IMM Roundtable #2: Evolution in material supply

What are the most pressing challenges facing molders in the material world? For IMM's second roundtable, the answers ranged from coloring options to handling tight supply situations.

Small to midsize molding operations increasingly rely on resin distributors rather than major suppliers to fill their diverse needs. It's not a new story-certain distributors have stepped in to fill the void created when resin manufacturers began concentrating on larger volume customers out of economic necessity. What continues to evolve is the role that distribution plays with its molding customer base, and the relationship between the majors and their distribution networks.

To plumb the depths of those changes, IMM presents the second roundtable discussion on material supply issues. (The first appeared in the September 1996 issue.) Our panel includes molders, major resin suppliers, a distributor, a compounder, and an IMM moderator. This forum was held on Dec. 12, 1997, at the Drake Hotel in Chicago. IMM would like to thank host Prime Alliance and all of the panel members, whose candor and efforts helped air some of the challenges and solutions to molders' productivity and success.

Forecasting Efficiencies
IMM: OEMs are demanding that molders compress the order-to-delivery cycle. Rather than 30 days from placing the order until the parts are in the customer's warehouse, the new target is roughly 15 days. Forecasting becomes an important part of this cycle reduction. How are both suppliers and molders teaming up to meet this new benchmark?

Donnelly: If we're talking about materials in general and operating on a forecast-the short forecast the customers want-my experience has been that forecasting as an art is really no better today than it's ever been. I think a lot of customers are fooling themselves that they are getting a benefit. They may think they are getting parts faster and they are. But, ultimately, if the forecasts are wrong, there's a bag, and the molder is left holding it. And we're going to slowly find a way to go back to the OEM and say, here's your bag. So it becomes a back-end loaded game that causes animosity. OEMs typically say, "well, it's only $5000." And I say, my company operates at a 6 percent pretax margin, and I have to earn that money back.

Irvine: Really, it's the biggest source of untapped cost reduction that is available to all of us. A significant amount of the inventories that we hold as a distributor turns out to be obsolete or overruns. Once again, we're left holding the bag and it's all because of ineffective or nonexistent projections and forecasts. The perfect world for me is where an OEM's forecast to the molder, the distributor, and the manufacturer is accurate, and that everyone in between is not adding an additional fudge factor. In turn, the only inventory that exists is almost virtual because it is being produced as it runs through the system.

Inventory is inefficient. I know it's sinful for a distributor to be talking negatively about holding inventory because people think that that's our role. But, in reality our role should be to act almost as a facilitator for our customer and suppliers and put together the timetables properly.

Donnelly: Business in general is heading in the direction of shorter product life cycles, which makes accurate forecasting difficult. What if molders did what the airlines do? Give customers a financial incentive for long-term forecasting-give them a better price if they stick to the forecast, and a higher price if they don't.

Anderson: One of the problems that we have in dealing with the computer industry is that the volumes are large. So when there are 20 percent corrections, we're talking about significant numbers. We may begin with a forecast for several million parts a year and all of a sudden, the demand in Southeast Asia goes south. Pretty soon, that $3 million forecast becomes $2 million, and that's a huge change. With business machines and semiconductors, the problem is that the technology changes so quickly that your customers are looking to get into the marketplace quickly and want you to have access to material in case they get larger opportunities than what they forecast. As a result, they are trying to push back to your suppliers and you a wider window of supply. And the time frame of market opportunities from any customer is probably six months or less.

There's so much momentum going that customers really do seem to have trouble looking out 12 or even six months. For example, five months ago, no one projected the current slowdown in Southeast Asia.

Grimes: I think forecasting depends on the industry. I don't know if some of these industries are going to be able to forecast. Their life cycles are so short, and they are making consumer-driven products. I don't think anybody here is really critical of the customer, and we realize that the customer's hands are tied.

Even though the forecast may vary, nine times out of 10, a new product is made out of polycarbonate if the old product was made out of polycarbonate. So, if you don't get stuck with the color scenario, then that helps. If you're doing one piece of business with a company and then it is dropped, that's when you get caught holding the bag. I think the OEMs understand that, too.

