MAPP Report: 2007 Raw Materials Survey
Industry Winter 2008
How does a plastics manufacturing business maintain profit margins in a marketplace in which nearly 40 percent of its manufacturing costs fluctuate on a daily basis? To gain a better understanding of this question, MAPP was asked by its Members to perform a survey focused on how processors are managing the process of buying raw materials. Based upon a list of 21 questions, the compiled survey results identify stark differences in both management styles and strategic thinking among plastics processing executives.
There are substantial differences in supplier relationship strategies – some molders pay on receipt of materials while others delay payment and draw out terms as long as possible.
There are unique differences in the knowledge base of the marketplace – some processors indicated a thorough understanding of all resin vendors who could supply the resin they buy, while others indicated having knowledge of only some of the resin vendors who could supply the resin they buy.
There are tremendous differences in the job duties and the focus of the purchasing professions in charge of procuring resin. Some companies ensure that at least 90 percent of its purchasing professionals time is spent focused on the resin marketplace, while other companies utilize their procurement resources in many other areas.
Despite wide differences in practices, every plastics processor has the common need to stabilize and reduce costs associated with raw materials. This report identifies the thinking and some of the tactics behind the ways plastics manufacturing executives are attempting to reduce the impact of the volatility of raw materials pricing on their business.
MAPP conducted its Raw Materials Survey in December of 2007, collecting data from over 80 industry executives via online input for a period of 10 business days. Although not a scientific survey, participants were given the opportunity to respond to approximately 21 questions related to raw materials strategies, cost control, and management. These questions were created by a group of seven industry executives.
Plastics business leaders participating in this survey represented an array of company sizes. The vast majority of survey participants (44 percent) consume between one to five million pounds of resin annually. In total, 76 percent of survey respondents indicated that annual resin purchases were 7.5 million pounds or below. Nearly 15 percent of those contributing data represented companies with purchasing power of 15 million pounds or more.
Current Industry Material Pricing Trends
The volatility of the oil markets in the 4th quarter seemed to have a direct impact on plastics processors, as 86 percent of the survey respondents indicated that resin pricing increased over a two month period. No price decreases were reported in this period, and 14 percent of the survey participants indicated that material prices remained the same.
For those who reported price increases, 47 of the 78 respondents (or 60 percent) indicated a price adjustment between two and seven percent. Nearly 27 percent of those reporting data indicated material price increases above seven percent in the two-month period.
According to MAPPs Special Report of the latest North American Plastics Industry Study produced by Plante & Moran, the resin price increases of 2006 outpaced pro-ductivity gains. Based on this knowledge and the fact that resin accounts for the largest cost component in nearly every plastics business, some processors are creating raw material strategies to contain costs and gain market advantages.
A total of 81 industry executives answered the question relating to whether or not their company had a resin strategy – nearly 30 percent said Yes, a surprising 60 percent said No, and 10 percent are in the process of developing a resin strategy.
Tactics in raw material strategies include recommending lower cost equivalent materials to customers, as nearly 89 percent of the survey respondents have successfully done so in the past. However, nearly three-quarters of the survey participants indicated that material recommendations are accepted and implemented by the customer only 50 percent of the time or less. With this statistic also comes an important data point: one in five processors has found ways to inspire its customers to switch to equivalents more than 50 percent of the time, and one in fifty has near perfect records in implementing 100 percent of material substitution recommendations.
An additional tactic covered in many raw material strategies includes the focus of the purchasing or materials professional. Some plastics pro-cessors believe that having a dedicated materials manager is important to their business. Survey results show that one out of every 13 plastics processors ensures that purchasing professionals spend at least 90 percent of their focus on raw materials.
Resin pellets lying on the production floor take many shapes. From the standpoint of an owner or senior executive, those shapes may look like pennies, nickels, dimes, and in some instances quarters or dollars. Most plastics executives are focused on reducing waste and gaining leverage with every dollar they spend. Cost control tactics identified in this report included finding alternative materials, reducing scrap, having multiple sources of supply, and developing relationships to gain market intelligence. Survey respondents briefly outlined a number of different money-saving initiatives, which included the following:
Survey respondents indicated that competition is key. Maintaining at least two approved suppliers for each resin purchase, or obtaining multiple quotes for every job, can keep vendor prices competitive. In addition, partnering with resin suppliers can benefit both parties, providing lower material prices for the molder and giving the supplier a steady stream of business. Respondents also advocated utilizing VMI programs, using a vendor warehousing system, or developing a relationship with RTi.
The amount of resin required by a molding job cant be reduced. However, the materials can be used more efficiently. Many responders advocated an aggressive focus on reducing scrap, monitoring waste by shift or by hour. Training employees in ways to reduce scrap and buying scrap parts from outside sources while managing an internal shredding and grinding operation also were mentioned. Equipment can be an important factor according to some who use automatic feeders, runner manifolds, and constantly examine and re-work tooling to reduce weight.
When costs of current material cannot be reduced any further, the alternative is to work with customers to find new materials and material sources. This requires customer education in regards to alternate resin types. At least one company has gone from pre-colored material to concentrates.
The majority of suggestions came under the category of purchasing. Plastics processors responding to the survey recommend bundling strategies for all resin purchased in order to gain the most pricing leverage with supply sources. In addition, the trend of bulk-buying at low market price points and carrying resin inventory is a trend that seems to be coming back, as well as making spot buys. Other strategies included the use of material consignment programs to ensure supply availability while allowing for decreased inventory on hand for the plastic processor. The source of material can make a difference in purchase price, so some recommend purchasing material directly from the producers. A focus on building and maintaining key relationships with resin manufacturers can keep processors informed of the market, allowing businesses to buy ahead of increases or to buy from brokers when prices go too high. An aggressive review strategy is employed by some businesses, utilizing cross-functional purchasing groups to meet regularly and review all aspects of purchasing. In some cases, purchasing managers were teamed with key business leaders (i.e. operations managers, Presidents, Owners) for constant and regular weekly reviews of purchasing levels, market conditions, business conditions, and strategic focus.
Continued volatility in the price of raw materials will have a persistent effect on the profit margins of plastics processors. By understanding what others in the industry are doing to combat high resin prices and developing an appropriate strategy for raw materials purchasing and usage, plastics processors can feel prepared for whatever change the market brings.
The complete survey is available at www.mappinc.com for $19.99. First Resource, Inc. and the Mid-America Plastics Partners, Inc. (MAPP) have exercised professional care and diligence in preparing this report, but because the data used in this report comes from third party sources and First Resource, Inc. and MAPP have not independently verified, validated or audited any of such data, First Resource, Inc. and MAPP make no representations or warranties with respect to the accuracy of the information contained in this report. First Resource, Inc. and MAPP shall not be liable to any client or any other person or entity for inaccuracy or inauthenticity of the information contained in this report or for any errors or omissions in its content, regardless of the cause of such inaccuracy, inauthenticity, error or omission. Furthermore, in no event shall First Resource, Inc. and / or MAPP be liable for consequential, incidental or punitive damages to any person or entity in any manner relating to this report.