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Plastics Business Winter 2014

Strategies for Today’s Plastics Processors

2014 OUTLOOK Economic Assessment Tooling Study Impacts Tax Strategies

Official Publication of Manufacturers Association for Plastics Processors


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Plastics Business

Strategies for Today’s Plastics Processors

Contents Cumulative GP change

profile

8

focus

industry

13

30

features profile Fearless Manufacturing at Noble Plastics ..............................................8 focus Challenges for the Tooling Industry will Impact Processors ................ 13

departments director’s letter ..................6

trends MAPP Business Forecast Survey Shows Strong 12-Month Outlook ....... 23

association .......................20

strategies Benefits and Burdens of the Domestic Production Activities Deduction .... 26

product ............................36

industry North American Plastics Industry Study Reveals Favorable Trends Impacting North American Processors ................................................ 30

advertisers .......................46

production The View from 30 Feet: State of Alabama Recruits Manufacturing........ 34 outlook After Gridlock, Plastics Industry Looks to Federal Policy Modernization and Cutting Red Tape .................................................. 38 solutions Why ERP Systems Fail to Perform ........................................................ 42

4 | plastics business • winter 2014

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director’s letter

Just One More Rep I made up my mind that it was time to get serious about my level of fitness. To control stress levels, provide relief from the pressures of work and to maintain a positive outlook on my daily activities, I have found that regular exercise is important in my life. As I am sure that many reading this can understand, when life happens, even the best laid plans and intentions of meeting goals, maintaining a healthy lifestyle and keeping balance can be lost in the turmoil of running a business. For several weeks, I struggled with getting back into the habit of exercising regularly. It’s much easier to regress than it is to progress when it comes to being physically fit. Nearing the end of one of my runs, I decided to push my running pace beyond the range of comfort, causing my heart rate to significantly increase, my lungs to crave substantially more air, my legs to ache from the pain of lactic acid build-up and my mind to switch from positive imaging to focusing on all the negative inputs being generated from the rest of my body. As I tried to fight the internal will to stop my workout, I began to realize how blessed I was to be able to experience this type of pain in the first place. I began to focus on the fact that I had the ability to experience the pain of a workout; I had the ability to go for a run; the ability to exercise; the ability to start or stop when I wanted. What I realized was that I would rather feel pain than nothing at all! From this vantage point, I was able to block out some of the discomfort and run a little farther. All of us – owners, presidents, general managers, human resource directors, engineering managers, plant managers, operators, folk lift drivers, material handlers, administrative experts – have the desire to contribute to our organizations, to out-perform expectations, to impress the boss or to meet and exceed customer demands. In the natural course of doing our jobs and having to constantly deal with very difficult circumstances, our business brains take in a great deal of negative stimuli from customers, peers and those in leadership positions. We hear complaints, we grow frustrated in our own performance and we don’t live up to the expectations of our own subconscious mind as it requires absolute perfection – we simply feel the pain. As with the pain of my daily runs, all of these negative stimuli cause our minds to play tricks, sending wrong messages to our brains in the attempt to persuade us to stop – to do one less repetition of something that might be really good for our company. I have found this lesson to be true in most things in life. Today, I am not as quick to take things for granted. Without realizing our own blessings, it’s easy to let the negatives overcome the positives. I make the effort to look for the positives in painful or uncomfortable situations. I feel fortunate because I have a job, I enjoy what I do and I have the opportunity to help people on a daily basis – this focus helps me to block the pain of any shortcomings. In fact, from this vantage point, it is much easier to do one more thing to help the business – to do one more thing to improve my leadership skills, to help an employee in need or to differentiate what we do from our competitors. In actuality, we all should feel fortunate to have the opportunity to be in difficult situations (Do we expand? Do we hire? Do we buy new technology? Do we enter into new markets? Do we rid ourselves of a difficult customers?) because the alternative of not having any difficult circumstance to address is much worse. The next time you are faced with difficulty and stress, remember that your opportunity is probably due to the fact that you’ve continued to do one more repetition and pushed to go a little bit farther than everyone else!

Troy Nix, Executive Director

6 | plastics business • winter 2014

Manufacturers Association for Plastics Processors, Inc. (MAPP) 7321 Shadeland Station Way, Suite 285 Indianapolis, IN 46256 phone 317.913.2440 • fax 317.913.2445 www.mappinc.com MAPP Board of Directors President Mike Walter, MET Plastics, Inc. Vice President Ben Harp, Polymer Conversions, Inc. Secretary Alan Rothenbuecher, ICE Miller LLP Bill Bartlett, First American Plastics/Quad, Inc. Tom Boyd, Blow Molded Specialties Norm Forest, Dymotek Molding Technologies Kelly Goodsel, Viking Plastics Matt Groleau, RJG, Inc. Bob Holbrook, Viking Plastics Ed Holland, M. Holland Company James Krause, Microplastics, Inc. Bob MacIntosh, Nicolet Plastics, Inc. Glenn Nowak, IQMS John Passanisi, PRD, Inc. Eric Paules, Crescent Industries Missy Rogers, Noble Plastics, Inc. Scott Titzer, Infinity CleanRoom Solutions Rick Walters, DeKalb Molded Plastics Roger Williams, Royer Corp.

Plastics Business

Strategies for Today’s Plastics Processors

Published by:

Peterson Publications, Inc. 2150 SW Westport Dr., Suite 101 Topeka, KS 66614 phone 785.271.5801 www.plasticsbusinessmag.com Editor in Chief Jeff Peterson

Advertising/Sales Janet Dunnichay

Managing Editor Dianna Brodine

Contributing Editors Jen Clark Melissa DeDonder

Art Director Eric J. Carter

Circulation Manager Brenda Schell


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profile

Fearless Manufacturing at Noble Plastics W

ith a passion for making things and a fearless approach to business, Missy and Scott Rogers are entrepreneurs in every sense of the word. They’re dedicated to the employees whose hard work translates into bottom-line success. They’re driven to discover new and better solutions for the customers who trust them to bring projects big and small to life. They’re relentless in the search for technologies and processes that allow their injection molding company to flourish and grow. And, they’re fun. From its inception, Grand Coteau, LA-based Noble Plastics was going to be different. The machinery salesman knew it when he arrived to set up the company’s first press and had to show Missy how to turn it on. A customer knew it when she found herself seated in a folding chair on the manufacturing floor with a front-row view of the first production run for the product she had designed. The employees knew it (once there were employees) when “Fostering a Creative Work Environment” was listed as one of only three Core Values for the company.

Scott and Missy Rogers, Noble Plastics

Today, Noble Plastics is entering its 14th year in business. The company has a cool story to tell, and no one could tell it better than Missy and Scott Rogers.

“We have a real comfort level with things that push limits.” Missy: We’re definitely different from the normal origin story! We’re both mechanical engineers and, in this part of the world, mechanical engineers tend to support the energy industry. I had worked on the refining side, but hadn’t been involved in plastics except for coatings and protection from the elements. Scott: My background wasn’t in plastics design, but I went to work for a company involved in oil field construction, and it was there that I designed my first plastic part. The part weighed 500 pounds, so I ended up designing the mold, too, and then I also had to participate in designing the equipment to run the part because you couldn’t buy a press to produce a part of that size. In the course of doing that, there were smaller components that were required, and that was when I started looking into injection molding as an opportunity for us personally.

interview by Dianna Brodine Missy: At that point, I was home starting our family. This interest and use of plastics in Scott’s career had taken place while I was out of the workforce, but I was looking to return to work, and manufacturing had lurked in the back of our heads. We were coming up with all sorts of things I could do, and while packing for one of Scott’s trips to follow up on a challenge that one of his plastics vendors had, it crystallized for us when Scott said, “I wouldn’t have to go if there was a decent plastics manufacturer here!”

