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Passing through material costs

The squeeze gets tighter every day as oil prices hit all-time highs. But to stay in business, you have to let your customer pay for your resin cost increases. Injection molding as a business is much like a grocery store. A high percentage of the cost of the products is beyond the control of both the grocer and the molder. Raw materials purchases are at a market price. On top of this noncontrollable cost is labor, overhead, and productivity costs that ultimately result in the price of the product.

The squeeze gets tighter every day as oil prices hit all-time highs. But to stay in business, you have to let your customer pay for your resin cost increases.

Injection molding as a business is much like a grocery store. A high percentage of the cost of the products is beyond the control of both the grocer and the molder. Raw materials purchases are at a market price. On top of this noncontrollable cost is labor, overhead, and productivity costs that ultimately result in the price of the product.

Buyers are interesting folks. They have budgets, which are the estimated costs of the components they purchase. Keeping within or getting savings from these budgets is the source of raises, promotions, and bonuses for the procurers.

We have the price of crude oil at the base of the cost of most all plastics. Crude oil produces the feedstocks that make the plastics we mold. The price of a gallon of gas and its frequent increases are the bellwether for resin prices. We now come to the basic dilemma: passing through the cost of a commodity we cannot control.

The game

The scenario: The cost of resin goes up and the molder tries to pass this cost through to the customer.

The buyer's response: The buyer will delay, negotiate a partial increase, or outright refuse to accept the price increase for as long as possible because you just blew his budget and therefore affected his promotion, raise, and bonus.

The response the buyer anticipates from you: By sheer force of will you are expected not to pass through the price increase. You are told this because of the following reasons:

1. You quoted a certain $/1000 price and by contract are held to it. If you don't agree, the full weight of your customer's legal department will be brought to bear on you.

2. This supposed pass-through is really a flimsy disguise for you not only to pass through a raw materials cost but also to fatten up your profit margins.

3. If the buyer yells, complains, and ultimately threatens to pull all the work in your shop and put it offshore, you'll cave.

Things you should consider before responding 1. Very few molders sign up for annualized contracts based on volumes. This gives your customer the right not to order as demand dictates. This also, however, gives you the right not to manufacture.

The buyer/seller relationship is like a marriage: strong by mutual agreement and can be terminated if conditions become untenable. 2. You should have quoted the job originally based on an original material price. Every time you run that particular job you should have recosted the job, requoted it, and waited for a written response authorizing the job to be run at the new price.

3. Again, like a marriage, threatening in any form is not conducive to good relationships. In a custom molding supplier/customer relationship, you want a marriage, not a high-maintenance partner. If you are threatened with legal action or the loss of business, you don't need these people. Stop production and put a lien on the mold until all outstanding invoices, finished goods, work in process, and raw materials have been paid for. Get rid of the molds and the customer.

Ways to do business

Publish and have your customer sign a letter of receipt of a policy manual you've written where you state, among other things, how you'll handle costs you cannot control. This saves a lot of hassle.

Hire a software developer and write a computer program so that when each resin's price increases you can sweep your entire part inventory and recost based on the new price. Immediately e-mail the new price to your customers, whether or not there are pending orders. While the buyer might complain, he'd rather have advance notice of a price increase than a surprise.

Discuss with your customers the concept of bundling. Your pricing would be far more favorable if you had two-dozen jobs all of the same color and grade resin than two-dozen jobs with 10 different resins. If you can't beat off the price increases, at least you can lessen their impact by bulk material purchasing.

Fair, firm, consistent, and communicative are the bywords in this type of volatile marketplace. If you are told that others will produce the product at a much lower price or with no increase, don't fall for the bluff. Give the job away and watch the fun. Tell your customer you want them to be as financially successful as you want your company to be. Nobody wins if one of you loses.

The ultimate end game

Sadly, I've seen a molder actually negotiate the price increase to where the molder absorbs some of the cost by lowering his profit. Keep in mind that a buyer's loyalty to a molder is the loyalty a rattlesnake has to a rat—you're only good until you're consumed. Moral: You ain't in business to lose money. At the very least your goal should be to break even.

Hold firm. The reason most molders are chosen has nothing to do with price. Cost is king only when the supply chain is consistently full and quality isn't an issue. If anything upsets this balance, cost is of no concern. Therefore, your ability to continue to do business should be based on your ability to consistently deliver good product. A few pennies per part increase is nothing compared to shutting down production for a few days.

Molders are wimps when they are afraid that the loss of business (which is easy to measure) will put them out of business, as opposed to absorbing an increase in raw materials (which is far more lethal in a business sense but harder to measure-until the bank comes calling). This kind of crisis is good for the industry because it thins the herd and leaves behind only those companies who are strong and robust enough to do business on a sound footing. For those who survive (stand by fair, firm policies), there is more than enough business to go around because of the others who've gone out of business.

Where you end up depends on how you play the game.

Consultant Bill Tobin ([email protected]) is a regular contributor to IMM. You can sign up for his e-newsletter at www.wjtassociates.com.

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