RT Tanner & Co Ltd

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Contents
Conclusions
Management
Accounting Systems
Trading Performance
Review of Balance Sheet
Future Prospects
Appendix

Bank Report

4 Operations
4.1 Introduction
In this section, our review concentrates on the activities of Tanner at Crayford and Dartford. Due to time constraints, we were unable to visit the Company’s site at Leeds and any reference to this outlet is, therefore, based on discussions with management at Crayford.

During 1989, the roof of the factory at Crayford was found to be in a poor condition and consequently the Company contracted to have essential repairs undertaken. We understand that the contractors did not carry out the work to required standards and as a consequence severe disruption to trading occurred. At the time, orders were placed with sub contractors and Tanner suffered the loss of some of its customer base. The non performance of sub contractors and advisors is now the subject of legal action and a claim of Ł286,000 plus other costs has been lodged.

4.2 Activities and Nature of Products
The Company is engaged in the manufacture and supply of quality envelopes and paper for business use. Its activities compromise the manufacture and sale of its own range of envelopes and pockets together with merchanting of other branded products.

The range includes stock envelopes and pockets in an extensive variety of qualities which can be personalised by overprinting, mechanised mailing envelopes for inserting machines and bespoke specialist envelopes and pockets. Additionally, self seal pockets, cardboard mailing cartons, and a comprehensive range of general printing papers and boards are also supplied.

The manufacturing operation is based in Crayford with warehousing facilities for completed and bought in stocks at Dartford. There is also a sales and warehousing operation at Leeds.

Quality assurance accreditation under BS5750 is not presently held but management has recognised the need to pursue this as major customers are indicating that it may become a requirement for the trading relationship to continue. However, due to financial constraints, no progress has yet been made.

4.3 Markets and Competition
The Bank’s latest Industry Information Sheet – Pulp Paper and Board was issued in May 1988. Whilst this may be regarded as a little dated, management was of the view that the observations, broadly, remain apposite. In the bulk paper market, MK was of the opinion that imports accounted for 60% of volume and 45% of value of the UK market with Scandinavia, Canada and Brazil producing large quantities to volume users such as the newsprint industry. In 1988, the market for printing, writing paper and board was estimated to be worth over Ł1,624 million per year and it is possible that some growth has been seen since that time. However, the Company addresses a niche market within this sector and MK estimates that Tanner has a 4-5% share of the UK sales in this particular sector.

As forecast in 1988, we understand that there is an excess of products in the UK at the present time which has led to intense competition, particularly on pricing. Whilst it seems that the marketplace for mass produced envelopes has experienced a degree of stagnation, management was of the view that demand for specialised products remained strong. During recent years, the paper industry has been subject to radical changes and considerable realignment as a consequence of sharp competition and a desire to maximise earnings. This has culminated in manufacturers seeking to distribute their own materials, particularly imports, together with substantial investment in machinery. This has culminated in smaller independents having to cope with increasingly competitive prices, Management has, therefore, recognised that Tanner would be unable to compete effectively with major players and it has been seeking to establish a niche market in the supply of specialist, high quality envelopes and paper. Nevertheless, the investment power of the large producers will, in our opinion, lead to the installation of quick change machines to address the potential growth market of personalised paper products. This in turn will continue to place cost pressures on smaller businesses.

MK has, in the past, produced an analysis of the customer base by areas of activity. This exercise was last completed in 1988 and, as an indicator, the results were as follows:

	% of turnover
Print Merchants/Wholesalers	9
Commercial Stationers	14
Printers	26
Local Authorities etc	11
Direct Consumers	37
Direct Mail/Advertising Agencies	3

MK told us that the percentage of printers has declined and direct mail has also suffered as set back due to the current economic climate. These reductions have been offset by direct consumers although information was not available to confirm these observations. The composition of sales is discussed in more detail at para 6.2.

Whilst MK considers that the major players are unable to currently provide the same flexibility as Tanners to customer requirements, he considers that John Dickinson, Wiggins Teape, Spicers and Chapman Industries pose the strongest competitive threat.

4.4 Pricing
MK is responsible for the pricing of the Company’s products. Stock prices are reviewed annually for implementation with effect from 1 February and bespoke products are priced individually.
Prices for own manufactured goods are based on the factory costings discussed at Para 5.3(b) to which a 10% mark up is applied before MK determines the final figure. A further target mark up of 30% is then applied to, theoretically, produce a profit. For special orders a mark up of 30% on the factory costs alone is sought.
For merchanting, pricing is entirely market led as we understand that heavy discounting is offered by competitors for volume. The mark up on the actual cost to the Company varies between 5 and 40% although each item is reviewed where less than 20% can be obtained. Nevertheless, MK accepted that some product lines may be regarded as loss leaders to protect other areas of the business. Direct mill sales are often achieved at a low mark up as goods are supplied direct from the manufacturer to end user. The mark up, typically, ranges between 2 to 5%.

The sales force is instructed to work to the Company’s price list although it is permitted to discount prices without reference. In the absence of any comparison of actual sales against costs, we were not able to satisfy ourselves that quotes are therefore profitable on all occasions. There was evidence that the costs of stock holding and movement between Dartford and Crayford for overprinting were not taken into account when establishing prices.

