Benchmarking study: Who’s winning, and why, in North American industry

Growth does not necessarily lead to profits. Big isn’t always better. Overhead is still the dominant difference between successful and struggling companies. Sales and marketing can save or sink you. These are among the conclusions drawn from the 2008 North American Plastics Industry Study, which offers some solid numbers on what it takes to be a plastics processing winner on the continent. 

The study is conducted and published by Plante & Moran PLLC, the 12th largest certified public accountant and business consulting firm in the U.S., and includes data from 172 companies representing 244 facilities in a broad array of processes in the U.S., Canada, and Mexico. According to the study results, industry employee productivity continues to climb as measured by value added per employee, but this enhanced productivity has not translated into higher profits due especially to the twin threats of continued price pressures and rising material costs.

But all is far from lost. “The results of the study show there is hope and perhaps prosperity ahead for those industry participants who persevere and have a well thought-out strategy,” said Jeff Mengel, plastics industry practice leader at Plante & Moran. “We have compiled statistics on the most profitable companies and identified success¬ful companies as those with more than 10% earnings before interest, taxes and owner’s compensation, 30% return on net capital employed, and at least 5% sales growth.” However, added Mengel, “These companies are few and far between. Of the 172 companies participating in this study, only 15 met all of these thresholds, while up to 55 met one of the three variables for success.”

Approximately 10% of the survey respondents lost more than 15% of last year’s sales through the resourcing of jobs by their customer, which is consistent with results of prior years’ surveys. Almost 25% of survey participants had to conduct e-bidding on exist¬ing programs, often resulting in a loss of contracts or reduced sales dollars (60% retention with a 3.1% price reduction).

The results indicate that highly successful companies invest more in sales and marketing and have a broader diversifica¬tion of customers. Significantly, successful companies’ new sales bring in a higher value proposition than the current sales, so margins are improving annually even after negotiated price reductions. Successful companies also maintain their pricing discipline, with very few sales returning margins less than 10%, according to Plante & Moran.

Other observations from the results include:
* Highly successful companies are not large. The technical niche they exploit may be better suited to a narrower market. But they are not thriving on volume. ?
* Highly successful companies have more working capital available to address capital investments and daily operations. ?
* Highly successful companies are twice as likely to be component specialists than the average processor. ?
* Highly successful companies lose five times the sales through resourcing than the typical processor does (6% of sales lost each year). This suggests they have high margins for performing difficult-to-mold parts. Once the molding difficulty has been resolved, the customer will seek a lower cost alternative. Still, the highly successful molders have net growth in excess of 5% per year. ?
* Overhead is still the dominant difference between successful and struggling companies. * Highly successful companies conduct 50% more setups than the typical molder (but not necessarily faster setups, perhaps due to the technical aspects of the part). ?
* Highly successful companies may invest heavily in new equipment, but net equipment is still a smaller percentage of total assets than the average processor. More of the successful companies’ assets are in receivables and inventory. ?
* Utilization continues not to correlate with success. The highly successful companies have average utilization, but also above-average manufacturing complexity, primarily due to the number of active molds required to match their higher degree of customer diversification. It is necessary to have available capacity to manage complexity and the vagaries of the customer demand.

A processor’s growth does not correlate with profits, says Plante & Moran, but highly successful companies have decent growth. In general, high-growth companies incur higher debt and interest charges. Highly successful companies fund their growth internally (high-growth companies have higher overhead to digest the growth). Highly successful companies use predominately intermediate and engineered resins, but also purchase a higher percentage of resins under the customers’ purchase orders, meaning they need not take on these commodities’ risk.

The complete 88-page Plante & Moran 2008 North American Plastics Industry Study is available exclusively to survey participants. A summarized report is available for purchase from the Society of the Plastics Industry at http://www.plasticsindustry.org. More information on the study, including how to participate, is available at http://plastics.plantemoran.com.—[email protected]