SWM - Mark Moore

educing product costs. The government has recently proposed new regulations forcigarettes making companies implement a new technology in cigarette paper calledLower Ignition Propensity, LIP. A number of states have already passed these newregulations and it is likely that all fifty states will implement these new LIP regulationsby late 2009 or early 2010. Demand for LIP paper is at a current level of 44 percent,and it is expected to increase to approximately 84 percent by 2010. With the new LIPpaper driving demand in the industry, it will be crucial to have efficient production inorder to lower costs with more paper being produced. Having a firm run its productionprocesses at a high level of efficiency helps lower cost of goods sold, which in turncreates a higher gross profit margin. SWM does a good job of running productionefficiently; they continually improve production times and have decreased product costson a year-to-year basis.Low Input CostsIn order to compete at the highest level in the specialty paper industry, havinglow input costs is crucial. Schweitzer-Mauduit sells its cigarette paper product to all ofthe tobacco industry. Recent activity in the industry shows some consolidation betweenseveral cigarette manufactures. The consolidation of several firms has created asomewhat harmful effect to Schweitzer-Mauduit’s operating results because it hasallowed their customers more negotiating leverage. Losing vital customers orexperiencing decreased sales has a detrimental effect on Schweitzer-Mauduit. To helpalleviate fear of loss or decreased operation results, Schweitzer-Mauduit enters intoagreements with these customers that ensure fixed prices for certain products. SWMuses significant amounts of energy, electricity, natural gas, and fuel oil to run itsmachines that manufacture the pulp and paper. Energy is generally not an issue butprices can and do fluctuate significantly. Due to this, SWM reduces the uncertainty ofenergy costs by entering into agreements with an energy cogeneration supplier toproduce their energy requirements for future periods and keep their energy costs down51