Birch Paper Company

"If I were to price these boxes any lower than $480 a gross," said James Brunner, manager of Birch Paper Company's Thompson Division, "I'd be countermanding my order of last month for our sales force to stop shaving their bids and to bid full cost quotations. I've been trying for weeks to improve the quality of our business. If I turn around now and accept this job at $430 or anything less than $480, I'll be tearing down this program I've been working so hard to build up. The division can't show a profit by putting in bids that don't even cover a fair share of overhead costs, let alone give us a profit."

Birch Paper Company was a medium-sized, vertically integrated paper company, producing white and kraft papers and paperboard. A portion of its paperboard output was converted into corrugated boxes by the Thompson Division, which also printed and colored the outside surface of the boxes. Including Thompson, the company had four producing divisions and a timberland division, which supplied part of the company's pulp requirements.

For several years each division had been judged on the basis of its profit and return on investment. Top management had been working to gain effective results from a policy of decentralizing responsibility for all decisions except those relating to overall company policy. Top management felt that the concept of decentralization had been successfully applied and that the company's profits and competitive position had definitely improved.

Early in the year, the Northern Division designed a special retail display box for one of its finished papers in conjunction with the Thompson Division, which was equipped to make the box. Thompson's package design and development staff spent several months perfecting the design, production methods, and materials that were to be used; because of the unusual color and shape, these were far from standard. According to an informal agreement between the two divisions, Thompson was reimbursed by Northern only for the out-of-pocket cost of its design and development work.

When the specifications were all prepared, the Northern Division asked for bids on the box from the Thompson Division and from two outside companies, West Paper Company and Erie Papers, Inc. Birch's division managers normally were free to buy from whichever supplier they wished, and even on sales within the company, divisions were expected to meet the going market price if they wanted the business.

AT this time the profit margins of converters such as the Thompson Division were being squeezed. Thompson, like many other similar converters, bought its board, liner, or paper and printed, cut, and shaped it into boxes. Though it bought most of its materials from other Birch divisions, most of Thompson's sales were to outside customers. If Thompson got the order from Northern,