8 | plastics business • winter 2014


profile

Scott: As a mechanical engineer, this process – from the part design to the machinery and the quality inspection – this is the whole curriculum for mechanical engineers. I was definitely bitten by the bug.

Missy: When he realized I didn’t have anything but a machine, a mold, a thermolator and a box of pellets, he took me to WalMart to buy a frying pan and a box of Tide so he could teach me to purge a barrel.

Missy: Our business analysis proved what we thought to be true. There were companies in Louisiana exploring specialty applications, but limited custom injection molders. Fourteen years later, we’re still out here on the geographical frontier. Because of our time in the energy field, we have a real comfort level with things that push limits, and that creates a sort of innovative and fearless feel. It felt right to start our own business.

Scott: And, we hadn’t even gotten our first machine installed on the floor when we found out our third child was on the way!

“The first machine showed up and at that point, no one in the company had ever laid their hands on an injection molding machine, let alone turned one on.” Missy: We entered the industry in the fall of 2000, and finding the first customer was easy because Scott’s company had parts being molded. We approached his employer to say we were thinking of starting a plastics company and asked if we could fulfill the contract. That made getting financing and deciding which machine to buy first fairly simple, because there was no speculation in it. Scott: Noble Plastics started out with Missy as the only employee, and I kept my day job. The first machine showed up and at that point, no one in the company had ever laid their hands on an injection molding machine, let alone turned one on. So, the equipment manufacturer’s rep came down from Strongsville, OH, to help with the installation, intending to be here for three days. The story is that after he found out what our level of knowledge was, he called back to the office and they gave him a week!

Missy: We were confident we weren’t wasting our money, but those early days were a challenge. At that point, even the salesmen for the machines were telling us, “You know no one starts a plastics company like this, right?” They wanted to make a sale, but still were warning us! At a time when business was contracting, people got very interested in the economies of distance, so we were in the right place at the right time. Scott: When the bottom fell out of the plastics industry, it allowed us to invest in machinery. Machine companies had new equipment sitting around, and we made good deals to get those machines on our floor. From that standpoint, the poor economy was an advantage to us.

“We’ve always had a very deliberate vision for parts that needed an engineering solution.” Missy: In the beginning, we went with what we knew by going after work primarily in the energy industry. We’ve always had a very deliberate vision for parts that needed an engineering solution. Today, we’re in consumer goods and retail, but our core business is in parts with highly engineered designs and critical performance requirements. Scott: We targeted products and industries that are harder to take overseas. In the case of some of the military production we do, it’s never going overseas – it can’t. That means we’re only competing with other domestic suppliers, and there are rigorous qualification standards that must be met. We also like customers who can benefit from the technology and engineering expertise we can bring to the table. Missy: Noble serves several industries with runs from smallvolume, new product start-ups to large-volume industrial and consumer goods. Our equipment ranges from 35 to 730 tons, and each cell is fully automated with Fanuc 6-axis robots. Our latest equipment purchase is an Arburg electric press, and we have plans to add two large presses later this year when Noble Plastics has added CNC machines, lathes and mills so employees could build end-of-arm tooling specific to the company’s applications. page 10 u

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profile t page 9 building renovations are complete. We have CNC machines, lathes and mills that were procured so we could build our own end-of-arm tooling, and all of our automation components are designed, programmed, spec’d and manufactured in-house. We also have monitoring systems at every manufacturing cell, using IQMS and eDart from RJG. A lot of our revenue is based in companies in the energy sector, but we have a wide range of products. We make cable tray components for off-shore oil rig use, marine rescue components and glue bottle tips so people can glue fake fingernails on their cats. It’s very big in Japan! Scott: Technology and automation have always been the keys to what we want to be when our company grows up. A lot of molders justify automation by calling it “cost removal.” We call it “uncertainty removal.” Plastic parts move! Every part has to be the same as every other part, and that’s what automation does for us. Automation can enhance a job, and for some jobs, automation is what makes them possible. Those are the best! Missy: We don’t want to be viewed as a low-cost provider. Instead, we want our customers to see us as a company that can help them with their problems. That’s the brand we’re endeavoring to build for the company.

Quality control is critical for many of the products created at Noble Plastics, and the company applies technology and automation to ensure that every part meets standards.

Scott: One of our customers is an entrepreneur who also is a mother. She came in for the commissioning of her first product, and she brought her dad with her. We got them some chairs to sit by the machine and watch as her product came off the press for the first time. Afterwards, her dad pulled us aside and told us she was more excited for that than she was for the birth of her kids! Missy: There is something really special about holding a product for the first time. It is like giving birth to a child, and to be able to share that with people and bring a solution into existence is a very rewarding way to spend your day.

“My favorite part of any project is sitting down at the beginning with a blank sheet of paper and something to draw with, because from that point, you can do anything.” Missy: For a long time, manufacturing was our sole focus. We hovered between 10-12 people, which was enough to staff multiple shifts running five days a week for the first seven years. The big change came seven years ago when Scott joined Noble full-time to form our design group. There now are two teams focused separately on product development and process development, and that added another 10 positions.

10 | plastics business • winter 2014

Scott: Our technical staff was spending time with design assistance, tool challenges, production consistency – whatever came in, we would work on it. What we found, however, is that we weren’t focusing on anything. Also, Noble started receiving more requests for product design, and that’s what I like to do. My favorite part of any project is sitting down at the beginning with a blank sheet of paper and something to draw with, because from that point, you can do anything.


profile

Missy: We expanded our staff and created a group that is responsible for product design – and not just injection molded product. We will write a proposal for anyone needing product design services. Scott: We have engineers and industrial designers on staff, and we take a holistic approach to the product design process. We get to know the customers, their needs and their customer targets so that we can design what’s best for the products. Sometimes, when manufacturers are involved in the design process, they’ll design products that are easy for them to make. The design group at Noble exists to design for the customer, not for our production floor. Missy: At the same time, we decided to create a transition team to bridge the gap between design and production. Process development and the commissioning of DOEs are hard to schedule in a rigid fashion. The team still is doing design work, but it’s process design. They’re solving the problems of production and process through the best possible engineered solutions. Scott: There are different entry points for our customers. They could start with an idea in their head, come into our design

group and then move into production. Some customers are really good at design, so they may consult with us on the manufacturability, but they bypass the design group and go right into the transition group for help with reviewing the tooling design, assessing the mold flow, developing inspection programs, etc. It’s made sense for us to separate the two functions, and the separation of product design from process design has brought in new business. Missy: We’re a 24/7 operation now with 30 employees, although a significant portion of our operation is lights out because of the automation we use. We are smaller-staffed than many companies in our revenue bracket because of our automation, but our staff is in general far more technical because of the number of engineers and degreed technicians we use.

