It’s no secret that resin prices have increased, putting pressure on plastic processors and reducing bottom line profits. In a recent MAPP economic survey, more than 88 percent of executives responding indicated that they had seen price increases in the first quarter of 2008, continuing an 18 month trend of similar market volatility. Plastics Business contacted MAPP members for their perspective on purchasing strategies, with questions about supplier relationships, ways to mitigate increasing resin prices, and the use of substitute materials.
1) What role does supplier relationships play in purchasing strategy?
All four molding companies responding to this Q&A have at least one employee dedicated to making resin purchasing decisions, often citing the pricing leverage obtained when one person controls all supplier communication. Shannon Paulins, the production control manager for Precision Custom Products, Inc. (PCPI), explained that having one employee with an eye on inventory can have benefits beyond price alone. “We are able to coordinate shipments to save on freight and fuel, along with getting better pricing than we would if multiple purchasers were purchasing similar products.”
A dedicated employee who regularly communicates with a resin supplier also develops a relationship that can be beneficial in terms of service, responsiveness, and as one respondent reports, tips on new business to quote. David Lessard, general manager of Sabin Corp., stated, “Buying strength is about relationships, not leverage. Our company is 40 years old and we’ve been buying for a long time.” However, Paulins doesn’t expect relationships with her suppliers to shield her from the price increases. “The suppliers are feeling a little pressure from their customers, but their hands are tied. As much as they don’t want to pass on the price increases, they can’t keep absorbing them either.”
Mark Hedges, sales manager for Channel Prime Alliance, agreed that suppliers are between a rock and a hard place when it comes to passing on price increases. “We can shield price increases by taking an inventory position, meaning that we can accept a purchase order for two to three months in the future and secure resins at the price we’ve agreed upon. But when we reload, whatever the price is, it is.”
Sharrocco Garcia, customer manager for Hoosier Molded Products, noted, “What we’re finding is that it’s best to look for an alternate supplier – someone who is smaller and trying to get their foot in our door. They often have an excellent start-up price or might have inventory that’s been in stock for a while that we can get for the price they paid six months ago. The bigger guys have to reorder more frequently and pass the higher price along to the buyer.” Garcia did see a positive aspect in the current situation. “All in all, I think we’ll see this helping out with diversity in resin suppliers. We’ll see some of the smaller companies become more prominent players.”
2) What actions can be taken in response to increased raw material prices?
Passing price increases along to the customer may seem like the obvious way to protect profits, but contracts and a fear that customers will look for a different molder who is able to absorb a smaller profit margin often negate that possibility. “With some customers, we have contracts and our prices are locked in, so we’re absorbing a lot of the cost increase,” explained Dick Andre. Andre’s company, Van Norman Molding, looks for relief through bulk purchases. “We’ve stepped up our bulk buying, trying to bring in as much inventory as we can for a price break.” In addition, the molder is working to lower its own costs by automating some processes currently done by hand. “We’ve been in business since 1934,” said Andre. “so it’s not the first time we’re seeing these price increases.”
David Lessard agreed that the recent resin price increases are not a new phenomenon at Sabin Corp. either. “We have to use a specific material and over the last 17 years, prices have gone up 80 percent. We’ve absorbed that through efficiencies that are process-related – better tooling, better equipment, and better quality control.”
Shannon Paulins has seen reactions from both suppliers and customers attempting to mitigate the effect of price increases, often with a negative effect on PCPI’s business. “The suppliers don’t like to keep anything on the shelves anymore, which causes longer lead times.” As for the customers, Paulins is seeing a change in ordering patterns. “They might pull in the next quantity bracket to receive better pricing, which leads to peaks and valleys in our ordering process, which then causes highs and lows in our sales.”
3) Have resin price increases led to the use of substitute materials? Increased recycling?
With resin prices on the rise, it makes sense to evaluate lower-cost resin choices for established production needs – if the customer agrees. For some molders, this is standard practice and not a reaction to resin market conditions. “We often advise customers of a lower-cost material that perhaps would meet their requirements,” explained Dick Andre. Problems arise, however, when customers refuse – or are unable – to change resin types. At Lessard Corp., much of the production is medical, leaving no wiggle room for substitutions.
Increased recycling has been part of the solution for some molders. At Hoosier Molded Products, excess inventory used to be held in case there was a possibility of using it for future business but that philosophy has changed. “Now we’re entertaining calls from representatives in the recycling business,” said Sharrocco Garcia. “We’re getting rid of obsolete materials and press purgings – anything we can do to keep from passing resin cost increases along to our customers.”
However, Garcia and the others interviewed for this Q&A agree that resin price increases are not going to reverse anytime soon. Customer reaction has varied, but most understand the economics of the situation, which is this: price increases from resin supplies (Garcia received three e-mails with price increase notifications on the day before the interview) will be passed along to molders, who in turn pass it along to customers, with the increases ultimately finding their way to the consumer market.
For access to the full 1st Quarter 2008 State of the Plastics Industry report, contact MAPP at (317) 913-2440.
Plastics Business would like to thank Dick Andre, Van Norman Molding; Shannon Paulins, PCPI; David Lessard, Sabin Corp.; Mark Hedges, Channel Prime Alliance; and Sharrocco Garcia, Hoosier Molded Products, for contributing to this Q&A.