Can manufacturers thrive in today's economy?

Many molders and moldmakers in the plastics industry are thriving; others are clearly struggling. What makes the difference is a business strategy—having a sound business plan and strategic marketing and sales plan.

Flying by the seat of your pants won’t work in today’s risky economic and competitive environments. Pilots like to say, “There are old pilots and there are bold pilots, but there are no old, bold pilots.” The same might be said for molding and moldmaking company owners.

Surviving in today’s economy is tough, and thriving is even more difficult to pull off. Many years ago, I worked with a man who believed the best time to start a new company (he was a custom molder) is when the economy is in the tank. He started up a proprietary molding business making his own products during the early 1980s when interest rates were through the roof and money was hard to come by.

It’s this kind of out-of-the-box thinking that manufacturers need if they’re going to thrive. For molders and moldmakers, that’s often difficult because developing a business strategy tends to be one of those management tasks that’s continually put on the back burner.

Paul Rauseo, managing director of the consulting firm George S. May International (www.georgesmay.com), says that while “lean” is a word familiar to manufacturing, it’s not so much a part of finance. “We believe that incorporating lean into finance is essential,” says Rauseo. “Finance runs by the use of best practices and focuses on operations metrics, but lean focuses on customer satisfaction metrics. Incorporating lean into finance—the evolution of lean—begins with accounts receivable, which is a direct reflection of customer satisfaction. The number one reason people don’t pay is they are not satisfied.”

Rauseo advises that before accounts payable sends an invoice, it should call the customer to see if they’re satisfied. “They’ll tend to pay faster if they are satisfied customers,” he says. Companies should send out customer satisfaction surveys to gauge where customer satisfaction lies, and work backwards from there, rather than forward from order entry, to evolve lean thinking. “We at George S. May take a much different approach,” Rauseo adds. “We look at lean as a component of finance and customer satisfaction as a part of profitability.”

Consider payback before you buy, Rauseo suggests. “Do a simple payback analysis to determine how to apply money that gets the best results for the company,” he says. “Whether it’s new technology or a new process, you must look at the payback period. You want a legitimate measure of the time it takes to get a return on your investment. That’s determined by dividing the cost of the equipment by the cost of the project’s average annual improvement in cash flow.”

Many molders believe that machine utilization is a good indicator of success—that is, higher utilization means higher profits. However, in the latest survey performed by Plante & Moran PLLC’s Plastics Industry Team (www.plantemoran.com), it notes, “Our studies continue to show that asset utilization is not a predictor of financial success—meaning even unhealthy companies can have good utilization. Utilization is a magnifier of the margins you are able to command, driven by unique technologies and processing skills.”

Jeff Mengel, who heads up the Plastics Industry Team at Plante & Moran, says, “It is our opinion that a healthy level of utilization for the custom molding industry doesn’t exceed 75% due to the complexity of the press array required. The slack is necessary to respond to customer demands and to be able to provide a wide array of press sizes, not all of which are expected to be busy.

“The wider the press size array, the more slack is needed with utilization. In contrast, a more focused factory can attain higher utilization. Yet the industry averages 40% utilization, mainly due to the 24/5 operating environment. Regardless, lower utilization compresses margins, particularly for commodity parts. Identifying and exploiting niches is the best way to counteract margin compression.”

One of the best pieces of advise George S. May gives to its clients, says Rauseo, is, “Extend your product and demographic reach. Don’t talk about credit, and don’t talk about money. Don’t ever say it’s the economy. Remove that from the equation and we can start talking business.”

For example, StackTeck (www.stackteck.com), a custom injection moldmaker in Brampton, ON, installed an inmold labeling (IML) molding system to offer customers the company’s expertise in building molds for inmold labeling and performing the qualification. StackTeck adopted inmold technology as a niche expertise, and recently received a patent on a new mold design that permits the ultimate in thin-walling for food packaging called TRIM, or Thin Recessed Injection Molding.

Mergon Corp. (www.mergon.com), headquartered in Ireland, extended its demographic reach to North America when it set up operations in Anderson, SC 10 years ago. Mergon recently announced expansion into injection molding to extend its technical capabilities. The company has been primarily an industrial blowmolder for high-tech hospital beds, office equipment and furniture, and the automotive industries. Allan Hinchliffe, its general manager, says the decision to broaden its capabilities into injection molding “gives us more opportunities to put value in and take cost out.”

Mergon blowmolds a lot of components that are married with injection molded components, such as a blowmolded toner bottle for office copiers. The bottle has an injection molded component that the company was outsourcing to a custom molder. “Bringing that component in-house means we don’t have the extra shipping and warehousing costs,” Hinchliffe says. “Molders have to be as lean as we can be in order to thrive, but it also has to be based on practicality.”

In addition to extending its reach by adding a complementary process, Hinchliffe says that Mergon’s strategy has been “to pick the right customer base and the right products that fit our capabilities, and then do a good job for the customer.”

Plante & Moran’s survey reported, “Not all customers are created equal. Moreover, not all customers are desirable. It’s important to know which customer relationships you want to protect and which customers you can be more aggressive with.” Customers whose parts involve a high degree of complexity but low contribution to the company’s profitability might be ones to weed out. Mengel suggests that molders go through their customer list like they do their financial portfolio, evaluating the contribution of each one to the overall value of the portfolio and making changes where needed.

“If they’re not companies you can grow with, you should be dealing with them on your terms, not theirs—and sometimes that might mean letting them go altogether,” said Mengel in the report. “Also, a component of strategy is creating leverage with your customer through customer diversification and market segment dominance. No company can dominate the industry, but a company can identify and dominate a niche.”—[email protected]