Editor's Note: This is Part 1 of a two-part series offering molders and moldmakers advice on staying competitive.
Offshore competition is a reality. But it’s not the only problem plaguing U.S. molders and moldmakers. A lack of industry savvy among OEM purchasers of tooling and molded components makes the perception of offshore’s monetary savings bigger than the reality. To turn this around, molders and moldmakers need to do a better job of educating their OEM customers. That’s the conclusion of Steve DeHoff, consultant for Stress Engineering Services, a product development firm based in Cincinnati, OH.
DeHoff spent almost 18 years at Procter & Gamble (P&G) as a purchasing and engineering manager. He was responsible for meeting the company's huge plastics requirements for molded parts and tooling for products ranging from detergent to water filtration devices. He also authored much of P&G’s current corporate strategies and work processes for plastics development.
DeHoff has experienced firsthand how "the industry leaves the last 30% on the table" by consistently failing to optimize the tooling/piece part combination. "I saved enormous amounts of money for P&G, got market time cut in half, and achieved better product quality all at the same time," says DeHoff. "[Molders and moldmakers] make themselves noncompetitive."
U.S. molders and mold manufacturers can be competitive with offshore competitors in many situations—if they understand where their customers are coming from and how to optimize their customers’ requirements and look at their products strategically, DeHoff emphasizes.
The China Conundrum
The decision to outsource production to China is often made by people at an OEM who haven’t a clue as to why they are doing it or what it will mean in terms of cost. "Someone at the top says ‘we’re going to China,’ so like lemmings going over the cliff, they all say ‘we’re going to China,’" explains DeHoff. "There’s no evaluation, no consideration of strategic alternatives, and usually a failure to consider the costs."
Whether China is a good choice is very situational. If there are cost savings, DeHoff notes that they can be minimal. "Many companies are giving back more in molding and logistics costs than they are saving in assembly," he says. "Assembly labor is the true area of advantage in China, along with resin cost advantages on certain raw materials."
OEM buyers don’t understand the economics of molding, says DeHoff. "Molding is a scale cost and is technology driven—you have to buy machines and molds—people usually just shift the cost from moldbuilding to molding," he explains. "Optimum total cost for our clients usually involves more spending on the mold in return for less spending on the parts."
Microeconomics Applied to Injection Molding
DeHoff notes that he has spent many years accumulating the necessary information to model the total economics of molding, including moldbuilding, and has modeled and validated hundreds of actual parts. Economics often have a cost optimization curve. "The grand ‘ah-ha’ is that microeconomic textbook models regarding costs fit this industry like a glove," he says.
The point is that injection molding costs have a U- or L-shaped curve, and in most cases molders are up on the wall of that curve, rather than at the bottom. Chinese molders and other very low-tech molders are often near the top of the curve.
"We feed clients rate-of-return information in addition to identifying the curve bottom for their particular situation after taking into account things like volumes, product life, financial life, depreciation, and basic tax effects for the moldbuilding options available," DeHoff explains. In most cases, the peak rate of return on incremental mold investment occurs just to the left of the curve bottom. In many cases, however, the curve bottom is executed at a return lower than the peak, but still very high. Often, the rates of return are several hundred percent. How many businesses have new products with rates of return this high? Most are happy with 15% to 20% returns.
There is no one in the molding or moldbuilding industry who can give buyers an explanation of why this works and why it’s better. The reason mold optimization works is that the molding industry is highly undifferentiated due to standardized mold equipment, and is very competitive, DeHoff notes. In economics, this makes pricing transparent to cost, meaning if you change cost you change price by almost the same amount. Conversely, when competitive forces are very low, there is little to no connection between cost and price.
In the custom molding industry, price and cost are almost perfectly connected, so if you can move the cost you can move the price. "As soon as the buyer benefits in the unit cost from money spent on the mold, he understands that cycle time matters, cooling matters, and tool steel matters; and that these are all dependent on how and where you purchase the mold, not the parts," DeHoff adds.
The molding industry fails to optimize its customers' costs because what the market will bear is different from what is possible and economically rational for the buyers. This is that 30% that the system leaves on the table. And, when you think about that in the context of the Chinese, it won’t make the difference all the time, but often it will.
"The person who needs to get educated are the buyers of molds and molded parts," says DeHoff. "They continue to have a difficult time understanding why this mold is $10,000 and the other guy is $200,000, and why it makes a difference which bid to accept."
Although some molders and moldbuilders try to explain the difference in price quotes to purchasers, DeHoff says there’s suspicion on the part of the purchaser. "Some doubt the information because the guys offering the explanation are selling the mold," says DeHoff. "In the end, buyers aren’t crazy, just ignorant. They just need information about how all this really works."
Stress Engineering Services Inc.