In the plastics processing market, bigger isn't always better - or more profitable.
That's one of the conclusions that emerged from Plante & Moran PLLC's recent updating of its ``North American Plastics Industry Study.'' Jeff Mengel - a partner at P&M, an accounting and consulting firm in Southfield, Mich. - sifted through the study's findings at the Plastics News Survival Boot Camp, held Sept. 13-14 in Rosemont.
The study took data from 2004 and 2005 for 132 plastics processors in the U.S. and Canada. Almost 70 percent of the group - which had total annual sales of almost $4 billion - was made up of injection molders. As a whole, the firms in the study group operated 213 plants using almost 3,300 injection presses and covering 11.5 million square feet.
Only 13 of the 132 firms met P&M's standards for success. To reach that level, a firm had to have a profit margin of at least 10 percent, a return on net capital of at least 30 percent and a growth rate of at least 5 percent.
The average successful processor in the P&M study had annual sales of $7.3 million - about half of the study's median sales total of $14.4 million. Successful firms also had higher pretax profit percentages - when compared to sales - of 13.8 vs. a median 5.8.
Successful firms also had a higher percentage of proprietary sales - 15 percent vs. a median 8 percent - and paid lower wages to their hourly employees. The hourly wage at the successful firms was $12.67 vs. a median of $16.12.
``The small size of the successful companies puzzled me at first,'' Mengel said. ``But that means they're very niched, they're very focused in what they do.
``They have a well-defined value proposition in what they bring to the customer.''
About 30 percent of the successful firms were focused in the transportation market, and almost 20 percent of them had material cost pass-through agreements with their customers.
As an overall group, firms in the P&M study had a press utilization rate of 41 percent in the 2006 study - up 5 percent from 2003, but still well below the 56 percent rate reported in 1998. The molding market still suffers from overcapacity, Mengel noted.
Gross profit margin reported in the study has been steady at around 18 percent since 1998. But that's not a good thing.
``That means there have been price increases and productivity increases and the end result is zippo,'' Mengel said. ``A lot of companies are struggling like crazy just to stay afloat.''
Mengel also pointed out that, in the study, there was no correlation between utilization rates and success.
``There's nothing sadder than a company with an 80 percent utilization rate that's losing money,'' he said.
He added that companies need to remain active in cutting out unprofitable business.
``You need to have discipline when quoting,'' he said. ``If a project has a profit margin of less than 7 percent, you might as well be taping dollar bills to those boxes instead of shipping plastic parts, because you're not making money.''