“No one can feel disconnected by title or department when we’re having push broom races or a lean scavenger hunt.” Missy: I think we tend to have a work hard/play hard mentality that serves to push us through some of the newer challenges and page 12 u

www.plasticsbusinessmag.com | 11


profile t page 11 drives continuous improvement. We had both worked for very large companies – with both the good and the bad that comes with it – and we had worked for small, innovative consulting firms where we could do whatever we wanted to, but resources were limited. We cherry-picked our favorite elements from both environments to create our culture at Noble Plastics. Scott: We spend more time at work than we do awake at home, so we want to provide an atmosphere that is comfortable, while also giving us the tools we need to do our jobs. Nothing is more frustrating than knowing what to do and not having the tools to do it, but there are all kinds of tools – from software and computers to the coffee machine and coworkers. Missy: We had done an employee survey and asked people what they’d love to have at the facility. We got a great list. The employees asked for flower beds, so that when we look out the windows, we have a nice view. They asked for a gym, which is going in now. They wanted a nifty coffee maker that makes cappuccinos. As owners, we didn’t decide what was nice – we asked what our employees wanted to enhance their experiences. So, no, we do not have an Olympic-sized pool (which was on the list), but we

have expanded cooking facilities. We’re letting people bring their personalities into the office. In fact, we encourage it! Scott: It helps people to see that if they have an idea for something, we’re going to do it if it’s manageable. Missy: We make sure to have fun, too, and it’s essential to team building. No one can feel disconnected by title or department when we’re having push broom races or a lean scavenger hunt. The building of our culture has been very deliberate. Our employees understand that our success depends on the success of our customers and their products. Our commitment to deliver on promises and our tenacity at developing solutions to new obstacles is unmatched, and I hope that customers and employees choose us because we are honest, capable, pleasant to work with and deliver what we promise. Scott: The most important attribute we look for in new employees is passion for their profession and excitement about what they could do at Noble. That’s why we got into the plastics industry in the first place. I looked around at NPE and decided this was a really cool industry. n

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focus

Challenges for the Tooling Industry will Impact Processors

I

n October of 2013, Harbour Results, Inc. (HRI) and the Original Equipment Suppliers Association (OESA) collaborated on a study of automotive tooling. The initial goal for this benchmarking study was to analyze payment terms and sourcing practices within the industry, which are two very hot topics for tool suppliers. However, the study focus evolved into an analysis of the entire tooling value stream and was designed to provide insight into and understanding of the roles of each stakeholder: OEMs; Tier 1 and Tier 2 parts suppliers; and tool suppliers. The study’s objectives were to uncover the root cause of inefficiencies, waste and risks impacting the supply chain; identify best practices; and provide cost-saving opportunities to the entire industry. Nearly a year was spent on research for this study, and it included formal interviews with seven OEMs (data gathered from three additional OEMs was informal), nearly 50 Tier 1 and Tier 2 suppliers, more than 50 tooling suppliers and various industry experts. In addition to these interviews, OESA conducted a survey of part suppliers and tool suppliers. This survey was executed with support from other associations as well, including the Manufacturers Association for Plastics Processors (MAPP). The data was used both to supplement interview data and validate key findings. The final report totals nearly 500 pages of detailed analysis on the tooling industry with a 43-page Executive Summary.

by Laurie Harbour Harbour Results, Inc.

The Harbour team uncovered some very interesting facts that affect not only automotive suppliers purchasing tools, but also manufacturing suppliers in other industries that are purchasing dies and molds for their businesses. Given Harbour’s extensive work in plastics processing, we wanted to look more closely at this data and the effects on processors as they acquire molds in future years. The following are some of the key facts from the study.

Size of the market The HRI team spent many months gathering data on the number of tool shops in North America. Using several lists and recent visits to more than 120 shops in Canada and the US, HRI determined that the focus was to be on tool suppliers primarily supporting the automotive industry and with the size and capability to grow. Although focused on automotive tool suppliers, the research led HRI to study the entire industry. According to the Bureau of Labor Statistics, there are more than 5,000 shops in the US; however, this includes every small shop under $1 million in revenue that makes small details, heat treat, graining and parts for tooling. These shops do not have the strength and capability to grow with the automotive demand coming in the future. Therefore, these shops were excluded from the analysis, and focus was placed solely on mid-sized to large shops. Following are the key figures from the research on the size of the tooling industry: page 14 u

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.

www.plasticsbusinessmag.com | 13


focus t page 13 • HRI estimates there are 625 US tool suppliers and 125 Canadian shops focused primarily on the automotive industry. Many of them build tools for other industries, such as appliance and recreation, but these shops have a majority of their business in automotive – they make 80 percent of the primary critical tools in a vehicle. • The average size of the North American tooling supplier is between $15 and $18 million. Many in the industry believe there are a high number of large tool suppliers that are $50 million and above, but in fact there are only a handful of these large tooling suppliers (approximately 15 to 20). • This focused group of tool shops directly employs approximately 75,000 people (an average of 100 people per $15 million shop) and a total of 187,500 workers when the support shops are included. • Utilizing the 750 suppliers in North America and the average size of a shop, the industry capacity for the US and

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Canada is approximately $11.25 billion. Looking at data on exports from LCC (low-cost country) regions, there are few shops out of thousands that support the majority of exports to North America for automotive. Based on estimates, HRI believes there is approximately $0.5 to $1.5 billion in imports from LCC adding to the capacity. Not included in this number is the amount of tooling coming into North America from Europe, Japan and other non-LCC countries to support foreign OEMs with their production. This information is too difficult to gather and not available from the OEMs. • The average number of major tools per vehicle is between 2,000 and 3,000, depending on complexity of the vehicle. However, the total number of tools per vehicle, including powertrain, is closer to 7,000. Tools range in cost from $5,000 to $1 million. For example, a front fascia tool can range from $500,000 to $1 million for the injection mold alone. In addition, each assembly may require more than 35 tools to complete. • HRI estimates from interviews that the OEMs in North America spend approximately $9.25 billion on vendor tooling, on average for vehicles produced in North America. At 2012 vehicle volume levels, the average North American vendor tooling content per vehicle was $550. These facts about the industry are critical to understand before moving forward with the other findings of the study. The OEMs spend billions of dollars on vendor tooling for their vehicles, and their current battle is the ever-changing consumer. Growing product complexity and mass customization are all forcing more tools per vehicle (20 percent more than 10 years ago per vehicle), and costs are rising. This same phenomenon is happening in every industry of manufacturing. Whether it is appliances, medical equipment or devices, consumer goods or industrial products, the changing consumer wants to mass customize the product and have more features. Every industry is struggling with rising costs and the need for more capacity while trying to meet these consumer demands. What is the future demand for tooling in the automotive industry?

