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Change and Opportunity: Focus on Four Areas to Improve

by Laurie Harbour

Harbour Results, Inc.

The 2015 calendar year certainly has started out with a bang for many processors. Business is up for most companies, the economy appears to be relatively stable, fuel prices have dropped tremendously and this is an NPE year. As processors gather in Orlando, Florida, to see new technologies, talk to old friends and make new business connections, many are wondering how 2015 will play out.

To understand the future, we have to look back at some of the changes over the last 10 years. In looking at materials, the changes have been substantial. Processors are working with new resins, and more change is coming as the materials companies create new and exciting products. The processes for many molders have changed dramatically, partially due to materials but primarily because the processors are striving to be more efficient and do more with the same. Companies are using various forms of automation like never before, with many implementing fully automated processes and others deploying creative types of semi-automation and hand automation to improve lower-volume processes.

Product orders continue to change from customers, and the mix and complexity in all industries is growing substantially. Molding companies are dealing with more SKUs than ever before in their manufacturing processes. Finally, the labor market continues to be a major challenge, whether you are supporting medical in California, automotive in Michigan or agriculture in South Carolina. Finding new, young workers to learn the business has been tough, and companies have had to become very creative in their search and retention processes.

Challenges for 2015: pricing pressure, volumes and more

Although the Harbour Results team are not economists, it does not take a rocket scientist to see some of the critical factors that processors are faced with as they go into 2015. Although markets are growing and business is good through North America, there are signs to watch as future indicators. The US GDP is strong and generating a lot of growth. When compared to other countries, like Mexico, it is easy to see why the US is leading the recovery. The US GDP will generate in one year what it takes Mexico 10 years to generate in terms of GDP growth. That said, the US growth is not coming from manufacturing, unfortunately. In the fall of 2014, there were roughly 250,000 jobs created each month in the US, but only four percent of those jobs were in manufacturing. The rest were in financial services, medical, health care and retail. So, although manufacturing is up – particularly in automotive – it is flat in many other industries.

Processors still are faced with huge challenges, including health care, the instability of the market, prices of material, value of their businesses, lack of labor and skilled trades and differences in customer mix, depending on the markets they serve. We are seeing owners investing in more capital equipment as they look to meet the volumes of their customers and replace aging equipment. There is enough stability in the market that they are willing to take more risks, but there still is reason to be cautious as they enter 2015. Many are concerned with the upcoming 2016 elections and the related media that will occur this year around issues like the economy. The media and election campaigns will focus on how great the economy is, while over-emphasizing manufacturing growth. This may lead to false assumptions and bad decisions by some processors as they look to the future. Our data shows that companies are very busy and growing; however, that does not necessarily translate into making more profit for those businesses. Donít allow the hype to provide a false sense of security.

Another troubling set of data we are analyzing is the tremendous pressure on pricing at each of the companies with which we are working. Their customers are asking for more givebacks, and target prices are dropping. Material as a percentage of revenue trends up as much as four to six percent, driven by a drop in piece prices – but material costs are not, in many cases. When this is combined with the huge drop in fuel prices and demand being down in places like China, there is excess capacity without a realized resin price drop to date. Companies are losing margin with the price compression from the customer. Much of this will put new pressure on processors for 2015.

No matter what industry the processor serves, there is a great deal of change taking place. Some industries, such as aerospace and automotive, have huge growth and backlog. The next three to four years in aerospace will bring a huge backlog of production as companies replace their old fleet and travel grows around the world. After that period of time, however, the backlog will drop like a rock, and those supporting aerospace will need to find new work.

In automotive, volumes are growing every day and the demand is staggering. Suppliers are struggling to meet volumes and are adding bricks, mortar and new equipment to meet the demand. The number of vehicle launches is over 30 per year and resources are limited, causing major delays with each new program. The appliance industry is booming as well, with many new high-level models being introduced by companies like GE, Electrolux, Whirlpool and others. And, much of this manufacturing has been moved back to North America from other regions, so processors are seeing new work. The pending purchase of GE Appliance by Electrolux has, however, brought some uncertainty because of the differences in their sourcing approaches. The next year will bring some visibility to the future strategy for manufacturing by those companies.

The biggest trends Harbour Results sees in all of its customers, whether plastic processors or mold builders, are the growth in complexity of part design, the move to more mass customization of product and the shift to more low-volume, high-mix production of parts.

