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Balancing capacity and profitability

May 31, 2001

4 Min Read
Balancing capacity and profitability

Editor's note: Rusty Capers has spent more than 30 years working with magnetic and optical media with DuPont and CD production with Cinram US. His insights on the state of the industry for replicators provide some universal truths valuable to both molders and moldmakers. 

Profitless prosperity. It is a state caused by an industry out of balance, and something that those in the CD/DVD market have in common with injection molders and moldmakers. "You absolutely need to cover your costs of capital," Rusty Capers emphasizes. "If you lowball the work, you figure you'll cover your out-of-pocket cost, but then there's no money in the kitty for new machinery." 

 

Capers strongly believes that any manufacturer needs to manage its business for profitable growth, which naturally leads to wealth creation. "Without wealth creation, growth for growth's sake usually results in longer-term disaster." 

In fact, when seemingly successful molders enter Chapter 11, it is all too often caused by growth for growth's sake without a focus on profitability. 

It's management's responsibility, notes Capers, to improve performance and accomplish good growth. "We have met the enemy and they are us," he says. "If you're taking at-cost business to keep a machine running at the expense of profitable business, you're in trouble." 

Selling Value 
Managing for profitable growth means focusing on what Capers calls full-book business vs. incremental (low-margin, short-run) business. "When capacity is down, you'll tend to gravitate toward incremental business," explains Capers. "The first thing you know, you're at capacity with incremental business. Then you borrow money to buy more machines to get more capacity and, because of the marginal nature of the business, find you can't pay it back." 

Capers admits that often it's easy to rationalize marginal business. For example, say a molder expands into a new capability or technology without knowing if customers value it enough to pay for it. "How much are customers willing to pay for this capability?" asks Capers. The rationale is usually something like, "Well, it's only 2 cents, but XYZ [a competitor] will do it for 2 cents and we'll lose the customer's business if we don't meet this price. Incrementally it looks OK, so we'll do it!" 

In such a situation the old molding joke applies: "We'll lower the piece part price and make it up in volume." In other words, molders and moldmakers must focus on what provides value that customers will pay for. Yet, notes Capers, it's always easier to sell on price rather than value. In the end, a molder sells time, and money is lost when valuable time is consumed by nonvaluable programs. 

Profitability 
If a molder is at full capacity, Capers suggests that the first thing needed is to dump the incremental business and replace it with full-book business. "Only put in new capacity when you're filled with full-book business," Capers says. "When you know that you're running machinery at full capacity profitably, then you can buy new machines with the profits." 

Capers tells of a large OEM whose strategy, when it found its plants at capacity, was to outsource to custom/contract companies up to 75 percent of what a new manufacturing line could consume. When that 75 percent threshold was exceeded, the OEM would pull all the outsourced work back in-house. Molders might consider a similar strategy, outsourcing low-end or incremental work until they have enough outsourced to justify adding capacity. 

Another key to managing for profitable growth, says Capers, is knowing the profitability of each customer. "If you don't know your profits on a customer-by-customer basis, you're flying blind," Capers states. "It's amazing how many companies don't know their profitability by customer." 

It's often an arbitrary figure depending on the formula, but Capers suggests "doing the best you can and sticking to the formula." Be consistent. Even if the figure is not precisely accurate, it can be an indicator that's usually satisfactory when it's indexed. 

"Some customers [or jobs] will be more profitable than others," he notes. "When thinking about adding capacity, look at the bottom of the [profitability] list, and replace that business with more profitable business." 

The lesson that Capers tries to get across to the CD/DVD industry is the same for those in the molding industry. "Sooner or later, financial returns not only have to cover the cost of capital, they must exceed the cost of capital . . . this is good growth." 

 

 

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