Tooling growth results in capacity issue It became critical to HRI to define the size of the vendor tooling industry in North America for today and forecast where it would be in five years. Chart A on page 16 reflects HRI’s analysis of the estimated size of the North American automotive tooling industry in 2012 to be $9.25 billion. This number represents tooling purchases for North American vehicle programs only. page 16 u


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eir product and have more features. Every industry is struggling with rising costs and the re capacity while they try to meet these consumer demands.

focus

he future demand for tooling in the automotive industry?

wth Results in Capacity Issue 14 the size of the vendor tooling industry in N.A. for today and forecast define itical to HRIttopage uld be in five years. The following chart reflects HRI’s analysis of the estimated size of the tive tooling in 2012 to bewith $9.25individual billion. This number bottompurchases line to the study research shows a $6 billion Basedindustry upon discussions tool shopsrepresents and Thetooling cle programs only. proprietary capacity surveys done on the industry, HRI then capacity gap by 2018. Further, HRI believe that this number

defined the actual capacity in the market for tools in North is conservative and could be higher if current demand for new discussions withtoindividual tool shops$11.25 and proprietary surveysvehicles done on the continues. America be approximately billion, or capacity a 79 percent actualUtilizing capacity many in the market N.A. tois be approximately $11.25 I then defined therate. utilization sourcesfor oftools data,in HRI 79 percent utilization rate. Utilizing manytool sources HRIbillion is forecasting a growth total the main question to be answered is As a result of thisingrowth, forecasting a growth in total OEM spendoftodata, $15.20 to $15.20 billion by 2018, or a 64 percent increase over the current spend. end in by N.A. where will this additional capacity come from? Some believe 2018, or a 64 percent increase over the current spend. the simple answer is increased sourcing to LCCs. However, in looking at China where a support infrastructure is in place, there are several evolving indicators that lead to a conclusion that this is not a viable option. HRI has spent a great deal of time in the past three years in Chinese tool suppliers (almost 60 facilities). Additionally, we have studied the economic data in this region. As Chart C indicates, HRI believes that there are several factors that will make LCCs, and China in particular, less of an option to meet this growing tooling demand in North America and around the globe.

2013 Harbour Results, Inc.

Chart A November 7, 2013

HRI’s 2018 forecast uses 2012 as a baseline for complexity and tooling cost per launch. The 2018 forecasted value is based on the number of vehicle launches planned in North America for that year (source: LMC Automotive).

2

Chart C

All inThe all,2018 the factors working against China seem to be higher HRI’s 2018 forecast uses 2012 as a baseline for complexity and tooling cost per launch. forecasted valuevalidates is based on the of vehicle launches in North America for thatinyear than those favor of moving production or tool manufacturing Chart B further thenumber growth of tooling byplanned analyzing (source: LMC Automotive). the foreign OEMs’ growth in North America. This utilizes the to the China market. Is Europe a region that could fill the gap for tooling? The short answer is no. In fact, number of launches each yearthe (source: LMC The chart below further validates growth of toolingAutomotive) by analyzing theand foreign capacity OEMs’ growth in N.A. the number of launches each year for (source: LMC Automotive) and plots theof percentage of part the growth in North America is due to the European plotsThis theutilizes percentage of tooling available sourcing by OEMs. tooling available for sourcing by OEMs. Using each company’s number of launches and the data shared Using each company’s number of launches and the data shared companies moving their tool sourcing to the region in which with HRI on the planned percentage of tooling sourced locally, HRI estimated this growth through 2018. arenew building withThe HRI onshows the planned percentage of tooling locally, chart the substantial growth, particularly for sourced European OEMs that arethey relatively to this vehicles. Many European companies have and have gettingthrough the majority of their critical tooling in Europe. HRIcountry estimated thisbeen growth 2018. The chart shows the said that North America is becoming a low-cost country to substantial growth, particularly for European OEMs that are them, and they are asking their German tool suppliers to set up shop in North America as a potential solution to the growing relatively newofto this Available country.for Planned Vehicle Launches Proportion Tooling problem. There really are no other regions of the world that could help close the capacity gap for vendor tooling because the infrastructure is just not there.

What does it mean to the plastics industry? Although much of the research and discussion has been driven specifically to the automotive industry and its tool suppliers, the message is a significant one to those processors that are buying tooling to support other industries as well. The auto industry tends to be a microcosm of a larger issue; in this case, it’s further tightening of pricing, tied to a capacity shortage of tool suppliers. Recently, Harbour spoke to a group of smaller Chart B mold builders that were not necessarily tied to the automotive industry. Theythat indicated to Harbour that they have plenty The bottom line to the study research shows a $6 billion capacity gap by 2018. Further, HRI believe

number is conservative and could be higher if current demand for new vehicles continues. 16 | this plastics business • winter 2014


focus

of capacity and are ready to be the solution to the industry’s issues. However, a survey of their customers shows that those tool suppliers are not price competitive in today’s market, particularly when competing with China and even while prices are rising. The business owners and leaders running plastics processing businesses today need to share more information and data with their local tool suppliers and get them engaged with associations like the American Mold Builders Association (AMBA) and Manufacturing Association of Plastics Processors (MAPP) in order to support them in their efforts to improve their competitiveness. Too often, processors do not provide the necessary feedback to tool suppliers that is needed to convince them they need to work harder at improving their businesses.

Takeaways for plastics processors Processors need to be cautious in how they leverage current tool suppliers against suppliers in China. HRI has seen many

North American tool suppliers let their customers send tooling to China, oftentimes hoping lessons will be learned. This has left some processors in a difficult situation. It is critical for processors to work harder to develop relationships with their tool suppliers. With capacity constraints throughout the tooling industry in North America, many suppliers are stepping forward to grow their businesses and capture market share in new industries. If relationships are not solid, those suppliers may find new and better customers, and processors may find themselves struggling to locate available capacity. Processors need to be more diligent about assessing their tool suppliers. It is customary to assess component suppliers, but infrequently do tool shops get assessed and/or audited by their customers. Processors should use these audits to assist the tool supplier in providing better service and product to the processors’ businesses. page 18 u

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focus t page 17 Tool suppliers have become quoting factories, driving tremendous transactional waste. Processors can do their part by not contributing to this quoting machine. Respect the tooling suppliers’ time. Plastics processors can drive improvement at the tool supplier if they become an “easy” team to work with. “Easy” does not mean that the processor pays more, but it does mean that the processor is easy to communicate with and to work with. Collaborate with tool suppliers and greater efficiency will be returned. The easiest way to gain efficiency at a tool supplier is by having visibility into the business load and schedule for an extended period of time. If processors can collaborate and share their strategic plans with their tool suppliers, the tool suppliers will better be able to plan and manage their workflows. The processors that have had the most successes have forged high-level relationships with their tool suppliers. They have become ‘clientele’ to a handful of shops and consistently

outsource their needs to that shop. As a result, they are getting more value from that shop. Some processors have considered bringing tool build in-house, but they have struggled to find talent. In the end, most have chosen not to expend resources into tool building, because they realize it is not their core competency. This is why collaboration is so critical. It also is critical to only refer tool suppliers selectively; only the closest strategic partners should have access to a processor’s best shops. This is difficult, particularly when in an association with other great processors, but the best resources must be protected. Tool suppliers from some LCCs will fill the capacity gap identified in the North American automotive industry and other industries because manufacturers will not stop launching new products. It is critical for processors and tool suppliers to work together to capitalize on this opportunity. Why not have North America reclaim this effort by supporting North American plastics business growth? n

