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Profit Sharing for Profit Making

Last time, we learned that Poly Wise is attempting to structure a deal with a polypropylene supplier utilizing the new resins pricing paradigm. They offer to buy polypropylene on a long-term contract at WTI futures plus 30 ¢/lb.

Last time, we learned that Poly Wise is attempting to structure a deal with a polypropylene supplier utilizing the new resins pricing paradigm. They offer to buy polypropylene on a long-term contract at WTI futures plus 30 ¢/lb. If successful, Poly Wise will easily be able to control its polypropylene costs against its product prices for many future months, opening the door to higher margins and sales while helping its customers control their costs.

While awaiting responses from suppliers, Poly Wise communicates its determination to secure the company's future to its employees, and wants to ensure employees are as focused on profit margins as management. Poly Wise constructs a two-part survey and emails the survey (anonymously) to employees who can significantly affect costs and revenues -- mold designers, engineers, sales staff, etc. The survey and results are as follows:

1)    Why are you in the plastics processing business?

a)     To make good stuff 28%

b)     Pay the bills 43%

c)     Nothing better to do 16%

d)     Help make a profit 13%

2)    If your employer had a profit-sharing program, how would you answer that question?

a)     To make good stuff 11%

b)     Pay the bills 19%

c)     Nothing better to do 7%

d)     Help make a profit 63%

Poly Wise expected to see a shift in responses between questions 1 and 2, but they didn't expect the shift to be that big. After gathering their composure, management decides to capitalize on the results of the survey with this message:

Shifting the Profit Paradigm

 "Dear Employees -

We are shifting our modus operandi on profit margins from defense to offense. Our profit margins have mostly just fallen out of our day-to-day operations and decisions. We've done a decent job managing margins in an environment of obscure and volatile polypropylene prices and hard-hit customers. However, times are tough and getting tougher. Our competitors are breathing down our necks and customer loyalty is more dependent on price than ever before. Profits keep us in business and you employed, so we all need to work together to secure and improve profits while helping our customers. We are attempting to change the pricing structure of our polypropylene supply to give us control over our biggest cost, but we also want your ideas. In return for your ideas and their successful implementation, you will share equitably and handsomely in the profits. Our primary objective is to meet or beat our budget projection of a 10% gross profit margin. The more we beat our budget projection, the greater your share of the profits. We will provide more details in upcoming messages."

Defense to Offense Pays

Poly Wise is overwhelmed with the positive response of its employees to its paradigm shift on profit margins. The mood lifts appreciably and ideas start to roll in from mold designers and others. Poly Wise is reducing its risk of employee dissatisfaction and sub-optimal performance while shifting from defense to offense on polypropylene costs. Management and employees smile, customers take notice, and competitors wince. Poly Wise is wise indeed.

Next week: Suppliers respond to Poly Wise's offer ...

About the author: Tom Langan is a risk management and trading consultant dba WTL Trading. He provides two levels of risk management services to processors and suppliers to help control resins costs, secure and improve profit margins, and increase sales.

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