By Lindsey Munson, editor, Plastics Business
In a matter of weeks, 2023 will come to a close and companies will begin the important task of analyzing the prior months to then take those learnings and build a strategic plan for 2024. Ultimately, this will paint a clear direction for management and internal teams as they head into a new year.
By taking early measures to create an annual roadmap, companies prepare to meet challenges and pressures head-on, to effectively combat economic impacts and to set their day-to-day operations up for major achievements.
In this article, four industry professionals break down the ins and outs of the industry based on their specific business area, including contracts, labor shortages, tax law and resin challenges. Through this information, plastics processors will gain insight into various market factors (i.e., geopolitical issues, demand-supply imbalances, technological advancements, consumer behavior, etc.), high-low trends of the industry and how to strategically plan for success in 2024.
In the past five years, the plastics industry has seen significant upheaval in commercial contracts, driven by unprecedented challenges that have included pandemics, labor shortages, energy crises, transportation issues and supply chain disruption. These circumstances have increased processor uncertainty and risk, which is why it is critical that leadership put a contract management plan in place. This allows management to monitor and assess contracts to ensure they support business goals.
This reduces risk and streamlines decisions by 1) putting contracts in one place, 2) installing an efficient method to manage contracts across channels and 3) providing better control of the contract through each stage.
Josef Keglewitsch, a partner with full-service law firm Ice Miller LLP, has extensive experience in the contractual complexities of the manufacturing industry and offers professional insight that can assist plastics companies in their yearly contract planning. “The industry should expect supply chain challenges to continue easing up as the new year hits, which will translate into fewer breaches of contracts,” Keglewitsch said. “In prior months, there was a spike in breaches as a result of the inability to perform due to supply chain-created limitations.”
“As for the labor market and its unrest,” he continued, “this could spread among a variety of industries as well as employment classes in processors’ vendor pool. This is a wildcard that is hard to predict, but could be incredibly impactful.”
The upcoming presidential election also will drive uncertainty and have a deep impact on the industry. This economic and legislative limbo isn’t new, as Keglewitsch shared there has been constant pressure on processors and that they, “… have been looking over their shoulders for years, unclear as to what will come next.”
However, he said processors should keep their eyes on current news: “There perhaps will be a negative impact at the end of the year, depending on the political party that wins, or as polling points move one direction or another. This will determine the outcomes of long-term concerns that include increased regulatory burdens and inflation that creeps into contractual relationships.”
As processors begin planning 2024, Keglewitsch shared practical ways to mitigate contractual challenges:
- Build price flexibility into customer contracts to ensure processors do not get caught flat-footed.
- Lock down vendors in long-term contracts.
- Be proactive in managing contractual relationships.
- Get smart force majeure provisions in place and make sure form contracts are state-of-the-art. Most importantly, don’t sign just to finalize the deal.
Labor Market and Closing the Skilled Gap
As an industry, solving the manufacturing labor shortage would make a company’s life a whole lot easier. However, it’s not just about finding a person to fill the need – it’s about educating from the ground up and finding skilled workers who can leverage today’s technology and advance it for tomorrow. Florida-based Management Recruiters of Tallahassee (MRT) has more than 40 years of experience in manufacturing recruitment solutions. MRT’s mission is to connect the people vital to manufacturing success. Its slogan, “Placement with purpose,” breeds the reality of exactly what manufacturers need to beat the labor market woes.
MRT’s Co-Owner and Executive Recruiter Jerry Jones said, “For plastics processors and manufacturers, regardless of their readings or feelings, the industry has a severe shortage of critical skilled technical talent.” A 25-year veteran in the recruiting industry, Jones has seen the highs and lows that come with the manufacturing industry, assisting companies with operational turnarounds and rebuilding them through recruitment, training and development.
Continuing, Jones said, “The challenges in employment and staffing are the shortages in the areas of operations, engineering, sales, finance and maintenance. The searches MRT is conducting today and for tomorrow bear this out. Considering not only the deficit in talent but also the housing cost, higher interest rates and boomer retirements will exacerbate the situation.”
Economically, Jones shared that the biggest challenge in the industry is the talent shortage and the ability to relocate a person due to housing issues, costs and mortgage rates. He said, “As mentioned time and time again, this will be with companies in the industry for some time and will intensify.”
As for the upcoming presidential election, MRT is preparing for a labor market slowdown but, Jones said, “… just for a bit.” He continued, “Typically, as the spring and summer wanes during an election year, companies pull back until after the election due to the fear of the unknown. Regardless of who wins, we will be back to business as usual.”
As processors look to 2024, MRT encourages them to sit down and review their employee rosters to see if any of their key people, the ones who carry the 80/20 rule, are approaching or are at retirement age.
Jones said, “The next step is to identify if the company has sufficient in-house talent to develop or if the recruitment process should begin to bring in labor from the outside. This brings another set of challenges with internal equity vs. what the outside currently is making.”
Most importantly, Jones said, “Companies should not shy away from a younger, less experienced person but rather encourage the new generation to step in and up. When the younger employee base is given an opportunity, MRT routinely has seen them shine – especially when given proper mentoring and coaching for success.”
Jones’ recruiting philosophy is not just to find the requirements for the position but rather, the right employee fit to include culture, experience, skills and capability.
