Indianapolis — Warning signs are visible in the latest plastics industry market study by Plante & Moran PLLC.
The study by the Southfield, Mich.-based firm tracks 250 data points at 130 plastics processing plants across North America. Those locations have combined annual sales of $3.6 billion.
The study covers multiple areas including financial, operational, strategic, human resources and sales. A large majority of processors taking part in the study are injection molders, but the results also include thermoformers, blow molders and extruders of profiles, pipe, tubing and film. Most of the participants are U.S.-based, although some locations in Canada and Mexico are included.
The most recent edition of the study showed that gross profits have declined for two consecutive years, Greg Alonso, P&M management consulting principal, said Oct. 6 at the 2019 Manufacturers Association for Plastics Processors' Benchmarking and Best Practices Conference in Indianapolis.
"There are significant signs of contraction, and that's cause for concern," he added.
Taking a closer look, the study showed that productivity — in terms of value added per employee — also declined, while injection press utilization has flattened. Profits were affected by higher wages being compounded by a dip in productivity.
"Processors' ability to manage costs while boosting productivity has been the key driver to the overall health of the industry," Alonso said. "But now there are signs of trouble ahead and profits are declining."
Among specific end markets, the study showed that results from transportation were down, while packaging results were flat and results from medical, electrical, office furniture and appliances were up.
The median facility in the study had annual sales of $24 million, but because of some very large participants, the mean was $50 million.
In the area of plastics and packaging mergers and acquisitions, the study showed that first-half deal volume had a slight uptick from the record levels of 2018. Overall plastics and packaging deal volume averaged a deal every day in the first half. "It remains very much a seller's market," Alonso said.
Looking closer at the study, 44 percent of sales from the plants covered came from the transportation market, with another 18 percent coming from the combination of appliances, office furniture and consumer goods.
Alonso pointed out that the plastics processing sector has become more concentrated, which means that although it's easier to manage, there are increased risks of large customers being able to negotiate lower prices. For example, in the 2018 study median, eight customers were needed to generate 80 percent of sales per plant. But in the 2019 study, that number had dropped to six.
The study also analyzed complexity at each plant — defined as the result of multiplying the number of molds by the number of resins used, then multiplying that result by the number of presses.
"Complexity can challenge a processor," Alonso said, "but for those with proper management, process capability and pricing strategies, complexity can be a competitive differentiator."
The study also revealed that employee turnover is increasing because of the demand for skilled labor and a tight labor supply.
"Experienced workers don't want to train other workers if those workers are going to leave," Alonso said. "And some new workers find out that they don't like factory work or working a night shift. But if companies can get these new workers through their first year, turnover tends to go down."
High turnover might lead to firms paying more overtime and to inefficiencies that eat into profit. The transportation industry had the lowest turnover among select end markets in the study.
The study also showed that successful companies exceed 10 percent return on sales, 15 percent return on assets and 5 percent sales growth.
Customer relations also were important in the study.
"You need to understand why customers buy from you, if it's for convenience or because of a special capability that you have," Alonso said. "If it's not something special, customers can switch to another supplier."
Alonso also advised firms to learn from the results of the study by understanding costs and by focusing on disciplined costing to help profitability. He recommended evaluating the complexity of a firm's book of business and its capabilities.
"If there's a mismatch there, you can take actions to reduce or manage complexity," Alonso said.
And finding quality employees remains a big part of the study.
"Focus on a strategy to address turnover," Alonso said. "And figure out how to retain good employees."