Multiform Containers Inc.

In the summer of 1989, Tom Foster, President of Multiform Containers Inc. (MCI), received the financial statements for the year ended February 28 from his accountant. The numbers confirmed that a visible market niche existed for a small company specializing in producing paperboard boxes for local manufacturers.

Two years earlier, the company had expanded to a new building in Sackville, Nova Scotia. Foster was pleased with the results but was wondering how to maintain his past success. As he said, ''The year's results were pretty good. But if someone asked what strategy we used I would have to say 'none,' at least nothing on paper. I had a certain philosophy about running the company. I didn't hire extra staff or invest in equipment unless it was absolutely necessary; before purchasing raw materials I shopped around looking for ends of line that would do the job, so, I could be satisfied that my raw material costs were as low as possible, and I watched expenses very closely, so some might say I was 'nickel and diming' it. Comments like this didn't bother me because, in the end, I knew that what I had done would improve my profits."


This can was prepared by Professor Clarence Ivey of Dalhousie University for the Atlantic Entrepreneurial Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management.

Copyright 1993, the Atlantic Entrepreneurial institute. Reproduction of this case is allowed without permission for educational purposes, but all such reproduction must acknowledge the copyright. This permission does not include publication.


Where Do We Go From Here?

To replace the existing machinery with new, more efficient equipment would cost about three quarters of a million dollars. Foster was not certain in his own mind that this was "absolutely necessary," nor did he like the long-term debt that would go along with equipment replacement. In thinking of areas for growth and expansion, several possibilities came to mind:

(1) Aggressively seek out new customers and increase sales to current customers.

(2) Expand into the printing business.

(3) Construct a separate building on a vacant lot, on which MCI held an option, and rent it to a small printing company. He thought it would be good for his business to have such companies located nearby.

Foster had to decide which choices to make to further the interests of the company.

The Company

Historically, boxes made from paperboard/ cardboard were supplied to Atlantic Canadian users by large printing companies located in Montreal or Toronto. The predecessor to a folding box was a set-up box One example of a set-up box was a chocolate box made in two pieces and shipped to the customer assembled. Such boxes had the problem of requiring extra storage and shipping costs. So, it was convenient for larger companies in central Canada to locate branch plants in Atlantic Canada to produce boxes for fishing companies, confectionery companies, and others with similar packaging needs. Once folding boxes were developed that could be manufactured, stored, and shipped flat, the need for branch plants diminished.

Tom Foster, James Aldrich, and Harold Veinot worked in a branch plant where the production was transferred back to Toronto. Being sales people for a plant located a thousand miles away was not satisfying, and they saw that the needs of small customers were not being met. By the late 1970s, Tom Foster, James Aldrich, and Harold Veinot were actively considering starting their own business. They reasoned that low volumes would not interest large firms based in Montreal and Toronto. The group felt their skills and resources would be sufficient to compete with the small number of local firms. SO, in 1980, Multiform Containers Inc was incorporated to produce folding boxes, counter displays, and other items requiring die-cutting (see Exhibit 1).

Provincial governments were encouraging small businesses by building incubator malls. Each mall would accommodate three to four businesses in separate spaces of 2,000-4,000 square feet. The rent for these spaces was subsidized for the first three years, giving fledgling industries a chance to get started. MO took advantage of this arrangement. In time, they outgrew this space. In 1987, they built their own plant.

Products

The company produced products which were made from sheets of paperboard of varying thickness, depending on the strength required in the boxes. Through effective purchasing, MCI's paperboard costs made an important contribution to profitability. Box design was the responsibility of the box manufacturer in consultation with the customer. Designs varied, depending on the product and whether or not the customer wanted a box that was different from existing boxes. It was important to design a box that was easy to make and economic to use (i.e., space economy in packing boxes into larger cartons for shipping). Boxes were made in numerous shapes: cube, oblong, round, and oval. Even though the print and the colour of a box was decided by the printer, the box manufacturer's input was necessary, as he was often the individual having the first contact with the customer. Two packaging experts, discussing importance of colour in packaging, stated: "A housewife in front of me reached for our product on the shelf in a shop. I asked her why she had chosen this brand. Her response, 'I really wanted to buy ... (and named a rival product),' but she could not find it. The package was, in fact, next to ours. But, since our package had been designed to attract and retain attention, she did not bother to look at others."1 The package is the face of the product. The customer recognized 'his' toothpaste, 'his' chocolate, by the colour, shape, and design of its package. An advertising campaign loses its value if the product is not easily recognized in the shop. The package must, moreover, not only induce an isolated purchase but encourage repeat business.

Marketing

MCI concentrated on developing the market niche serving businesses with low volumes, businesses which were of less interest to large, printing, die-cutting companies. MCI's emphasized products that needed special packaging. The quantities were not large, and a quick turn-around was important. MCI was not interested in trying to take business from large competitors. Such a strategy would lower margins and require extra investment in equipment. Those would be risks taken for business which the competitor could take back at any time.

