by Laurie Harbour and Scott Walton, Harbour Results, Inc.
Plastic processors live in an industry that changes day-by-day or even minute-by-minute, so as December fades into the distance, many companies will look to the past and attempt to project into the future to see what is in store.
Has the end of the economic turmoil been seen?
- Has this been a temporary dip, or is another recession inevitable?
- Which customers will decamp from Asia in the medium to short term?
- If the Japanese earthquake and tsunami did not bring the world economy to its knees, will realignment of the euro or collapse of the common currency do it?
- Will banks under pressure restrict access to credit as they did in 2008 and 2009?
Enumerating the Challenges
The economy still is not rotating, despite all the changes that occurred in 2011. Unemployment remains at record high levels and as much as the government tries to create jobs, it still is not happening at the pace politicians would like. The crisis in Europe and its impact on currency are having a substantial effect on the US economy. The world stock markets are on a significant roller coaster, and no one can predict when or if stabilization will occur.
The effect of China and other low cost countries on the US manufacturing base is changing yet again. In 2011, the Chinese government instituted a mandatory 15-percent wage increase across the entire workforce. Additionally, the Chinese Government is anticipating more wage increases over the next five years as it works to grow the middle class and skill level within China. This will surely change the calculation of outsourcing to low cost countries and begin to level the playing field. Let’s not kid ourselves though – in 2012, China will continue to be a manufacturing powerhouse even with these unprecedented increases in cost. Chinese manufacturers are working on the right tactics to create sustained manufacturing excellence across multiple facets of their value proposition.
Economics were, no doubt, overshadowing all else in 2011 and left many muttering under their breath, “Been there, seen that, done that.” 2012 will bring another economic cycle, up and down, but plastics are now a fact of life. No matter how soft or unpredictable the economy becomes, polymers will continue to increasingly drive applications across multiple markets and industries. Even if fewer tablet computers and mobile phones are sold, they will still be made of plastic.
Probably the most significant underlying factor affecting the United States manufacturing base today is the stalemate in the government and the effect on consumer spending. The government will not move until the elections in November are behind us. Meanwhile, as companies continue to improve productivity and increase volumes, they are making money. Companies are performing better, operating efficiently and doing more with the same number of people. These productivity improvements, combined with the uncertainty of the economy and the government stalemates, have driven companies to hoard cash and only hire the critical few. Banks are lending money, but not without a painstaking, drawn out process. All these variables put significant pressure on consumers to spend money to spur economic growth. According to economists, if consumers can drive spending the economy will begin to rotate.
With all these challenges facing US companies in 2011, a bifurcation began to occur among plastics processors. The industry leaders are growing their revenue lines, financially strong and operating at over 85-percent capacity utilization. The laggards are struggling to maintain market share, operating at less than 50-percent utilization and just plain scraping by. The gap will continue to widen as the best companies become more selective and continue to sell value rather than capacity.
So what challenges are companies facing in 2012 and beyond?
- Which direction will petrochemical and polymer prices take next year?
- What will an election year bring?
- Will the Middle East finally gain dominance of the market’s upstream end, or will the scepter pass to China?
- If money is tight, will consumers continue buying new cars? Will they abandon plastic carrier bags if they have to pay for them?
- Will the Chinese and Arabs begin making their own plastics machinery?
In the next 12 months, beyond the underlying economic issues, plastics processors will face constant raw material fluctuations and supply uncertainty for the near term. Additionally, companies are looking at the next 12 months with a need to determine future sales demand. It has been erratic over the last 12 months, and uncertainty leaves companies wondering what to do about manufacturing forecasts. These uncertainties will force the best and brightest to continue doing more with the same to maintain a profitable competitive edge.
Focus on the Front End for 2012
2012 will be full of surprises as the next act from the financial and political power brokers unfolds. Saying farewell to 2011, there are some words of advice for 2012 – the most important being, “focus on the front end of the business”. Plastics processors should work more diligently than ever to understand where the market is headed and the demands customers will put on their businesses.
The vast majority of companies assessed by Harbour Results already have been pushed and pulled into a world of mass customization. The high-volume, low-mix model is becoming less and less common, and the new normal is a low-volume, high-mix manufacturing environment that changes more rapidly than ever. Operational flexibility and agility are becoming club dues and those organizations that can meet the ever-changing market dynamics will get the gold.
Building flexibility in this environment requires greater focus on understanding customer demand. Comparing internal historical data to customer projections and cross-referencing those numbers to an external market source will provide clearer visibility of demand. Processors can then apply this demand data across the entire business value chain, working to match their supply and demand at a 1:1 ratio. Wherever an out-of-balance condition is seen, it is time to stop to identify the over capacity or the bottlenecked condition, and then work to bring the demand and supply ratios back in balance.
Moving through the business model in this fashion will quickly identify those areas requiring additional flexibility. Processors should avoid the temptation to go right to the manufacturing process to find improvement opportunity. Sizable out-of-balance conditions often manifest in the transactional processes, such as quoting, costing, project management or engineering. And by all means, a focus should be placed on production tooling – this always is a land of opportunity.
Beyond the next 12 months, companies are concerned about what will happen with globalization. Will the balance of manufacturing change as costs rise in low cost countries? If so, what will the impact be on US manufacturing? Another huge concern of plastics processors and all manufacturers is the lack of labor in both skilled and general manufacturing. There is a related concern with the lack of young talent entering the manufacturing field. So, while China grapples with unprecedented increases in labor costs, US manufacturers continue to struggle with the next generation of skilled workers.
Address These Opportunities
There are certainly challenges beyond the control of the plastics processor, but opportunities exist that are being missed – or ignored. During a recent survey of plastics companies, there were disturbing findings, including the following:
- Data revealed that a majority of companies are not formally communicating with their customers (see graph on this page). As times have changed, processors have stopped sitting down with customers on a quarterly, or even annual, basis. These meetings are critical for companies to better understand future demand and areas of improvement. A simple written customer survey is not good enough, especially since many customers do not complete these.
- Additionally, data revealed that over 80 percent of companies surveyed have the owner or president leading the sales effort (see graph on page 8). Filling the role of president is a full time job in itself. Attempting to lead sales efforts will lead to neglect of one role or the other, to the detriment of the company. Owners need to invest in the right person to lead their sales efforts, while keeping their own eyes on the vision of their companies.
- Another incredibly troubling finding was the lack of continuous improvement focus by most companies. This year, the data actually revealed a backwards trend in this area. As volumes have increased, companies are working less on continuous improvement. If the opportunity to drive efficiency improvement was not seized during the recession, the answer now is to throw labor at the increased volume to push output rather than throughput. In the survey, processors continued to state that operational improvements are one of their biggest challenges for the next 12 months, yet those same companies are not focused on continuous improvement. It is critical for companies to see continuous improvement not as an extra credit assignment, but rather as a part of doing business. These companies need to constantly challenge thinking and push for improvement. This can be done with more teamwork and involvement from the people on the floor, but this too was a backwards trend in the survey.
As plastics processors look to the future, they should expect the uncertainty to continue as the US government and economy sort themselves out and the European Union woes continue. Sizable challenges and barriers will continue, and tomorrow’s leaders will need nerve, drive, knowledge and creativity to be effective. Companies need to focus on what they can control: continuous improvement, communication with customers, solid business plans and stronger employee involvement. Work on understanding customer demand, and position businesses to meet this demand with continued tenacity and determination. Driving flexibility in an environment is far easier with a greater understanding of future demand. Build an agile organization around this predicted demand pattern, and be prepared for anything. 2012 will surely deliver on a new series of challenges and opportunities.
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.