September 1, 2005
Manage company complexity for the most profitable growth. Because no growth equals no future.
It''s a fact of life in the ever-changing, highly competitive plastics marketplace. Clearly, a company needs to grow just to survive. For some plastics processors, growth for the sake of growth is the way to win. The logic may go like this: If you''re big enough, you can afford to spread overhead costs. Or maybe you may even become large enough to gain leverage with your customers. But how big is big enough? And how does a plastics company simultaneously grow sales and profitability? The answers aren''t clear for many companies, according to the recent North American Plastics Industry Survey by Plante & Moran. The stumbling block for profitable growth: complexity. Growth brings more resins, more presses, more molds-more costs. The reflexive response of a strategically drifting company is to throw headcount or equipment at those growing pains. But the added staff and equipment only exacerbate the pain: more employees, more equipment-and higher costs. You cannot grow yourself to profitability.All things in moderationThe 2004 industry survey, a study of the competitive polymer marketplace, reveals that companies with between $14 million and $37 million in sales have the greatest difficulty managing debt. These companies often function in a reactive mode based on customer demands, not on a focused strategy. For these molders, debt is a fixed cost that becomes difficult to address when sales slip. At that point, cash flow easily trumps strategy as the lead driver of business decisions. Desperate to cover the debt, these companies lure business with destructively low pricing, further eroding profitability. The Plante & Moran survey also indicates that for 25% of the processors, more than 30% of their current sales are earning less than 10% gross margin. The ability of these companies to succeed with an increase in sales is dramatically reduced by thin-margin sales. These processors must shed thin-margin sales and replace them with better product before they can emerge from this death spiral.To break the cycle is to grow smartly, putting talent to good use-use that produces value while keeping costs down. However, managing complexity is a challenge for any processor. As with nearly any success story, complexity management begins with a plan-a focused long-term strategy that zeroes in on your core value proposition. In simple terms, you must learn how, where, and why you make your money. Then chart your company''s direction and seek customers that fit your business model. With a strong, clear strategy, it''s easier to determine how to put the right players in the right spots. It''s also crucial to use other resources wisely, in line with strategy. For example, successful processors organize their equipment for more efficient workflow. Many companies have multiple machine types, organized by type, size, or application.Compare such streamlined organization to a typical injection molder from the survey: Management sees a sales opportunity and buys a large press. Then the company seeks additional contracts to make use of the press. Often, these are low-profit products that contribute more to overhead costs than they do to the bottom line. The results are more stress, higher costs, and lower margins.Know your ABCsIt''s important to have a sharp focus for your company''s direction-and seek customers that fit your strategy. Consider the products that keep your machines humming. How do those products fit with your company''s competitive profile, strategic vision, and desired customer? Typically, the product fits into one of three categories: A, B, and C."A" products define your company and are the focus of your strategic vision. In a perfect world, at a perfect company, all the machines produce A product. "B" products, meanwhile, bring in decent profit margins and represent the bulk of your current contract jobs, but aren''t the heart and soul of a business. It''s the kind of stuff, if you''re lucky, that you fill the gaps with. Then there are "C" products. C products are low-profit, strategically irrelevant jobs that just keep machines running without many positive bottom-line benefits. Some customers promote "C" product as "burden burners," meaning they help absorb burden costs but otherwise offer no profit margin.The goal, of course, is to make as much A and B product, and as little C as possible. C products have a place, but should be taken on only with an exit strategy that does not impair the remaining business (that is, don''t let C product compromise A product).Even a very large C product order shouldn''t justify buying equipment. Such capital spending with limited ROI can lead to the suffocating debt that compels companies to abandon strategy and instead make cash-flow-driven decisions. The strongest companies stick to what they do well, occasionally doing favors with C product-but only on their own terms, not on those of the customer. You can''t make a strategic decision overnight about whether to take on unprofitable projects-not even for an important customer that keeps your cash flow going. Action, analysis and revisionSuccessful management of complexity''s ABCs requires action and thoughtful revision. Injection molder Lakeside Plastics, a Tier 1 and 2 automotive supplier based in Windsor, ON, leads the way. Plante & Moran has helped Lakeside identify strategies and tactics to become more competitive in its industry and with its competitors. As part of that process, Lakeside has focused on maximizing and sustaining equipment profitability. Press availability was a constant issue, even though there were plenty of presses."We were constantly facing scheduling logjams because the `right'' press was not available. To top it off, the first response to resolve the issue was to buy another press!" recalls Glenn Coates, president.Each additional press acquired would have increased the debt load and reduced cash flow without any additional value to the customer. The company resisted this desire and instead now tracks overall equipment effectiveness (OEE) in cycle efficiency, uptime, and yield. Lakeside evaluates OEE every day for each machine and each job and then publishes the data in its daily newsletter. The data helps people throughout the organization identify and eliminate waste. After a product launch, Lakeside dispatches a team to observe the job and analyze it. Coates explains Lakeside''s philosophy of constant reevaluation: "You might quote something, and three years later, you''re finally running the job. The process changes from what you thought was going to happen to what really is happening in practice. At that point, we ask, `What can happen if we change this up a bit?'' You won''t really know the answer unless you ask the questions, and you won''t ask the questions if you don''t take a close look at the operation." The Plante & Moran industry survey shows that moderate, managed growth is generally the most profitable. And process changes-not added headcount or new equipment-are the best way to manage complexity. Enormous size does not guarantee higher profits. Companies with moderate growth can find a niche that is just as profitable as a larger company''s market, while aggressively expanding larger companies sometimes are wildly disorganized and haven''t developed the processes to maximize profitability.This is because old habits die hard. Small companies that succeeded with a hands-on, dedicated leadership team tend to retain that culture long after the company outgrows the old business model. Successfully growing companies remake themselves by introducing and improving processes instead of piling on people to handle complexity. The leadership must have the courage to make that transition.At Lakeside, the processes are always in transition. The company keeps on top of emerging trends in the business and the industry at large with annual, department-by-department, task-by-task priority ratings of all projects. This regular competitive analysis goes a long way toward helping Lakeside keep its resources behind the strongest ROI.Always on the lookout to adaptConstant adaptation makes a good model in an industry that is so rapidly changing on so many fronts-technology, labor, supplies, pricing, etc. Still, such issues aside, the industry is inherently tenuous, by virtue of the relatively short product life of many plastic components. The key is discovering new opportunity. It may take someone from outside your organization with impartial observations to help determine how best to focus your direction. However you do it, you need a plan in place and a regular review of your progress.Start with strategy. Understand how, where, and why you make money. This way, you know what defines a good sales opportunity for your company. Then look to the future and prepare to pounce on those good opportunities with an organization that''s well groomed for sensible growth.
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