The approach Tom Foster Preferred was to create new business by designing boxes for small companies who did not have the skills themselves. To date, this provided about 150 customers requiring regular contact. Experience showed that such an approach resulted in repeat business of about 30%. (About 70%

1 Dr Jean-Paul Favre, Frank Gianninoto, "Colour Sells Your Packap," Package and Industrial Design, New York, 1969, p. 25, 45.

of the business was not repeat because the firm dealt with many small businesses, some of which "went bankrupt" because they did not have the capital or strength to carry through from the production stage to market.) Often a small manufacturer does not really know what he needs. For example, a company wanted to package salt water taffy. The owner spent $1200 for a package that he considered attractive and unique. The problem he ran into when he approached a box maker was that the package had too much colour variety and the design was awkward. The package would have cost $2.00 each to produce, while the selling price of the product allowed for a 50cents package cost. So, MCI had to redesign the package.

Small folding boxes constituted 40% of the business. Another large segment of MCI's business (40%) was to take material from the printer and convert it to finished goods for the printer. This included displays and promotion folders, which are completed by die-cutting. The remaining 20% of MCI's business involved taking large sheets of paperboard and cutting them into various dimensions for shirt boards, picture backs, and other products.

Production

Previously, Tom Foster and/or Harold Veinot went to the customer's plant. Now, they encouraged the customer to visit MCI's plant. This made it possible to show MCI's facilities and capabilities, and the customer felt he/she was part of the design process. Steps involved in producing the finished product were as follows:

a) Customers knew their own products and where they were to be sold, but did not know how to make suitable boxes for the products. After listening to the customer's request, the box maker decided on the weight of paperboard required and made up a prototype box.

b) Once the plant received the order, the die-maker took a piece of special plywood and made a the that would be used to cut out the box shapes. The die was inserted into a steel frame in the die-cutting press. Sheets of paperboard were inserted in a frame that was aligned with the die.

c) The drums of the press were rotated so that a continuous feed of paperboard sheets was pressed lightly against the die, and the steel rule in the die scored the paperboard. Later, the excess paper was stripped away manually, and the flat form of the boxes were ready for shipment to the customer. Certain boxes required gluing, which was done by MCI. (The diecutting process is illustrated in Exhibit 1. This includes a picture of Heidleberg Press, a sample of a die, a box in flat form off the press, and a finished box.)

Equipment

A polar cutter was used to cut the paperboard into sheets for die-cutting. A gluing machine was used to glue portions of boxes and folders when required. Three Heidleberg die-cutting presses of varying sizes were used to die-cut the boxes The large press could handle most jobs, with the smaller presses being required for Jobs with a very small dimension. Unlike printing presses, speed of output was not a consideration. If the press ran too fast, the die-cut pieces would fly into the air. On die-cut presses, the operator controls the speed.

Plans were in the works to buy one or two new presses, because some printers who normally did not have die-making skills set markings that were not accurate enough. The box maker had to take the job off of the press, make a new die, run a proof, and send it back to the printer for approval. So the machine could be tied up for two or three days, or the job could be removed and a second set-up done later. That is why it is useful to have extra presses for flexibility, which enables good planning.

MCI had nude a practice of buying used equipment. A gluing machine could cost as much as $400,000 and a secondhand machine as low as $5,000. One used machine was purchased for $5,000, but the machine could not be adapted, so it was written off. The next purchase was perfect: for a total outlay of $10,000, the company's needs were satisfied. MCI had no problem with conversion or maintenance costs, and by purchasing used equipment, large bank loans for equipment were not necessary.

Financial

Assistance in financing the equipment purchased and construction of a building was provided by ACOA and its predecessor. Total assistance was approximately $88,000 on a total cost of $335,000. Additional assistance in the purchase of equipment was provided by the Province's Department of Small Business Development. This monetary help was obtained through program which were meant to encourage small businesses to start, grow, and expand. In the case of MCI, the programs did exactly that. A five-year income statement reflected 1989 sales of $441,350, an increase of $143,705 over the previous year and an increase of $323,394 since 1985. Earnings after taxes, at $96,279, were the highest in five years. (Exhibited five-year statements include: income statement, balance sheet, common size income statement, and bar chart.) Tom Foster gave the financial statements to his part-time receptionist/office clerk for filing. His thoughts continued to focus on a strategy that would provide direction for company growth and increased profitability.


Exhibit 1

DIE-CUTTING PROCESS

Source: Company records

Exhibit 2 - FINANCIAL

MULTIFORM CONTAINERS INC
INCOME STATEMENT 1985-1989

mc01.jpg (51316 bytes)

Source: Unaudited Financial Statements

MULTIFORM CONTAINERS INC
BALANCE SHEET

mc02.jpg (41801 bytes)

mc03.jpg (15208 bytes)

Source: Unaudited Financial Statements

Multiform Containers Inc
Common Size Income Statement

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Source: Unaudited Financial Statements