Plante && Moran study: Number of 'highly successful' processors up

Indianapolis — Business has been reasonably good for North American plastics processors, with stable material costs and interest rates as well as steady sales growth. But companies need to prepare themselves for changing environment in the next economic cycle.

That's a conclusion from the 2016 North American Plastics Industry Study, which also found that about one in five processors qualify as “highly successful,” up from a historical rate of about one in 10.

Jeff Mengel, a Plante & Moran partner and long-time director of the annual survey, shared the findings at the Manufacturers Association for Plastics Processors (MAPP) Benchmarking and Best Practices Conference in Indianapolis.

With an estimated 16,000 plastics processors in North America, P&M defines “highly successful” as those with a 10 percent return on operating income, 15 percent return on assets and 5 percent sales growth.

This year's study is based on 90 completed surveys representing 154 facilities with over $5.5 billion in sales in a broad array of processes from United States, Canada and Mexico. The polling period ran from Jan. 1, 2014 through Mar. 31, 2016.

Mengel was encouraged by the high percentage of highly successful processors. Their financial successes are built on the foundation of operational excellence — compared to the average participant, the highly successful companies have 13 percent higher productivity, 18 percent higher press utilization and 29 percent lower internal defective parts per million.

The positive trends also hold true for the overall industry, with higher productivity and higher profit margins.

Productivity, measured by value add per employee, has seen a 19 percent boost during the past decade for the median company in the survey. The top quartile companies increased their productivity by more than 27 percent. But even the lower quartile still drove up productivity by 16 percent. Companies that failed to increase productivity did not survive, Mengel said.

Higher productivity generally leads to higher profitability. Gross profit margins have improved over pre-recession levels, but are just 6.7 percent higher than 2005.

The past eight years have seen the plastic processing industry shrink by $1.17 billion (or 1 percent), which is all attributable to less material content both in terms of price and weight. The number of companies dipped 18 percent, thanks to consolidation and liquidations. As many as 117,700 employees (or 10 percent) were trimmed. Despite all that, the industry has maintained roughly the same value add output, indicating a leaner and more productive state.

“[The industry] is getting more value out of those employees,” Mengel said. And the remaining workers are being rewarded for their value contribution. Average pay has increased 20 percent from 2006 to 2014, influenced by factors such as high skill levels as well as some inflation.

The 2016 report showed participants had flat gross profit margins but enhanced earnings before interest, taxes, deprecation and amortization (EBITDA), the latter correlated with how unique a company's value proposition is. Mengel classified companies into three categories:

• The top 10 percent are “unique processors” that leverage manufacturing processes that are harder to duplicate, include significant secondary operations, unique tools and/or materials, and high automation.

• The next tier, about 30 percent, compete on their organization design.

• The bottom and majority group, about 60 percent, compete on price.

“Everyone has a bit of everything in their company,” he added.

About the price-based model, he commented: “Everyone plays this game, it's just a matter of how much of your sales it consumes.”

While global OEMs continue to outsource from lower-cost locations for simple, slow, and small parts, domestic manufacturing has advantages for complex, fast, large parts that require logistic coordination and specific skill levels. Mengel advises companies to focus on improving overall equipment effectiveness, minimizing “noise,” creating convenience for customers and lean plant floor activities.

The “unique offering” business model tends to be the most difficult but also the most profitable. They generate 15 to 20-plus percent net income, while the industry average is 9.6 percent. Many companies desire this position but are not willing to invest in the necessary infrastructure, including market awareness and research, new technology application, and applied and basic R&D.

“It requires dedicated R&D, pushing the envelope,” Mengel said.

“Unfortunately, few of the companies we encounter engage in formal R&D,” the report pointed out.

The “organizational design” business model centers on the capability to organize the company more efficiently than the competition. People represent 40 to 60 percent of controllable costs [sales minus material costs], and “that's the easiest thing to manage to improve bottom line,” he said.

He added that most of the Plastics News Processor of the Year nominees fit into this category.

“They have sustainable organizational skills,” Mengel said. Some focus on employee engagement, others focus on core competencies and tend to have high levels of automation and lower complexity.

The complexity term is constructed as a multiplier of the number of resin compounds used, the number of molds and inserts and the number of presses. It serves as a double-edged sword: on the one hand, diversification and can be used as a defensive weapon; on the other hand, it often equates to higher material handling costs and headcount requirement, less predictable scheduling, and increase working capital needs.

Mengel said high complexity tends to exist in companies under $30 million, while large companies seek higher volume and greater predictability.

“Understand where you make money… don't be afraid to get paid for complexity,” he said. In the meantime, companies need to keep flexible operations and responsive setups and prune responsibly.

He urges business owners to take stock of their companies with “brutal honesty” and take action to rebalance.