Survey shows processors win with solid fundamentals and strategic planning; size not essential

By: 
January 11, 2010

The annual Plante & Moran North American Plastics Industry Study for 2009 is complete, and the consulting firm’s Jeff Mengel doesn’t have a lot of good news—not that any of us expected much. However, you could find some surprises in this year’s study, and reasons for hope going into 2010.

A variety of plastics processors across several industries participated in the 2009 Plante & Moran North American Plastics Industry Study, with the transportation industry being the largest group of respondents at 36%, including thermosets and thermoplastics, compression, structural foam, injection, blow, thermoforming, and extrusion. By process, standard injection molding had the most respondents (60%).

Half the study’s respondents have moderate production volumes—between 20,000 and 500,000 annual units per mold. The rest were split between low volume (less than 20,000 annual units) and extremely high volume (more than 500,000 annual units per mold). While there was no correlation between volume and profitability, there was a negative correlation between profitability and volume when companies operated with fixed material cost contracts. Molders saddled with these types of contracts are often automotive suppliers. “Automotive is notorious for rejecting material price adjustments,” noted the report, “and these molders generally had 30% lower profit margins than other industries (the only industry that statistically correlated with lower profits).”

Utilization does not correlate with profits, but is a magnifier of the value proposition. “If you compete on price, the market dynamics of supply and demand have compressed your margins as there are just too many molders willing to quote using ‘survival’ pricing,” said the report. Higher margins went to processors that compete on a unique solution. And higher utilization creates higher profitability for those competing with a unique niche.

Productivity continues to improve as measured by value-add. Value-add per employee (all employees) has risen to $76,486. However, the bulk of the productivity improvement was used to pay for an increasing cost of labor. The report notes that followup inquires in 2009 revealed a significant reversal of labor costs as companies cut labor rates and headcount as a primary response to the “Great Recession.”

Average two-year sales growth for 2008 was puny—1.7% with only 51 companies having more than 5% two-year sales growth. “Surprisingly, growth does not correlate with profits,” said the report. Mengel continues to be surprised also at the lack of strategic thinking with regard to growth among many processors, “and they suffer as a result.” Toward the end of 2008 and into 2009, any growth was rare and Mengel’s continued warnings about the consequences of non-strategic growth were “hollow,” stated the report. “Our current concern is the desire to increase sales at the expense of appropriate margins,” Mengel said.

That reminds us of an old industry saw, “We’ll charge less for the parts and make it up in volume.” Mengel warns processors that in 2010 and beyond, “strategic growth will again become important.”

“More than ever companies are investigating new markets,” Mengel stated during an interview about the survey results. “Companies are viewing marketing [vs. selling] with renewed vigor, targeting industry niches, customers, and product lines.”

Plastic Components Inc. (PCI) in Germantown, WI develops a marketing strategy each year based on market and economic trends. “Last year’s [2008] marketing plan included a strong emphasis on tool transfers because we felt there would not be many new programs in 2009 due to the recession,” says Teresa Schell, marketing manager for PCI. “We capitalized on opportunities in 2009 that arose from distressed molders and the need to move molds.”

PCI’s 2010 goal is to broaden its customer base into medical, understanding the importance of diversification. Currently, no single customer represents more than 20% of Plastic Components’ business. “We know there are a lot of processors already in medical, but we took this goal straight on by aligning ourselves with champions—with people to help with messaging, and another group to put us in the face of these new opportunities, who recognize and validate our ability to mold medical parts, and get into the market that way,” says Schell. “We don’t want to develop all these systems and procedures without work to fill it. The plan was developed in the last quarter of 2009, so 2010 will be about new market penetration and broadening our capabilities in the medical market.”

Plastic Components proves out what Mengel concludes about successful companies: “Highly successful companies invest more in sales and marketing and have a broader diversification of customers. These companies exploit a niche and possess a value proposition in technical skills as evidenced by their higher-than-average pursuits: gas assist, multishot, or intricate insert molding; multiprocess capability; engineered resins; and patent technology (licenses or self-developed).”

Manufacturing overhead ranges from 20%-32% of sales from the lower- to upper-quartile participants, noted the report, and is directly affected by the complexity of the manufacturing environment. “Large numbers of molds, resins, and presses need to be managed by your more expensive indirect labor,” said the report. “Retaining customers with low sales volumes and low margins may actually reduce profitability and should be reviewed.”

Tough year for some
Plante & Moran’s study reveals that large companies had a 20% probability of lower profits, primarily because they had a more difficult time keeping up with resin price movement, and tended to rely on volume to earn their profits. Large companies also tended to provide more price reductions to their customers. “Two-thousand eight and nine were generally not kind to the larger molder that relied on material purchasing and equipment utilization to earn a profit,” said Mengel in an interview. “Instead, it was the smaller, niche molder with a diversified customer base that performed the best.”