Tax Impacts and Politics
While 2023 introduced a mix of tax benefits and challenges with rising interest rates and inflation, companies will be digging deep for tax planning strategies amid volatility across most plastics industry sectors. Mike Devereux is a partner, Industrial Products Manufacturing leader and CPA for Wipfli, Milwaukee, Wisconsin, a business and accounting consulting firm, brought answers, insights and strategic moves on how to prepare for the annual tax impacts of 2024 affected by a tough economy and Washington’s political moves.
Devereux said, “As 2023 comes to a close, processors will continue to face significant uncertainty around US tax laws. Congress has a history of making provisions of the tax code temporary to get around very complex budgeting requirements. The Tax Cuts and Jobs Act of 2017 (TCJA) made many taxpayer-friendly changes to the industry’s tax laws. Specifically, manufacturers greatly benefited from these changes, such as lower tax rates, 100% bonus depreciation and flexibility in their methods of accounting.”
On the flip side, processors are feeling the tax pressures. He continued, “Congress enacted tax increases impacting the manufacturing sector in order to ‘pay for’ the tax breaks. One such tax increase that processors felt the impact of was the way companies are required to account for research expenditures. For processors, this can include engineering labor, new tooling and technological process improvements.”
“Beginning with tax year 2022, taxpayers are required to capitalize their research expenditures, amortizing them over five years, if the research is domestic, or 15 years if foreign research expenditures are incurred. This is a significant departure from companies deducting research expenditures as paid or incurred, which has been allowable since 1954,” said Devereux.
If a member of the tax-writing committee who authored the TCJA were asked, they would tell you that this provision was never meant to become effective. Congress would fix it in the five-year window before its effective date, Devereux shared.
“Well, the can was kicked down the road and many processors saw a much larger tax bill this year,” he said. “When viewed in a silo, fixing this issue is bipartisan; but US Congress does not legislate that way anymore.”
With the end of the year approaching, the research expenditure fix, along with other provisions important to processors such as the continuation of 100% bonus depreciation, is being considered by Congress in a year-end tax extenders package. While most manufacturers would be happy if Congress fixed it for 2023 and thereafter, current legislative language fixes the issue retroactively to the beginning of 2022, causing much ambiguity and uncertainty on a tax provision that can be material to processors.
As for the new year outlook, Devereux said, “The 2024 election will significantly impact US tax law in the very near term. Many of the TCJA benefits enjoyed by manufacturers are expiring in 2025. Lawmakers must address these expiring provisions at the start of the 119th Congress, and the party that controls the White House and both houses of Congress will rule the day, extending or ending many of the tax provisions important to manufacturers. A split government is almost certain to create Congressional infighting, resulting in a last-minute tax bill that no one likes, passed by a Congress that didn’t read or understand the tax changes impacting US manufacturing.”
“Processors can mitigate the risks of this tax uncertainty with proper planning,” said Devereux. He shared tips to include tax professionals and run projections in multiple different ways – considering best-case and worst-case scenarios.
He continued, “Wipfli saw the 2022 tax increases surprise and impact the cash flow of many processors. The income tax is a significant line item on most processors’ P&Ls, and planning should not just happen at year-end, but rather throughout the year.”
In closing, Devereux said, “It is important to understand how it will impact the cash flow and overall profitability of the business. By engaging in continuous planning, processors are giving themselves enough time to execute those plans in a thoughtful manner.”
Resin Trends and Challenges
Plastics processors are feeling the pressure as they continue to face resin challenges, from shifts in supply and demand to high pricing trends and meeting production goals. With no sign of those challenges letting off the gas in 2024, companies are full throttle with their efforts to creatively adapt and develop a strategy for succeeding against market disruptions. PolySource, Overland Park, Kansas, a seasoned resin distributor, knows the importance of preplanning and strategically aligning a processor’s resin needs and the steps necessary to fulfill production orders, maximize profitability goals and efficiently sustain for the future.
Grant John, president and CEO of PolySource said, “Now is the time to proactively plan and an important part of that process is understanding what the inventory levels are for key products. There are vast differences specific to products, whether it be for producers or distributors, so don’t assume because demand is down that everything is available.” As for pricing, PolySource has seen feedstocks and resins bottom, with many of those products moving upward as 2023 comes to a close.
“It’s clear that there is global volatility,” John said, “not only with the wars but also with the automotive strikes that will cause larger issues the longer they last.”
In response to the market volatility, plastics processors’ single most important factor is communication. John said, “Forecasting and demand planning is vital to a successful partnership. Especially now, it’s not just looking in the rearview mirror and evaluating past demand – it’s collaborating on key decisions and understanding what is needed to be successful for the OEM, processor and supplier.
Analyzing and managing the working capital and profitability at the processor level is very important. The more the processing community understands their most profitable jobs the more they can understand how to protect the supply chain and operations that support those. It has been the paradigm shift for everyone involved in the process the last 18-24 months – moving business back into a proactive mode vs. a reactive mode.”
In the always-evolving manufacturing industry, plastics processors need to prioritize and conduct a deep dive into every area of their company to build an impactful 2024 strategic plan. Developing a formalized strategic plan that takes on the ins and outs of contracts, addresses the labor market, focuses on tax initiatives and is proactive against resin challenges will contribute to a company’s year-end success and the ability to effectively maneuver the lows and highs of the industry.
More information: www.icemiller.com, www.mrrecruiter.com, www.wipfli.com, www.polysource.net