The prospect of cutting hundreds of millions of dollars out of your freight bills is enough to drive some big shippers into mergers. Just ask International Paper.
It is buying packaging manufacturer Temple-Inland for $4.3 billion. “This makes a good corrugated box business, which we have in International Paper, an excellent one," said IP Chairman and CEO John Faraci. The combined $30 billion company, he said, will be “a very powerful cash flow engine.”
It also creates some powerful synergies, which Faraci says will come more from wringing efficiencies out of freight shipping than cutting jobs from factory operations. IP estimates it will achieve total savings of $300 million over 24 months after the acquisition closes, which is expected early next year.
“There are considerable supply chain synergies,” Faraci told when he announced the deal early this month. “We have lots of miles of containerboard traveling to mills, and then boxes traveling from box plants to customers. We’ll re-sort all that, and that will be one of the big synergy buckets.”
A number of big, nationwide shippers are launching supply chain makeovers, from the one under way at Home Depot to network expansions by retailers like Kohl’s and consolidations in the bookstore business. But the IP example shows that slicing costs from shipment flows can be an important factor in merging factory networks as well.
Paper and box manufacturers generate a lot of railcar and truck loads, including pulp and recycled boxes in and large lots of finished products out. Besides raising freight rates, shippers often big face extra costs like the pass-through of a 30 percent jump in diesel costs over the past year.
IP knows from experience what it can do to shake out transport costs, since it got similar shipping benefits from its 2008 purchase of Weyerhauser’s containerboard packaging business. Although IP did not specify how much it will save in each area for the merged box makers, Faraci said “the big buckets are going to be logistics, supply chain, purchasing, overhead, duplication elimination and some box plant rationalization.”
The new merger comes at a time when the U.S. jobs market has faltered, prompting CNBC to ask Faraci about the job cuts this deal would bring to the IP and Temple workforce. “There will be some elimination of duplication,” he conceded. “But really I’d say the biggest area of cost efficiency is not jobs. It’s in logistics and transportation.”
How’s that? “Our logistics costs in our packaging business are higher than our labor costs,” he told CNBC. “We will take Temple’s system and put it together with International Paper’s, and we’ll take a lot of miles out of transportation . . . We know how to do this. We see some real opportunities there. ”