With every business opportunity comes risk.
``I almost went out of business five or six times,'' said Dave Spence, president and chief executive officer Alpha Packaging Inc., a $100 million blow molder based in St. Louis.
When the storm hits, what does it take to survive and thrive? Four industry veterans shared their stories of ups and downs at the Plastics News Boot Camp Survival conference, Sept. 13-14 in Rosemont.
Like other manufacturing sectors in North America, plastics processing was hit hard at the turn of this century by the massive shift to offshore production and outsourcing.
When the Northern Division of Mack Molding Inc. saw the storm brewing in 2000 - all of its injection molding business, mainly computer parts, was leaving the U.S. - President Jeff Somple and his management team came up with three options: to go to China, compete with China or run away.
Most of Mack's customers suggested it go to China, but Somple said the custom molder wanted to stay put. Moreover, he believed going to China would be a ``win in the short term but [a] lose in the long term'' for Mack. In 15 years, Somple reasoned at the time, China would not have an advantage in the kinds of things Mack was doing.
To compete with China from U.S. soil was not an option either, because of China's advantage in material costs. Also, he said, ``Automation was not going to get us where we needed to go.''
So the firm opted for shielding itself from direct competition with low-cost regions like China. As the Chinese proverb goes: ``Retreat in order to advance.''
The Arlington, Vt.-based company made a decision to focus on business that was, and still is, problematic for China: low to medium volumes of large parts that are difficult to ship; products with high quality standards; and those requiring last-minute configurations.
The third-generation family business saved itself. After reaching the bottom in 2003, it began to grow again. ``We had good growth in 2004-06, about 15-20 percent a year,'' Somple said.
End market selection and customer relationships determine the future of a business.
Diversification is an effective means to reduce risk. In 1999, Mack Molding was relying on just three customers for three quarters of its sales. When those customers left, Mack's sales tumbled and its workforce was cut to less than half.
Now Mack has no one customer that accounts for more than 10 percent of its total business.
Relying on a single large customer is ``an easy trap to fall into,'' Somple said. ``It's always hard to say `no thanks, you are getting too big' when a customer tries to give more work to you.''
He said Mack is much more selective about customers and orders now, with a lot of poking and probing and not a lot of quoting. ``We ask customers why they are not making the products in China,'' he said.
The company also conducts quarterly risk analyses, which includes assessing its customer concentrations.
No matter how important those customers are, the long-term viability of the business must take priority.
Tim Erdmann learned that lesson the hard way. The former president of Pine River Plastics Inc., a bankrupt injection molder that folded in February, said many suppliers never say no to the customer.
``They are being taken advantage of,'' he said.
Pine River's automotive customers locked in part prices when resin prices spiked 30-40 percent in 2003. ``That impacted our bottom line, as resin makes up 40 percent of cost,'' he said.
Century Mold Co. Inc. of Rochester, N.Y., also serves the auto industry. Century President and CEO Ron Ricotta echoed Erdmann's warnings, saying molders need to be aggressive in dealing with customers.
Century has grown from $27 million in 2002 to $87 million this year, with plants in Mexico, China and the U.S. The injection molder also outsources two-thirds of its tooling from overseas.
``The North American auto culture has changed,'' Ricotta said. ``Suppliers have to be fair to themselves. In necessity we've gone back to being aggressive with customers. If you don't, you won't be around.''
Suppliers need to be aggressive about such things as delivery timetables, payments and passing on resin costs. The firm has rationalized its customer base based on those issues, he said.
If material costs equal 60 percent of a firm's total costs, that means added value is less than 40 percent; combine that with the effect of higher numbers of cavities and faster cycles and ``taking material risk makes no sense,'' Ricotta said. Century passes resin price hikes through to its customers, he said. Meanwhile, the company is trying to increase its diversity, both within and outside of the auto industry.
Mack's Northern Division and Pine River were facing similar challenges when the business climate turned upside-down between 1999 and 2000. Both companies had just expanded. Their main difference was cash flow.
Zero-debt put Mack in a strong financial position, enabling it to steer through the storm. With machinery and capacity ready, the company invested in building its market expertise, quality systems and an infrastructure for new end markets. It also boosted its medical business from less than 10 percent in 2002, to 30 percent today. As well, Mack has taken on long-term medical programs that don't bring an immediate return but will pay off in a sustainable way.
``You have to have the cash to finance it without revenue coming in for a couple years,'' Somple said. He predicts Mack's 2007 sales will break $300 million.
In contrast, when Pine River opened its third facility in South Carolina, the company converted from making cellular phones to interior auto work. But the anticipated volume disappeared and the new location, chosen to be close to customers, became the firm's biggest cash strand. All three plants were underperforming. The new plant managed to break even in 2003, but then came resin price hikes. Even with some customers agreeing to shoulder the burden, Pine River had to eat the increases for nine months, stretching its finances very thin.
Erdmann said the company had several opportunities to reinvest and refinance, but it fell apart in December 2006.
``We were not able to turn around the financial situation,'' Erdmann said. ``You need enough cash to support your growth.
Companies need to choose bankers that understand the industry, he noted.
``It's been like pushing a boulder uphill,'' Spence said about Alpha's history. When it started in 1985, the firm made $500,000 in sales. In two decades it has acquired three companies, boosting sales to $101 million and employment to 400 people.
Spence said a business owner must lead by example.
So, he added: ``Like what you do - and with an underdog mentality.''