| Philip
Morris' Richmond plant goes high tech
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Virginia Business
November
2004
For
motorists driving Interstate 95 in South Richmond there’s
no missing Philip Morris USA’s looming factory.
Marking the spot is a multicolored tower with the names
of the company’s brands. Viewed by some as an
unsightly gateway to the city, it is an unmistakable
landmark nevertheless. Passersby are reminded of an
irrefutable point: the Richmond area, addicted to Philip
Morris’ presence for decades, would suffer major
withdrawal symptoms without the cigarette company’s
jobs and investment.
Even diehard tobacco foes can’t dispute Philip
Morris’s importance to the region. About 3,500
Richmond-area residents work full time at the cigarette-making
plant just south of downtown, churning out smokes at
the rate of 600 million a day. Another 3,000 people
work at various offices and warehouses, making it the
second-largest private employer in the Richmond area.
That includes the 270 employees who relocated when Philip
Morris, the world’s largest tobacco company, switched
its corporate headquarters from New York to Richmond
a year ago.
Now, 30 years after opening the plant, Philip Morris
is deepening its Richmond roots with a $300 million
expansion. The massive investment is expected to produce
about $8 million annually in property taxes and other
fees for Richmond. And the expansion introduces technology
that will streamline operations. Phase one includes
a new inventory-handling warehouse designed to make
the supply chain more nimble. Encompassing 500,000 square
feet, the facility provides adequate room to consolidate
operations from several locations. Space is better organized
to accommodate up to 20,000 pallets of supplies. Sophisticated
gauges regulate temperature and humidity to cut down
on spoilage of heat-sensitive tobacco leaf.
Slated to open in November, the warehouse includes a
system that automates storage and retrieval of material.
The $26 million system eliminates “one of the
least desirable jobs in the plant,” says P. Steven
Hunter, director of operations and logistics. Instead
of prowling through cluttered inventory shelves to record
product information, employees use computers to “point
and click” on product codes. Powered by software,
the bar-code readers can track more than 3,000 codes,
including cigarette and filter papers, packaging cartons,
shipping boxes and health-warning labels. Products no
longer have to be physically hauled from shelves, either.
Automated cranes, extending to the ceiling, retrieve
items from inventory. Conveyors quickly move them through
the warehouse to robots, which automatically load the
material onto hydraulic-powered carts for delivery to
the factory floor.
High expectations accompany the new gizmos. The company
is eyeing a return on investment of 19 percent through
more efficient materials processing. The new machinery
cuts down on “machine-ability,” or the number
of cigarettes rejected due to malfunctions of older
equipment. Automation also reduces mishandling because
of human error, another costly area. “Every time
you handle a product, you increase the potential for
damage,” says Hunter.
Savings are expected from other changes as well. More
than a dozen new cargo bays will boost truck deliveries
considerably, to between 40 and 50 a day. The increased
capacity potentially means fewer trucks have to make
return trips, thus reducing trucking costs. Last year,
Philip Morris paid a whopping $18 million in tobacco-freight
costs to Virginia carriers.
Another $25 million went to warehousing companies from
whom Philip Morris leases space. “We’re
going to be able to free up about half the square footage
of our other facilities, and get out of about 90,000
square feet of leased warehouse space,” says Hunter.
Competing in an industry under siege requires Philip
Morris to cut costs wherever it can. Philip Morris is
among four tobacco companies forced to pay 46 states,
including Virginia, combined indemnities of $200 billion
during the next 25 years. In exchange, the government-brokered
settlement inoculates the companies against lawsuits
from individual states. The major tobacco companies
also face increased competition from discount cigarette
brands.
Putting the stamp on its Richmond identity, the company
moved its corporate offices a year ago, retrofitting
the former Reynolds Metals Co. building in Henrico County.
Gov. Mark Warner was instrumental in persuading the
cigarette company to leave the Big Apple. (Its parent
company Altria Group Inc. remains based in New York.)
Yet Warner’s $1.3 billion tax package, passed
by the Virginia General Assembly earlier this year,
hikes the cigarette tax from 2.5 cents per pack to 20
cents per pack this year, and then raises it to 30 cents
per pack in 2005. How this will affect company sales
in Virginia is unclear, but the increase turned heads
in a state long known for having the lowest cigarette
tax in the nation.
Philip Morris’s economic impact, though, resounds
beyond Richmond. Half the burley tobacco and more than
one-third of all flue-cured tobacco produced in the
state is sold to Philip Morris. All told, the company
bought more than $30 billion worth of the leaf from
Virginia growers in 2003, or about 16 million pounds.
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