Indianapolis — Plastics processors are seeing a flattening of sales growth, asset utilization and productivity and should focus on risk reduction in case the long period of economic growth comes to an end. That's according to the latest North American Plastics Industry Study conducted by Plante Moran.
The annual study was presented at the Manufacturers Association for Plastics Processors Benchmarking and Best Practices Conference in Indianapolis.
Tim Erdmann and Greg Alonso, both principals at Plante Moran, presented the study along with insights into how a processor can best position themselves.
"I think it's important to recognize that we know that good times don't always roll," Erdmann said. "I think there is a cautionary note because we're long in this growth cycle. And I think as [Alonso] had pointed out, the lower quartile of companies are really not in a good place right now. And after the extended growth cycle that we've had, to be in a weak position is not in a good position to be in if we come into a period of adjustment."
According to the study, companies slotted into the lower quartile of processors saw a decrease in sales in 2016-17. The study included 117 processors that represent 232 facilities and $6.2 billion in sales. The survey includes processors with various end markets. The report estimates there are 14,000 plastics processors in the United States, with 6,000 of them being injection molders. The median sales size is about $27 million.
While the report had a short cautionary tale, the news isn't all ominous. Some of the most successful companies are seeing growth in many areas.
"Collectively, our position is there really are a lot of signs that this could be a really strong and continued run for many in manufacturing," Erdmann said.
Alonso said over the past 10 years, there has been a 20.7 percent cumulative improvement in productivity.
"Processors are doing a great job of managing their labor force," he said. "And that has really been a driving force behind the success of the industry in recent years."
Average profits ticked down in 2017 to 8.3 percent. That mark was as high as 19 percent in recent years.
"Profits are down because of rising wages and a tight labor market," Alonso said.
Erdmann said the large expansion seen shortly after the recession in 2009 has dissipated.
"Being this long in the growth cycle that we're in, we saw some expansion take place shortly after we got out of the recession. I think some of the market forces are really starting to shrink those profits," he said.
The two Plante Moran experts highlighted customer concentration, defined as how many customers a processor has to reach 80 percent of total sales. The report said that the average lower-quartile company has four customers adding up to at least 80 percent of sales, while the companies dubbed as successful have 11 customers on average.
Alonso said when a company relies on just a few customers to make up such a large portion of sales, that can be very risky.
"[Those customers] are likely exercising leverage over those companies' pricing because you cannot afford to lose them," he said. "If you have four customers that make up 80 percent of sales, it would be really challenging if you lost one."
On the other end, having too many customers can be too difficult and expensive to manage, Erdmann said.
"We would encourage you to find that optimal level to manage your risk," he said.
The report suggested processors should understand their market position and focus on strengths to drive profit growth while considering mitigating strategies.
"If true that we are at the apex of a nine-year industry expansion, focusing on the bottom line (but not ignoring the top line) can provide the best insulation from both the known and unknown challenges that lie ahead," the report said.