4.5 Sales Organisation and Marketing MK is responsible for the sales force which comprises a sales manager and seven representatives at Crayford and three representatives at Leeds. Leeds’s sales and warehousing are managed by Bill Pearson on a day to day basis. Tanner seeks to provide coverage throughout the UK and in the last 12 to 18 months MK has been engaged in seeking new opportunities in Europe. An incentive scheme is employed by the Company which provides bonuses of up to 5% of salary, maximum, based on both monthly and annual volume targets. However, the sales force has, in the main, been unable to achieve targeted figures in recent years and few payments have been made. One representative has been dismissed recently without replacement and MK is of the view that further economies may be possible in due course. In our opinion, the Company’s operations may be well suited to a telesales facility although we understand that the lack of funds has prevented any progress being made in establishing such an activity.

Sales are achieved by a mixture of tender for specific contracts or order. Contracts, however, form a relatively small proportion of total sales. Whilst the Company has, in the past, been represented at trade shows very little marketing or advertising is now undertaken due to the lack of available funds. We understand that a budget for expenditure has been set each year but this has been removed as pressures on cost containment have been encountered.

The Company is a member of the Envelope Makers and Manufacturing Stationers Association and the National Association of Paper Merchants.

4.6 Buying
Purchases comprise raw materials used in the manufacturing process and merchanting goods.

The buying of raw materials is the responsibility of the production estimator and planner who is guided by board decisions as to quality and mills to be utilised. As the Company’s products are often linked to paper produced by mills, alternative sources of supply are not available. Lead times for supply vary based between three and six weeks and materials are mainly purchased from UK mills such as Thomas Tait, UK Paper GB Papers and Wandsborough Papers. Other items such as specialist cardboard packaging are obtained from manufacturers such as Charles & Davis and Prior Packaging with lead times being slightly shorter than for paper. Minimum re-order levels are utilised and the buyer endeavours to maintain stocks at one week ahead of production. For paper used in the Classic range (GB Papers) a discount of 33% is obtained.

The stock of products for the merchanting operation contain many branded names. It was, however, apparent that the Company was unable to compete on pricing with the major players due to the lack of purchasing power. In the circumstances, Tanner became a member of the Network Paper Stockist Group, a consortium of similar sized companies formed to gain the benefits of bulk purchasing. A number of items are therefore bought from this source.

Parts of the range offered is supplied direct by a Swedish based company and Tanner has to purchase bulk quantities to secure competitive pricing.

4.7 Production and Distribution
The planning and scheduling of production is influenced by bespoke orders which are linked to the provision of stock items. Management seeks to establish a schedule of working up to two/four weeks ahead. Our review indicated that the controls and reports employed by the Company were, generally, adequate to facilitate effective monitoring of the production operations.

The process is labour intensive and a significant proportion of the machinery is dated. Management has sought to optimise the benefits arising from new plant installed in the last five years but there seems to be considerable scope for further automation. It is accepted that additional investment is, however, subject to the availability of funds.

During our visit, we gained the impression that stock items are being produced without adequate communication with the sales force. This has culminated in appropriate items being manufactured which the Company has been unable to sell. In our opinion, this has been a contributory factor to the current overstocking discussed at para 7.4.

Other than envelopes and pockets, the Company has a small cardboard carton production facility for its own stock products. Specialist boxes are sub contracted to external business. Quality control procedures are employed at all stages in the operation and we understand that returns due to faulty goods are extremely low.

Overall, we consider that the existing production process could be improved and, in our opinion, there may be scope for achieving some staff reductions. The present capacity appeared more than adequate in some areas but we understand that other areas, particularly newer machinery, are unable to meet demand. The production workforce currently works two shifts between 6am and 10pm. Should further funds not be available for new machinery, we suggest that management may wish to consider introducing a third shift if demand continues to outstrip capacity.

The workforce mainly comprises unskilled manual workers although some difficulty is encountered in recruiting adjusters. Nevertheless, we understand that staff turnover is low. The employees are members of SOGAT82 and whilst we were told that difficulties have been experienced in the past, there does not appear to be any major problems, at present, due to that union’s wanting influence.

Distribution of Tanner’s products is achieved by utilising five vehicles, in the Company’s livery, contracted from Beck and Pollitzer. Deliveries are made up at the Dartford and Leeds warehouses and a transfer operation is in force between production at Crayford and Dartford. In our opinion, this part of the operation is extremely inefficient and we were not convinced that all the handling and storage costs are recognised in the Company’s pricing. PT has recognised the significant cost of the Dartford warehouse and has indicated that he would wish to incorporate this at Crayford. It is accepted that there may well be scope for stock reductions but we consider that this proposal will be unachievable, a view shared by KM and GR.

4.8 Summary
The Company appears to have established. Albeit not major, position in a market which is subject to intense competition.

Our review of operations indicated several shortcomings which do not appear to have been adequately addressed in the past. Management seems to be aware of some of the operational weaknesses such as production and warehouse deficiencies but has yet to demonstrate that effective action has been taken to correct matters. In our opinion, there are shortcomings, including the identification of full costs to facilitate considered pricing decisions, which cannot be addressed until such time as reporting systems have been improved (para 5.6 refers). We consider that stronger direction of sales and better communication with production is required and that a clear strategy should be developed and actioned to provide focus to the sales effort.

We formed the opinion that an urgent radical review of the Company’s operations is essential in view of the marketplace and its recent financial performance.