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18 | plastics business • winter 2014


association

A Letter from Mike Walter, MAPP Board President Maximizing Your MAPP ROI This issue of Plastics Business includes a summary of the results of MAPP’s Economic Survey. Did your organization participate? If so, odds are your business is doing well and you’re optimistic about 2014, finding business conditions to be good or excellent. If your organization didn’t participate, is your business outlook more pessimistic, finding business conditions to only be acceptable or worse? What’s setting the successful, optimistic processors apart? There’s business out there for the taking, so why isn’t the survey reflecting universal optimism? I would bet the successful businesses have developed a culture with active participants that strive for success, aggressively seeking out and capitalizing on business opportunities, while the “marginal” businesses are on standby, waiting to be courted with opportunities – and they’re probably getting by with this strategy. The same can be said about the value received from MAPP membership. Prior to joining the association, you may have received a “sales pitch” from Executive Director Troy Nix demonstrating how MAPP vendor discounts easily can offset the cost of membership dues. That’s true! The vendor discounts do offset the dues, making the decision to join the association a no-brainer. Even if you are content to observe from the sidelines, watching MAPP do its thing, you will see a positive ROI. Nevertheless, MAPP members who successfully leverage their association to receive a high ROI aren’t just watching and waiting; they’re active participants who embrace the concept of members helping members. They’re sharing best practices with other members, learning about business conditions and opportunities, helping to get members out of a jam and receiving the same in return when the need arises. These members recognize that you get out of your membership what you put into it. MAPP originally was founded by a group of processors that understood the concept of strength in numbers. They realized that their chance of individual successes would be enhanced if they worked together to solve problems. While MAPP has grown and changed considerably over the years, this foundation of partnership remains in place. It is what drives the success of MAPP and is what sets us apart from other associations. MAPP isn’t just another association – this is your association. So, what are you doing to maximize the ROI of your association?

20 | plastics business • winter 2014

MAPP Shipping Program Company Celebrates its 25th Anniversary PartnerShip, the company that manages the MAPP shipping program, is celebrating its 25th anniversary this year. PartnerShip was founded by the non-profit National Association of College Stores (NACS) in 1989 to help college stores with all of their small package and LTL freight shipping needs. Twenty-five years later, it now is a leading shipping solutions provider to small- and medium-sized businesses across North America. Today, PartnerShip helps over 17,000 businesses across over 120 industries and trade groups manage their small package, LTL freight, tradeshow and specialized shipping. If your company does any amount of shipping – big or small – be sure to take advantage of this MAPP member benefit and the broad set of services, the significant discounts and the logistical expertise that PartnerShip brings through the MAPP shipping program. For more information or to enroll, visit www. PartnerShip.com/12MAPP. This program is free, with no obligations and no minimum shipping requirements. Call PartnerShip directly at 800.599.2902 with questions or email sales@PartnerShip.com.

Upcoming Member Webinars MAPP and Stout Risius Ross Advisors will be presenting a webinar on the merger and acquisition (M&A) and financing markets, as well as facilitating a discussion of the key factors that drive value in middle market plastics processors on Feb. 27, 2014, at 11 a.m. EST. The presentation will focus on current M&A trends across all sectors of the plastics industry; recent representative M&A transactions; valuation levels in the M&A market (by end-user industry segments); overall financing conditions for plastics processors in the middle-market; and the factors that drive the value of a plastics processor, such that one company may command a higher value relative to another. As the economy and industry conditions continue to improve, it is important for all participants, whether


buyers, sellers or long-term operators, to be current on M&A and financing conditions, as well as relative valuation levels among plastics processors. This 60-minute webinar is free for members. Register online at www.mappinc.com for this or any of the upcoming webinars. The calendar is updated frequently, so check back often! Also, make sure to register for the MeltFlipper and Scientific Runner Design webinar presented by Beaumont Technologies on Feb. 21, 2014, at 11 a.m. EST.

Save the Date for the 2014 Benchmarking Conference Mark your calendars for the 2014 Benchmarking Conference taking place at the JW Marriott in Indianapolis, IN, Oct. 1617, 2014. Jack Daly is back by popular demand as the keynote speaker! This year’s conference focus will be Leadership. Stay tuned to the MAPP website and your inbox for more details as

they emerge. The MAPP staff is looking forward to another record-breaking year! In addition, videos from the 2013 Benchmarking Conference now are available. To order, call the MAPP office at 317.913.2440.

Annual Wage and Salary Survey The MAPP office will launch the annual Wage and Salary Survey in the 2nd quarter of 2014. This popular report features comprehensive analysis of well over 50 different job classifications from plastics manufacturing companies that serve a variety of end-use markets. These job classifications represent well over 16,500 hourly and salaried employees. Last year’s report was completed by more than 200 participants located in 30 states across the US. It is one of the very few reports of its kind, completely devoted to the polymer manufacturing industry, and it has grown by 20 percent in company participation in just two years. Look for the launch date announcement in the spring. n

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www.plasticsbusinessmag.com | 21


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trends MAPP Business Forecast Survey Shows Strong 12-Month Outlook by Troy Nix, MAPP

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early nine out of 10 plastics processing executives are expecting their 2014 sales trends to increase over the next twelve months, according to MAPP’s most recent survey on the state of industry’s economic conditions. Up 13 percentage points from last year, this 12-month outlook is the strongest ever recorded in any of MAPP’s previously published business forecast surveys. A mere two percent of the 150 executives who provided input during the survey process feel that their businesses will shrink, and 11 percent believe sales will be flat for 2014. Fueling the optimism for expansion, plastics processing executives highlighted their expectations for the highest growth markets, which included the automotive, medical and consumer goods sectors. Automotive sector optimism was supported by the development of new automotive platforms and an anticipated overall increase in vehicle production volumes to near 16.5 million units. Many expressed both recent and substantial increases in quoting volumes and, in general, possessed an overall sentiment that the automotive marketplace still is recovering from prerecession levels and has a great deal of pent-up demand. The more surprising sector highlighted by executives was the consumer goods segment. Predominate reasons for growth in this sector included feelings that the overall economy is improving and that business is coming back to the US from overseas. Many cited new tooling orders, recently awarded business and a trend in steady growth as keys to their optimistic view points. The data points compiled on the continuing fight to retain and regain business from overseas competitors were probably the most dramatic of all survey findings. Documented as the largest increase since MAPP began recording information on gains or losses of business to foreign businesses, 34 percent of this survey’s respondents indicated that they acquired work from overseas suppliers in the fourth quarter of 2013, which represents a twenty-four point increase from last year’s survey. In addition, survey results also reveal that fewer American processors (four percent in total) lost business to their overseas counterparts, while two percent indicated losing work because customers actually relocated operations outside of the US. Although the overall outlook for growth and sales expansion is very optimistic for 2014, plastics manufacturing executives continue to face a wide variety of both external and internal challenges. The availability of a skilled and able-bodied workforce was identified as the top issue facing the vast majority of all business leaders. The absence of technically inclined

people, combined with the challenges in finding individuals who want to work, is an ever-present obstacle to improving business operations. Leading executives working to resolve this issue now ensure dedicated resources and planning efforts are included in their annual business strategies. Second on the list of top challenges for processors in 2014 is a focus on sales revenue, with a bit of a twist. As most businesses deal with the need for diversity and new revenue sources, the need to manage and control rapid growth is the new processing challenge that has surfaced. About half of the processors who listed sales revenue as a primary concern now are faced with a great number of business opportunities and, in some cases, more opportunities that they actually can handle. Those caught in this uptick in the new business sales cycle are in need of increased production capacity, more people, better resource planning tools, more facility space and more cash. Although somewhat counterintuitive, rapid sales growth oftentimes can lead to catastrophic business failure more quickly than a slow deterioration of the top line. Included in the list of the top challenges identified by processors is the need for operational improvements, which encompassed the need to better contain and control costs, the need for more aggressive waste reduction activities and the need to more aggressively integrate and adopt continuous improvement efforts to improve efficiencies. Rounding out the list were increased government regulations and the impact those policies have on conducting business. This category contained concerns about the Affordable Care Act, increased taxation and the regulatory environment as a whole. n MAPP’s full business forecast report contains information on 4th quarter performance and 2014 forecast data on employment levels, sales trends, procurement of production tooling, profitability trends and more. To obtain a copy of this report, visit the Publications tab at www.mappinc.com.