As new consumers enter the market and technology changes peopleís daily interactions, processors are seeing and will continue to see volumes changes; particularly, on those parts that the consumer interfaces with daily. These volumes are becoming very low while the number of SKUs being managed is growing as large OEMs try to give customers the features they want. Some of these changes are driven by regulations (as areas like automotive try to meet some of the CAF… standards), but for the most part, these are driven by consumers wanting their phones, small household appliances and cars customized to meet their styles and tastes. One of the hottest trends with consumer products is in color as people are demanding the latest and greatest "cool" color on their products. That color trend may only last a few months before consumers move on to another "cool" color.

These changes from the customer are driving the need for new materials that process differently and have different properties. Additionally, processes in the plants have had to change as operations personnel jump new manufacturing hurdles while managing the number of SKUs and the complexity of parts. Another huge trend has been the need for more "Big Data," and many companies donít even know what this term really means. However, what we see is that companies need new and different data from their processes in order to run the manufacturing floor and still make money managing the variation.

Improvements to make in 2015

The impact of all of these trends and market factors on processors is different depending on the industry focus, customer and type of product being produced. Many will manage these trends without skipping a beat, while others will struggle.

No matter where a company falls on this continuum, there are several improvements that companies can make – and are making – to improve the things that they control. In the end, these items will allow processors to grow their profitability, invest in new capital and, in turn, grow their businesses and improve the outlook for the future.

What are some of those very "actionable" things that processors can do to improve their businesses? Companies are returning their focus to lean manufacturing and basic engineering, which they may have lost sight of, to gain back some efficiency. But, the processors and mold builders that are making quantum strides to improve their businesses are focused on four key projects.

Strategic planning. Instead of having a vision as a leader, articulating that vision and calling it a long-term plan, the best companies have taken that vision and turned it into actionable one-year objectives. Those objectives then are cascaded throughout the organization to all levels of the company, with metrics that have been developed and are driving each personís role and responsibility in meeting the longer-term vision. Too often, company leadership thinks a plan has been developed, yet wonder why the plan is not being met. Usually, itís because the company has not cascaded the plan into what it means to each person in the company and what that personís role will be to achieve success.

Market intelligence. Companies finally are realizing the need to gather market intelligence, not only on their type of process, but on each and every industry in which they produce product. The best companies have put people in place to gather market intelligence on their customers in terms of forecasts, new models, new processes and materials. They also gather data on industries such as automotive, aerospace, medical, etc. Even the smallest companies (under $10M) have put people in place at conferences and trade shows, talking to customers and tapping other sources to gather data that allows them to be more knowledgeable. That knowledge base allows them to focus on the third project – demand planning.

Demand planning. Demand planning has been the most challenging aspect for most of the businesses with which Harbour Results has worked. Companies tell us that they canít get the information from their customers that is needed to provide an accurate forecast. Some of that is true because customers wonít provide it, but many times it is because companies donít ask. The best companies are realizing even a little bit of demand planning is driving efficiency in their businesses tenfold. Today, Harbour Results estimates that less than half of the processors and mold builders we have interacted with are doing any form of demand planning, and it shows in their profit performance. Companies think that because they budget they are doing demand planning, but thatís not even close. Some industries, such as automotive and aerospace, allow for this to occur more easily because the third-party data is out there. However, in consumer products, the large customers tend to be clueless, and that falls heavily on the processors supporting them. Those companies that use market intelligence, talk to their customers, gather third-party data and use all means possible to do demand planning have shown that they can drive throughput by 20 to 30 percent, making profitability soar.

Systems efficiency. The last project that is getting a lot of focus and success from companies is a real look at manufacturing efficiency, but in a different way than previously accomplished. Companies need to view operations as an entire system, rather than simply improving the efficiency of one or more machines. Companies need to analyze the system from scheduling on, throughout each and every piece of equipment that supports making the product. Those that have done this are seeing the ability to manage the higher mix and lower volumes much more easily. Inventory can be managed better and turned over much faster, changeovers are improving and machine utilization is at an all-time high in those shops. Companies are beginning to manage multiple business models under the same facility and doing it very profitably.

Some companies have done one or more of the four improvements outlined here, such as evaluating systems efficiency or strategic planning. But, those that have put all four of these projects together are running like a well-oiled machine while making a ton of money and operating with a true sense of calm. For many, 2015 will be a great year, and everyone has the opportunity to get there. Thereís no need to over-complicate it; instead, focus on the right things and work ON the business.

Laurie Harbour is president and CEO of Harbour Results, Inc. Combining operational and financial advisory expertise with industry analysis and thought leadership, Harbour Results delivers results that impact the bottom line. The company specializes in manufacturing, production operations and asset-intensive industries, as well as a number of manufacturing processes, including stamping, tooling, precision machining and plastics. For more information, visit www.harbourresults.com.