Burns: What we've seen that has had a significant effect on our business is companies going to pull systems, where they used to take 40,000 lb a month, or 20,000 lb twice a month, now it's 3000 to 5000 lb, eight to 10 times a month. We're in the custom compounding business, and that adds cost to our operation. Freight goes up when small lots are shipped, and now we have to make a choice of stocking finished goods and driving up working capital. We make so many different custom products-1500 to 2000 a year. We focus on building inventory on raw materials more so than finished goods, and this push towards pull systems is causing some serious difficulties.

Information technology is one of our largest markets-while it is the one out selling all of this great computer technology to help us do a better job, you would think it'd be one of the best at forecasting. But because of short product life cycles, in our experience, IT OEMs are probably the worst at giving and living up to a forecast.

Zimmerman: If I'm predicting the weather in Chicago for today, I'd be very accurate. The closer you get to the forecasting event, the more accurate your forecast will be. And what we're in the process of doing is really trying to update that forecast frequently so communication becomes very important. When you, in the molding community, get word from your customer that things are different, up or down, if we understand that, then we can adjust.

I'll give my "standard product" pitch-those are products that a lot of people buy so the inaccuracies of the forecast can tend to balance each other out. Finally, I would say that we need to stress how our customer benefits from an accurate or more accurate forecast. It's like any other problem-you have to measure it and monitor it, find out where the defects are, and work together to address them. And we've had some fairly good success with that approach with some of our customers. But some just can't grasp it.

Colors: Custom or At-the-Press?
IMM: Purchasing custom colors is also evolving within our industry. Molders are faced with higher minimum quantities if purchasing from a major resin supplier, because the majors can't produce small lots at a competitive price. The other option, coloring at the press, is more cost effective, but can be problematic with customers who don't trust this type of coloring for lot-to-lot consistency. What are the tradeoffs here?

McConnell: We've seen trends, such as in the '60s, when custom colors were standard products from major resin suppliers. In the late '70s and '80s, there was a change toward making custom colors only in large volumes. As far as inventorying, the trend is more toward coloring the material yourself. I like the idea of that, but sometimes we have a hard time getting our OEM to approve that-they don't have the confidence that this color will be consistent from lot to lot. Automotive is beginning to lighten up on that issue and is letting us color the material as long as we have the quality assurance in place to ensure color consistency from lot to lot. There is relatively inexpensive color monitoring equipment as far as checking the color. You get a readout, and if you hit within this tolerance, the color is good. That helps a lot, and thanks to the computerized world, the cost has come down.

Zimmerman: With the costs of color monitoring equipment coming down, coupled with the trend by resin producers to supply fewer grades, in many cases it has become more practical for the custom molder-rather than the resin supplier-to color the resin.

Frasier: To agree with what Wally said, it's because it's difficult for us to capture the value associated with producing the custom color. We still produce custom colors, probably a lot more than we ever have, but it's difficult for us to get people to pay for it and to be able to respond in the time frame. I think that's where the coloring at the press, however you do it, is in the direction of speed, as a significant advantage both economically and from a standpoint of having to have all those SKUs floating around.

We say the same thing as you-the OEMs are very reluctant to accept this approach and to have confidence in it. I begin to see now some move towards relaxation of color tolerance specifications. For example, the housing on that laptop on the table is produced to a very narrow color tolerance. Do end users care?

McConnell: What really compounds the problem is if you have a three-color requirement for the same part from your customer-meaning you have to inventory large amounts of precolored material. When the product is phased out, such as in automotive, many times you may be caught with thousands of pounds of an obsolete, precolored resin. Coloring the material at the press or at another station means we only have to deal with color concentrate inventories, rather than large quantities of unusable precolored material.

Irvine: The other piece of that puzzle is compounders that can produce custom colors. It takes time and money, but it's certainly less time. Lead times are dramatically reduced.

Tight Supply Options
IMM: How does our industry get into tight material supply situations, and what can molders do when the supply of specific materials does not meet demand?

Frasier: I'll try to answer the first question with an example. The world market for polycarbonate is 2 billion lb a year, and growing in the NAFTA market on the order of 6 percent a year, and in Europe, probably pretty close to that. And until recently, we frankly didn't see a big change in that double-digit growth in Asia. Asia used to be a very small piece of the global pie and that's not true any longer. So you look at all of that together and if you take an average of 6 percent, you're fairly close to 200 million lb a year of new capacity that's needed.

When we put in that kind of capacity, it sounds like a lot of material and it really is. But it does get utilized in various global marketplaces fairly rapidly. The lead time to justify new capacity through engineering, construction, and start-up is probably a couple of years anyway in the best of times. So the increments of capacity are roughly balanced with one year's increment in demand.