www.plasticsbusinessmag.com | 23


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strategies

Benefits and Burdens of the Domestic Production Activities Deduction

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nacted in 2004, the Domestic Production Activities Deduction (DPAD)1 is generally nine percent (9%) of a taxpayer’s qualified production activities income (QPAI or qualifying income) for the tax year.2 The DPAD is designed to be the economic equivalent of a three percent (3%) reduction in tax rate on qualifying activities. This article will focus on how the DPAD applies to the various revenue streams of plastics processors, addressing qualification requirements of sales related to parts and molds, as well as determining which party is eligible for the deduction in instances of multiple parties’ involvement in the same economic activities.

by Michael J. Devereux II, CPA Mueller Prost PC

Michael J. Devereux II, CPA, is Mueller Prost PC’s director of manufacturing and distribution services. His primary focus is on tax incentives available to manufacturers. Mueller Prost’s Tax Incentives Group is nationally recognized and has assisted hundreds of companies in the manufacturing sector to identify and utilize these incentives. Mueller Prost PC is a member of MAPP and offers MAPP members three hours of complimentary tax and accounting advice. For more information, call 314.862.2070 or email mdevereux@muellerprost.com.

Basics of the deduction Qualifying income is equal to the taxpayer’s domestic production gross receipts (DPGR or qualifying sales), net of allocable expenditures. Qualifying sales are those sales from the manufacture, production, growth or extraction of qualifying production property in whole or in significant part by the taxpayer in the United States (US). In addition, the DPAD cannot be greater than that taxpayer’s taxable income (or adjusted gross income) or 50 percent of the W-2 wages paid related to the activities giving rise to such deduction. Most US manufacturers engage in qualifying activities. That said, taxpayers should not assume that all net income is qualifying income. For a taxpayer with qualifying activities, the following steps should be taken to compute its DPAD: 1. Determine the amount of qualifying sales (domestic production gross receipts). 2. Net allocable expenses against qualifying sales to determine qualifying income (qualified production activities income). 3. Multiply qualifying income by nine percent (9%). 4. Determine the taxable income (or adjusted gross income) and 50 percent of W-2 limitations. 5. The DPAD equals the smallest of nine percent (9%) of qualifying income, nine percent (9%) of taxable income or 50 percent of the W-2 wages paid related to the activities giving rise to the DPAD.

Considering the various revenue streams of a plastics processor Taxpayers must determine whether sales are qualifying on an item-by-item basis. The term “item” means the property held for sale by the taxpayer in the normal course of business. Therefore, plastics processors must first determine the “item” being sold. Taxpayers must consider the facts and circumstances in order to determine their item(s). Some considerations include the following: 1. This provision of the code goes by many names, including, but not limited to, the Code Section 199 deduction, the manufacturers’ deduction and the US production deduction. 2. The deduction was phased in over time with the deduction equal to three percent (3%) of QPAI in tax years beginning in 2005 or 2006; six percent (6%) of QPAI in tax years beginning in 2007, 2008 or 2009; and nine percent (9%) of QPAI in tax years beginning in 2010 and thereafter.

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Plastics processors must look to the relationships with both customers and vendors to determine whether another party has the benefits and burdens of ownership. 1. Does the taxpayer sell plastics parts only? 2. If the taxpayer is selling the production mold to the customer, is the mold sold as part of its sale of plastic parts or is the molds held for sale as a separate item? 3. Does the taxpayer provide services for additional consideration that would be determined apart from the sales of goods? 4. If the mold is a separate item (product), was the mold manufactured “by the taxpayer?” The answers to these questions may determine which sales are qualifying domestic production gross receipts and which are not. Taxpayers must keep books and records capable of determining which items are qualifying sales.

Multiple parties involved in the same economic activity IRS treasury regulations provide that only one party may claim the DPAD with respect to any qualifying activity performed in connection with the same qualifying production property.3 That is, the item must be manufactured (1) by the taxpayer (2) in whole or in significant part within the US. This does not mean that multiple parties cannot have qualifying income for different stages in the economic activity. Rather, meeting these two requirements allows taxpayers to claim the DPAD for their stage within the overall economic activity. If one taxpayer performs a qualifying activity pursuant to a contract with another party, then only the taxpayer who has the benefits and burdens of ownership of the qualifying production property is treated as engaging in qualifying activity.4 Determination of which party has the benefits and burdens of ownership is based upon the facts and circumstances, and taxpayers should consider which party has the following: the risk of loss, title of the work in process (WIP), control over 3. Treasury Regulation §1.199-3(f)(1) 4. Treasury Regulation §1.199-3(f)(1)

the production process, liability with respect to “make good” contractual provisions and an opportunity to benefit financially from increased efficiencies in the production process. An item is treated as manufactured in whole or in significant part by the taxpayer if the manufacturing activity performed by the taxpayer is substantial in nature, taking into account all of the facts and circumstances, including the relative value (i.e., cost) added by the taxpayer.5 Taxpayers looking to determine whether the manufacturing activities are substantial in nature with respect to an item in a more objective manner may rely upon the safe harbor provided in the Treasury Regulations. If the direct labor and overhead added by the taxpayer account for 20 percent or more of the taxpayer’s cost of goods sold related to the item, the taxpayer is deemed to have manufactured the item in significant part.6 Plastics processors must look to the relationships with both customers and vendors to determine whether another party has the benefits and burdens of ownership. For instance, an original equipment manufacturer (OEM) may contract with a plastic injection molder for the production of a plastic part. The plastic injection molder may contract with a third-party tool maker for the production of the mold used to produce the part. In this common set of facts, which parties are entitled to the DPAD and for which items? Again, taxpayers must look to the facts and circumstances in order to determine whether each item is manufactured by the taxpayer in whole or in significant part. Some considerations include the following: • Is the mold a product held for sale to the OEM once the processor meets functional specifications (e.g., making the mold an item or component thereof), or does the processor retain ownership of the mold that is used in the production of the plastic parts, thereby making the mold a cost allocable to the plastic parts? • If the mold is sold to the OEM, does the contract between the OEM and the processor bundle the mold and parts into one item, or may the OEM purchase the mold in a separate transaction and, subsequently, be free to use a different processor to produce the parts? • If the mold is a separate “item” and a third-party toolmaker manufacturers the production mold to the processor’s specifications, does the third-party tool maker or the plastics processor have the benefits and burdens of ownership during the manufacturing process of the mold?