Suppliers to the automotive industry have suffered the worst. The report put it bluntly: “The transportation industry punishes and eats the weak.” The domestic OEM (what used to be known as the “Big Three”) and the Tier One customer (Delphi, Visteon, etc.) have been losing market share for years, resulting in aggressive quoting practices, noted the report. Quoting models assumed a high level of press utilization that was unattainable after September 2008. Material price adjustments were tough to get from this industry, and if a molder did get something—anything—it was happy.

Bright spots for a few
There wasn’t anything in this report that molders haven’t heard before; niches are still riches. The winners tended to be the niche molders, noted the report. Companies with exceptional value-add content and higher engineering headcount as a percentage of the total tended to have higher profits. “Niches are found in unique design, tight tolerances, new processes, and by integrating various processes,” said the report.

A diversified customer base also helped molders, along with diversified industries, as the recession impacted various companies in various industries in different ways. Some were impacted more than others, so spreading the risk over many customers in diversified industries helped deflect the pain. However, noted the report, “You can have an excessive number of customers that drive complexity and thus costs. Companies that managed the complexity were likely to have 30% higher profitability.”

Smaller processors are by nature more nimble, but similar to the large companies, the shoot-and-ship molders tended to rely on asset utilization for profit. Companies with higher value-add had more opportunity to contract and did not rely on volume to make a profit. PCI has implemented production strategies over the past few years that helped it weather the storms of 2009 by making its 40,500-ft2 plant a fully automated production facility. President and CEO Tom Duffey notes, “We have robots, conveyors, and computer screens all over the building, but there are no operators involved in the molding process, thus we don’t have the cost of human involvement.”

PCI’s Schell says the company averages 1.02 people per press vs. an industry average of 8.6 people per press. Plastic Components has 42 presses and 44 employees, which is why it relies on automation. “We have seven technicians whose job it is to get the process going, and then we keep the molding process going without the need of an operator.”

Long-term success
Plante & Moran’s study revealed continued productivity enhancements in the face of deteriorating utilization, with the medial value-add per employee rising to $76,486 from $58,296 in 1998—a 30% improvement. “Similarly, utilization has continued to deteriorate, reflecting a more than 30% decline from 1998,” said the report, “the end result being a flat gross profit expectation over the same 10-year period.

“How can the industry work so hard just to stay even?” the report asks rhetorically. There are two possibilities, noted the report: 1) The customer adjusts the “allowable” margin based on current market data; or 2) the molder engages in productivity improvements only to the level of “acceptable” margins.

Successful processors, however, never underestimate the advantages of productivity and efficiency, as well as the need to stay continually focused on those. Greg Botner, president and CEO of Wilbert Inc., headquartered in Broadview, IL, said “productivity is key” to success in the plastics processing industry, “as it has been for years—that hasn’t changed.”

Wilbert Plastic Services Inc.’s focus has been on consolidation of plants and newer and more efficient equipment. On the thermoforming side of the business, the company has added robots to provide greater flexibility and efficiency. To improve productivity in thermoforming, Wilbert is adding extrusion capabilities to produce its own sheet to bring the process further upstream. On the injection molding side of Wilbert’s business, the focus is similar, Botner adds—doing more with less, doing shorter runs at a high productivity rate. Botner also pointed out that Wilbert has slashed its inventory over the past 18 months by 65%—a critical factor he says is key to survival in these market conditions.

“During 2009 we saw a substantial loss of volume, but we focused on managing cash and cash is king. We’ve done a good job of managing cash and putting it back in our business,” he says. “All of this was not easy to do, but we’ve weathered the downturn pretty well by paying attention to details, seeking growth in markets where, in spite of the fact that customers continue to consolidate suppliers, our goal is to be the supplier that stays.”

 Jeff Mengel says that, while there has been a lot of fallout among molding companies, “There has been even more retrenching as companies have dramatically reduced their breakeven point to even allow profitability with greater than 40% sales reduction,” says Mengel. “Therefore, the market is still highly fragmented.”

The best advice Mengel offers to companies that want to be successful and grow their business for the future is to get back to basics. “The best companies have exquisite alignment of their strategy, organizational structure, compensation, and systems (SOCS),” Mengel noted. “Yet only 66% of our respondents prepare strategic plans. Now is a unique opportunity to reinvent your company as you rebuild it from the aftermath of the Great Recession.”

Plante & Moran’s Jeff Mengel made several key observations based on survey responses:

Highly successful companies…
. . . are not large. The technical niche they exploit may be better suited to a narrow market, but they are not thriving on volume.
. . . have more working capital availabile—more cushion to address capital investments and daily operations.
. . . are two times more likely to be component specialists than the average molder.
. . . may invest heavily in new equipment, but net equipment is still a smaller percentage of total assets than the average molder. More of the successful companies’ assets are in receivables and inventory.
. . . have average machine utilization, but above-average manufacturing complexity, primarily due to the number of active molds required to match their higher degree of customer diversification.
. . . use predominantly intermediate and engineered resins, but also purchase a higher percentage of resins under the customers’ POs, meaning they are not rewarded/punished for commodity risk. Clare Goldsberry

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