The majors all compete for funds within their company with the other businesses. It's the same for any materials. So you have to be able to show the returns that get you the funds to justify the new capacity to get it built. Then you throw on top of that some of the acts of nature that come to bear on you, and sometimes the capacity isn't what you think it is.

The more that our customer base requires specialization, the less the capacity is. That's one of the reasons we continue to push for standardization. We get more capacity that's cheap capacity. We're in a situation today with PC where the combination of market growth, forces of nature, and the fact that there hasn't been much new capacity in the last couple of years means that we're now bumping up against that ceiling once again. The difference between this time and a couple of years ago when we went through this is that there is announced capacity coming on that will be, I think, sufficient to take care of the short-term problem.

That's not to say that we won't be faced with this again in three years. But we have fairly ambitious expansion plans. One of our competitors has also announced expansion plans. So I think we're looking at a window of two to five months, where it will be snug. I don't think it will be as bad as it was the last time. We did learn some things.

Irvine: Perhaps dual sourcing is the answer to the question of what can molders do during tight supply situations. Our customers look at buying their polycarbonate from a distributor and a resin supplier. They have two options there, obviously from the same manufacturing plant, but they've handled a lot of their dual sourcing requirements that way.

Donnelly: Equivalence is becoming more of an option. While our customers may have a specific material spec'd onto the blueprint, they are beginning to hear the tight supply message. If we can work closely enough, they may spec an equivalent material in addition to their first choice. We're faced with having to make those options available.

Role of Distribution
IMM: In the wake of the molding industry's creative growth, major resin suppliers can no longer economically serve a certain portion of the market-small to midsize custom molders who have diverse purchasing requirements at varying volume levels. As a result, distributor networks have grown. What do you see as the role of the distributor today?

Irvine: It's a trend that's been well documented. What it boils down to is just an analysis of where efficiencies lie. Production efficiencies lie in manufacturing. Distribution efficiencies are from local warehousing and logistics functions and a local base of technical service that requires a lot of customer interaction. The same analysis is being done on the molding side of the business. I think there is segmentation between the different types of molders and who does what work most efficiently. It's really an overall effort to eliminate cost. Because it gets to the point where you can't lower your prices anymore. It comes to the point where you just have to eliminate costs that don't add to the value.

Anderson: As the distributor, your people are in the field, seeing the molders weekly or maybe even twice a week. Don't you think that gives you a better picture of what's going on? You are probably getting a more accurate pulse of what's really happening, where major resin suppliers can't do that.

Irvine: I think distribution was added to the mix in this industry to reduce costs. Effectively, it's a lower cost way to manage service intensive accounts. We all started with the idea that distribution was primarily going to be there to service the small processors that didn't receive a lot of attention or bought in small quantities that the manufacturers couldn't produce and handle efficiently. But distribution has evolved. Today, we're involved with the service intensive accounts that require an extreme amount of attention. It's another tool for our supplier partners to have closer contact with the processor, part of their arsenal.

IMM: Technical support requirements seem to be changing along with the molder's customer base. They're asking more from the distributor, but not necessarily in terms of technical bells and whistles. Many would rather have knowledgeable technical support from an experienced source, then use computer-aided analysis as a backup. How does this compare with your operations?

Grimes: Although we are a relatively small molder, we have C-Mold in- house, partially because our emphasis from the beginning has been on strong engineering support. We have several seats of Pro/E as well. And I agree exactly-I think the best of both worlds is to have the experience and the software.

We have one processing technician who has been in the business for 20 years, while one analyst has a Masters Degree in Plastics Technology. And the chemistry between them is perfect-they work perfectly together and one feeds off of the other. And we do go back on existing tools to improve the process. We just have the right chemistry in a couple of people to make that work. I'm not saying it works everywhere. And I'm not saying it's right for anybody else. One reason we have that is we're also a moldmaker. And part of the reason that we have it is for corroboration.

Irvine: I think many distributors feel that customers are attracted by those services, but in reality it doesn't work that way because the customers still want the lowest possible price, and they shop the jobs around but still utilize the services. It's not going to be today, but I think in the not-too-distant future there will be-from our perspective and our producers' perspectives-the ability to charge for some specific services, such as computer-aided analyses.