5. Treasury Regulation §1.199-3(g)(2) 6. Treasury Regulation §1.199-3(g)(3)

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strategies t page 27 • If the third-party tool maker is determined to have the benefits and burdens of ownership during the manufacturing of the production mold, does the plastics processor’s direct labor and overhead account for at least 20 percent of all the costs allocable to the mold? In most instances, the plastics processor will have the benefits and burdens of ownership related to the manufacturing of the plastic parts. Generally, plastics processors can benefit significantly from reducing cycle time, scrap or press downtime.

Step 3: Economic Risks • Is the taxpayer primarily liable under the “make good” provisions of the contract (for example, the warranty, quality of work, spoilage, overconsumption or indemnification provisions)? • Does the taxpayer provide more than 50 percent, based on cost, of the raw materials and components used to produce the property? • Does the taxpayer have the greater opportunity for profit increase or decrease from production efficiencies and fluctuations in the cost of labor and factory overhead?

Clearly, if the plastics processor manufacturers its own molds, it has the benefits and burdens of ownership during its manufacturing process. However, processors using third-party toolmakers will need to examine their contracts to determine which party has the benefits and burdens of ownership or if their direct labor and overhead account for at least 20 percent of the cost of the molds to determine whether the mold may be treated as qualified production property.

If the taxpayer answers “yes” to two of the answers in Step 3, the taxpayer has the benefits and burdens of ownership during the manufacturing activity.

IRS issues directives helping taxpayers determine benefits and burdens of ownership In order to reduce ambiguity in contract manufacturing arrangements, the IRS has issued three directives to help taxpayers determine which party has the benefits and burden of ownership during the manufacturing of an item.

The third directive clarifies the second directive related to taxpayers already under IRS examination and the removal of an attestation provision of the agreement with the counterparty suggested in the second directive.

The first directive identified three steps to determine which party has the benefits and burdens of ownership. Step 1: Contract Terms • Does the taxpayer have title to the work-in-progress (WIP)? • Does the taxpayer have risk of loss over the WIP? • Is the taxpayer primarily responsible for insuring the WIP? Step 2: Production Activities • Does the taxpayer develop the qualifying activity process? • Does the taxpayer exercise oversight and direction over the employees engaged in the qualifying activity? • Does the taxpayer conduct more than 50 percent of the quality control tests over the WIP while the qualifying activity was occurring? If the taxpayer answers “yes” to two answers in each step, the taxpayer has the benefits and burdens of ownership during the manufacturing activity. If not, taxpayers must proceed to Step 3.

28 | plastics business • winter 2014

In superseding the first directive, the second directive provides that both the taxpayer and the counterparty agree at the outset of the manufacturing activity which party has the benefits and burdens of ownership.

The final directive makes clear that if the parties have not agreed, it should not be presumed the taxpayer does not have the benefits and burdens of ownership. Rather, the IRS must examine the facts and circumstances to determine which entity has the benefits and burdens of ownership for purposes of the DPAD. Author’s Observation: While the first directive was superseded, the questions identified in each step are helpful to taxpayers in determining whether they have the benefits and burdens of ownership during the manufacturing process, based upon the relevant facts and circumstances.

Conclusion The DPAD is an extremely beneficial provision of the internal revenue code for taxpayers in the plastics manufacturing industry. Careful consideration of the requirements and questions posed in this article will help taxpayers ensure they are calculating the proper amount of DPAD, as well as help establish procedures that substantiate such positions in the event of an IRS examination. n


industry

MAPP BenchMArking conference ToPic

North American Plastics Industry Study Reveals Favorable Trends Impacting North American Processors

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ow time flies. It wasn’t too long ago that the plastics industry in North America was reeling. Plante Moran estimates that the Great Recession led to the failure of 1,000 injection molders alone. With the resurgence of manufacturing in North America in the past few years, the plastics industry has recovered quite well, as validated by the latest collection of data from the North American Plastics Industry Study (NAPIS). These conditions are creating opportunities for companies to expand into new geographic markets and technologies. But, can processors stay ahead of their thriving competitors? Do they have truly unique manufacturing skills? And, if the sale of the company is being considered, how ready is it for the beauty contest to attract top dollar? Before this article sheds light on these questions, let’s take a look at where the industry stands today by looking at some of the factors driving favorable company performance. As a frame of reference, since 1995, Plante Moran has led the NAPIS, which serves to gather and analyze the most empirical data collected in the plastics processing industry in North America. This year, 84 companies representing 131 facilities and $3 billion in sales responded to the survey. The majority of respondents were US-based, with some representation from Canada and Mexico.

by Ted Morgan Plante Moran

The following graph shows year-over-year adjustments to productivity as measured by value-add per employee, equipment utilization percentage and gross profit margins for the last 10 years. Cumulative productivity change Cumulative GP change Cumulative utilization change

Ted Morgan is a senior manager at Plante Moran and co-leads the firm’s plastics industry team. Morgan has over 15 years of industry experience and has spent most of his career working for plastics processors in various capacities. Process experience includes in injection molding, blow molding and compression molding. His current role focuses on providing strategic and transactional services to many of the firm’s 200+ plastics clients.

Press utilization and workforce productivity are at or near 10-year highs. Profits also are at historically high levels (although Plante Moran has seen a drop in the past two years, which we attribute to a sharp increase in product launches). In addition, the number of “successful companies” has doubled. The term “successful company,” for purposes of this study, refers to any company that exceeds a 10 percent return on sales (before interest and taxes – adjusted for owner compensation), return on assets

30 | plastics business • winter 2014


industry

in excess of 15 percent and sales growth greater than five percent. In most years, fewer than eight percent of the survey respondents meet this criteria; however, this year, 16 percent of the respondents met this criteria. While the majority of the industry appears to be performing favorably as compared to recent years, this does not mean that all companies are thriving as roughly 25 percent of the study population lost ground with respect to EBITDA. For those companies experiencing favorable company performance, Plante Moran offers commentary on key drivers supporting their recent success.

weak companies routinely lowball quotes to keep the presses running, the reduction of available capacity has brought pricing discipline to the industry. Interestingly, it appears the growth is strategic with a modest reduction in average complexity levels, meaning some low-volume customers were priced out of the company.

Higher productivity

Growth is required for enhancements to enterprise value. Profitability without growth is a slow death. Eventually, the skills that create the profits will commoditize and the business will lose its profitability, as well as growth. However, growth also is chaotic and exciting. Uncontrolled growth leads to bloated indirect staff that is only temporarily necessary, but often become permanent. Companies with controlled growth were normally the most profitable. However, in the current year, the typical company experienced growth in sales from seven percent to over 20 percent. Median sales growth was

Labor productivity, as meaCumulative productivity change sured by value-add (sales less material and outside processing) divided by total fulltime equivalents, significantly jumped in 2012. As we all learned, during the depth of the recession, companies were forced to figure out how to do more with less. It appears that many processors have retained this skill set post-recession. The industry as a whole also is getting into a rhythm operationally with the continued sales growth.

