Wolfgang Schmitt, Rubbermaid Inc.'s top executive, told shareholders at the Wooster, Ohio, company's annual meeting April 22 that for every 1 cent resin price increase imposed by suppliers, Rubbermaid's cost of business goes up $10 million.
In 1996, the company's cost for resin jumped $150 million, accounting for nearly half of the $335 million the firm planned on saving by restructuring.
Rubbermaid's problem is one all processors face. That's why forward contracts are generating interest in the plastics industry.
Louis Dreyfuss Energy Corp. of Wilton, Conn., and Enron Corp. of Houston, among others, have developed these risk-management tools in the form of financial contracts for commodity materials. The instruments have been used for years in other industries.
Necessity, it appears, remains the mother of invention.
That's because processors such as Rubbermaid increasingly are confronted with the consolidation of market share by customers such as Wal-Mart Inc., Kmart Corp. and Target Stores. Each gained its position the old-fashioned way — by price-cutting. Today, the trio of retail giants account for 81 percent of the consumer products market that Rubbermaid serves, along with its competitors.
Given their market dominance, the three wield great influence over suppliers. Like the automakers in Detroit, their power allows them to establish policies that extract product pricing guarantees for an extended time. Many processors like playing the pricing game — they're experienced at the art of negotiation and feel they can make a better deal than their competitors or use price fluctuations to squeeze customers for additional profit.
But given that some resin prices can vary from 10-60 percent in 12 or 24 months, it's easy to understand why some processors have become desperate to find ways to level the ride.
Suppliers claim that the uncertainty of production in the ethylene-polyethylene chain and the different PE grades make it difficult to engage in uniform futures pricing. Difficult is not the same as impossible, however. Risk managers do well addressing the uncertainty of the weather as it affects other commodity markets in different climatic zones. Processors presumably could benefit by similar pricing management.
Many resin suppliers aren't keen about the idea, since it would change what now is essentially a cost-plus pricing system. Unfortunately, there is little incentive in such a system to manage costs aggressively. That's why it needs to be changed.