8% and that would be lowered to about 2.4% with the new
machine. Second, the sheeting process also affected waste in later (downstream) processes. Downstream
waste for both internally and externally sheeted paper was currently 1.8%. The new Leaf Maker would
produce sheets that were far flatter than those produced by the old machine or purchased externally. This
would improve sheet handling in latter operations and reduce waste to somewhere between 0.8% and
1.6%
The net effect of the Leaf Maker replacement on inventory was not entirely clear. Paper already sheeted
would typically arrive four days before it was used. If the paper was bought in rolls, it would spend five
days as a roll and then two days as sheets before being used. Thus, there would be an extra three days of
physical

inventory .11 However, the increase in inventory volume would be offset to some extent by

the lower roll price.

Typically, the sheeting operation would run two shifts a day five days a week. For all calculations, Box-It

assumed 240 operating days a year. The 240-day benchmark reflected the effects of holidays and other reasons for
work stoppage.
10

Capacity is determined by both a machines design but also by the mix of work being done. Short jobs or

unusual jobs require more setup time and would reduce capacity. The new Leaf Maker could have a much larger
capacity if the mix of work were to change.

An important consideration for Snow was how volumes and costs would evolve over time. He had seen
substantial growth. In the future, he expected a minimum of 3% growth but would not be surprised to see
growth of 7% or 8%. In either event, the unused capacity of the new Leaf Maker would soon be
employed. He estimated that all costs would increase by about 2% a year except paper. The cost of paper
fluctuated widely and was an important source of uncertainty in his business. It would certainly matter in
this analysis since the central motivation for the replacement was the cost of paper. Snow believed that
given decreasing demand, the cost of paper would be unchanged over the next five years. For his analysis,
he would assume no change over the life of the machine.

Decision Criteria
Snow said that his central reasoning for any decision, even a capital investment, was whether the
decision would be good for my operations. This is not to say he was focused on annual cash flows: Any
large capital investment was going to hurt cash flows in the near term. It was a philosophy based on a
firm belief that to be successful financially over the long run, his firm needed to be at peak operating
efficiency at all times. Nevertheless, he recognized the need for careful capital budgeting analysis to be
sure that the operating benefits of a project justified the capital outlay. This financial justification was also
something he would use to help secure the financing he would need for the purchase. The purchase would
be initially financed from Box-Its short-term line of credit at prime plus 1% (at the time, the relevant
prime rate was 3.25%). Aside from an 8% subordinated loan equal to about $1 million, the long-term debt
of Box-Its comprised a 7.5% $3 million loan secured by real estate due in 2033 and various other loans
with shorter maturities and an average interest rate of 7.25%.
Aside from the actual cash flow effects, Snow believed the Leaf Maker replacement provided one
additional capability. As soon as he obtained a customer order, Snow would order paper. For precut paper,
it would take five to seven days for the paper to arrive at his plant. If he had the needed paper type on a
roll, he could have it sheeted that day. Even if he had to order a roll, that roll would arrive within the next
two days. Thus, he could more quickly print orders that used rolled paper. Of course, this capability
would not matter to all orders, but shorter customer lead times, what Snow referred to as speed to market,
was becoming increasingly important. His thoughts were echoed by Rossi, who said, One question we
always ask when making decisions is, Will this help us do it faster? He also said that Its hard to put a
price on speed and flexibility, but I know that any equipment we run in-house adds to our efficiency.
Regarding capital budgeting analyses, Snow employed the traditional net present value analysis using an
appropriate discount rate. In addition, since his firm was highly leveraged, he needed to be aware of the
annual cash-flow implications of any project. To arrive at a discount rate, Snow would gather cost-ofcapital data from a number of comparable firms. In addition, recognizing that his business rose and fell
with his customers, he included a sample of firms that captured the general health of the market in which
he sold his products. A representative set of such firms is listed in Exhibit 4. A summary of capital market
data is provided in Exhibit 5.

11

The need for extra space was not an issue. Box-Its had plenty of extra warehouse space.

Exhibit 1
BOX-IT, LLC:
Income Statements

Data Source: Box-It Graphics financial statement.

Exhibit 2

BOX-IT, LLC
Balance Sheets

Data Source: Box-It financial statement.

Exhibit 3

BOX-IT, LLC
Schematic of Proposed New Leaf Maker

Source: Box-It.

Exhibit 4

BOX-IT, LLC
Industry Financial Data by Company

Exhibit 5

BOX-IT, LLC
Capital Market Data as of December 28, 2009

Estimated Market Premium

6.00%

U.S. Government Bond Yields

2-year

1.14%

5-year

2.69%

10-year

3.85%

30-year

4.63%
Corporate Bond Yields (long-term)

AAA

5.26%

AA

5.44%

5.77%

BBB

6.37%

Data Sources: U.S. Federal Reserve and Mergent Bond Record.

Assignment Questions
1. What are the key success factors in this industry at the time of the case? How has Box-It
positioned itself to excel?
2. What are the non-quantifiable and strategic benefits of replacing the Leaf Maker?.
Describe the value drivers of the replacement decision.
3. Calculate an appropriate discount rate for evaluating the Leaf Maker replacement

decision.
4. Perform a net present value analysis of the Leaf Maker replacement decision.

[Hint] While it is possible to perform such an analysis looking at the changes in

all cost items, for this analysis, please calculate the present value of future costs
assuming the old Leaf Maker is retained and assuming the old Leaf Maker is
replaced. The net present value of the replacement would be the difference
between these two values.