Price Wise: An old dog learns some new tricks

In our last episode, we learned that after deciding to search for a supplier to provide polypropylene at the new resins pricing, Poly Wise switched from defense to offense on profits, telling their employees:

"Profits keep us in business and you employed, so we all need to work together to secure and improve profits. We are attempting to change the pricing structure of our polypropylene supply to give us control over our biggest cost, but we also want your ideas. In return for your ideas and their successful implementation, you will share equitably and handsomely in the profits."

Poly Wise follows up with specifics on its profit sharing program:

"We have two reward levels under our profit-sharing program: 1) Everyone Shares and 2) Key Contributors. Our objective is to meet or beat our budgeted 10% gross profit margin. The more we beat it, the more money we all make. Key contributors (employees whose ideas we adopt that lead to higher profits) will make even more."

Poly Wise is overwhelmed with the positive response of its employees and the mood lifts. [Profit sharing is far more effective at improving employees' moods than cookies, absurdly recommended in this otherwise insightful WSJ article on improving morale in the work place.]

CFO Steps In

In moving from defense to offense on profit margins, Poly Wise takes the additional step of putting its CFO in charge of the Purchasing and Sales Departments. The aggressive but fair CFO calls in Ralph, the Purchasing Manager: "Ralph, you have been tasked with finding a long-term polypropylene supply for us at WTI futures plus 30 ¢/lb. We want to be able to control our polypropylene costs against our product prices so we can increase margins and sales while helping our customers control their costs. We're tired of resins prices and the market controlling our profitability. You have a crucial role in this effort, but I'm concerned about this email you wrote to me a few months back:

In today's world of such volatile resin prices (cost swings like we've never seen before), hedging is too risky. Public companies can make up excuses to shareholders as to why the "hedging strategy" did not work, leading to under-budgeted margin results or (most likely) losses. In plastics processing, no company can afford NOT to pass along resin cost increases immediately to customers. The real issue is communication between our Sales Department and customers' Purchasing Departments. Our customers need to understand any type of price protection or the unwillingness to accept a justifiable increase not only puts our health/existence at risk, but theirs, too.

"That approach doesn't cut it anymore, Ralph. We can't just pass along higher resins costs to our customers when we want to, and that's not our Sales Department's fault. We're losing customers despite not passing higher resins costs along to them. Worse, our profit margins are weak. We need to change. You need to change.

Carrot and Stick

"I've teed this up for you, Ralph. Learn about the new resins pricing paradigm and find us a polypropylene supplier at WTI plus 30 ¢/lb so we can all benefit - you, in particular, as a potential key contributor. But I want results, Ralph, and if you can't do this, I'll find someone who can. Given our new profit-sharing program, that won't be too difficult."

Ralph Steps Up

Ralph is an "old dog" but he's not dumb. After 28 years in the plastics industry, he actually enjoys the challenge by his new boss, the CFO, and is determined to learn this "new pricing paradigm" stuff. He reads previous articles on Price Wise while the CFO provides backup for Poly Wise's WTI + 30 ¢/lb bid to polypropylene suppliers:

Poly Bon Steps Up

Ralph contacts many polypropylene suppliers, including Big Oil Chemical Companies for whom Ralph thinks a polypropylene price at a differential to crude oil makes the most sense - Exxon, Chevron, Conoco, BP, and others. Ralph is somewhat surprised when his first response is from Matt, the Marketing Manager at Poly Bon.

To be continued ...