Higher profits

The two largest cost drivers Cumulative GP change for plastics processors are resin and labor. Control these two items and profits are almost certain to come. Resin pricing during the past 12-18 months has had only modest increases when compared to recent years. In addition, a higher percentage of plastics processors are able to pass resin cost increases to customers. Regarding labor, as suggested above, the productivity data suggests that plastics processors continue to do more with less people (and subsequently, have been able to manage their labor costs).

Other factors contributing to higher company performance includes sales growth and turnover:

Sales growth

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Higher utilization

Press utilization increased for the third straight year. The top quartile is in excess of 50 percent utilization for all presses, based on a 24/7 basis. While press utilization does not correlate with profitability, as many

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industry strategies t page 31 11.5 percent. The growth appears to have allowed processors to be more discerning with customer contracts as median manufacturing complexity continues to decrease from 2010 (meaning less molds/resins in processors’ production mix). While most processors in the industry welcome the rebound in sales, Plante Moran would expect current sales growth rates to be tempered in the medium- to long-term. This still is a cyclical industry, and we will see softness in demand once again.

Turnover

Personnel turnover is hovering at a very nice level of 22.8 percent, which is surprisingly low considering the demand for top talent. Part of the reason for the low turnover has to do with both increased wages and the greater use of automation. The ability to manage a complex environment is much easier (and productive) with a skilled and stable workforce. However, the continued slow recovery of the housing market is limiting employee mobility, which in turn limits the availability of skilled employees and also restricts employee turnover. Expect higher employee turnover when the value of homes recovers. As an industry, we should be proud of our recovery. But… let’s be honest. Processors think highly of themselves. When Plante Moran asks companies to rate themselves on the uniqueness of their manufacturing practices, product and design capability, and competitive position within the industry, the average is a six or

seven on a 10 point scale. Theoretically, the average should be a five. However, the inflated value probably is due to ignorance of the competition and the market versus hubris of the respondent. Customers may have greater perspective of the differences between competitors than the companies involved do – a scary proposition. The graphs below highlight some of Plante Moran’s findings on this topic from the latest study. A key takeaway from this year’s study is for successful companies not to lose sight that they are one of many that are doing well. For struggling companies, it’s critical to identify and address the organization’s pitfalls – and quickly. The window of time is closing since much of the competition is thriving. In conclusion, successful companies have a strong value proposition and often support their value proposition with quoting discipline. Companies that misfire often have high manufacturing complexity (number of presses, molds and resins to monitor and schedule) and misaligned organizational structures. An organization’s enterprise value can be impacted today by taking a holistic approach to looking at the business, surrounding the business with talent that can keep up with today’s pace of change and becoming an adaptive and innovative enterprise. n

About the NAPIS

Participating in the North American Plastics Industry Study and the benchmarking that ensues allows processors to be brutally honest about their competitive differentiation. There is no charge for participating in the study. In return for participating, processors receive an 80+ page detailed report which communicates the results of the study and offers Plante Moran’s related commentary on many of the results. The report is “board presentation” ready and is divided into a few key sections to provide industry and benchmarking analytics and a report card that grades the participating company against its peers. For more information about the Plante Moran survey and to download a complimentary copy of the 2013 Survey Report, which includes additional perspectives on the industry, please visit at www.plantemoran.com/industries/plastics.

32 | plastics business • winter 2014


{On the mark.} Get the North American Plastics Industry Survey Report at plastics.plantemoran.com. With the most empirical data on what drives profitability and performance in the molding industry, our plastics industry team offers guidance you can depend on. Helping you hit your targets with top quality advice that will keep your business rolling forward is Contact: Jeff Mengel Leader, Plastics Industry Team 312.602.3515 jeff.mengel@plantemoran.com Ted Morgan Co-Leader, Plastics Industry Team 248.223.3575 ted.morgan@plantemoran.com plantemoran.com

a higher return on experience.


production

The View from 30 Feet:

State of Alabama Recruits Manufacturing by Jen Clark

Business gurus often talk about the view from 30,000 feet – the big picture that provides a look at overall operations. Perhaps, however, the focus should be on the view from 30 feet – a close-up of specific processes and procedures that make an impact now. Google the term “auto industry” and the search engine returns a slew of Detroit-related articles detailing the ups and downs of one of America’s most storied industries. Detroit, after all, is home to the “Big Three” automobile manufacturers – General Motors, Ford and Chrysler. But one economic development group aims to challenge the notion that the epicenter of the American auto industry is in Detroit. The Economic Development Partnership of Alabama (EDPA) has led efforts to market its state as an automotive and aerospace leader, while also working to attract investment in virtually every industry sector. Since 1997, more than 6.3 million cars and light trucks have been produced in Alabama, which is home to vehicle assembly plants for Mercedes-Benz, Honda and Hyundai. It also is home to a growing automotive supplier network serving OEMs in Alabama and neighboring states.

executive vice president, explained that EDPA began by looking at moldmakers in the Windsor, Ontario-area and in Michigan that might already be doing business in the southeast region of the US and have the capability and size to potentially make an investment in the region. The recruiting process begins with meetings to understand the support that the companies would need, especially in terms of workforce training and education programs.

“We have the presence of German, Japanese and Korean manufacturers and have moved from no production 20 years ago to some 915,000 vehicles last year,” said Bill Taylor, EDPA’s president. We came to realize, as the industry has matured in Alabama, there was a need for additional businesses to be present in the state to help support and supply services to the OEM.”

The companies then are invited to visit Alabama “so they can get a better picture of the auto industry here,” Sewell said. We show them there is a real business opportunity here.”

Over the last year, the Birmingham, AL-based group has worked to recruit companies and get them to invest in Alabama. One area that caught EDPA’s attention was the plastics industry, specifically moldmaking. “There are a lot of mold shops located in the US,” Taylor said. “We’ve tried to educate them about what’s been going on in the automotive industry and the support systems around the industry, as well as what is going on in Alabama.” EDPA serves as a recruiter to get those businesses to expand into Alabama, rather than relocate. Steve Sewell, EDPA’s

34 | plastics business • winter 2014

Added Taylor: “We’re not talking to anyone about moving their facility. We talk to them about expansion. It’s an opportunity for growth.” EDPA hosted seven company visits to Alabama in November alone as part of its targeted tool and die program. It’s the state’s commitment to manufacturing that makes the sell. “We have a high number of manufacturers and a long history of manufacturing in various sectors,” Sewell said, noting aerospace is the newest addition. “It’s about commitment. Who’s still supporting manufacturing?” n Read the full story at www.plasticsbusinessmag.com.


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product

Conair Coiler Delivers High-Speed, Tensionless Productivity

The new dual-spindle automatic cut-and-transfer coiler from The Conair Group, Cranberry Township, PA, is ideal for high-speed winding of small, flexible extrusions. Nominal line speeds range as high as 800fpm, depending on size of the extrusion being coiled. Even at these high speeds, little to no friction or winding tension is generated, preventing deformities in delicate products. The unit is ideal for extrusions such as medical tubing, small tubes and small flexible profiles. Fully automated transfer of winding to a new reel means there is no operator involvement or process disruption, which effectively increases line speed and performance during changeover. For more information, call 724.584.5500 or visit www.conairgroup.com.

Milacron Adds West Coast Technical Center Milacron, a global supplier of plasticsprocessing technologies and industrial fluids, has opened a High Impact Technical Center in Irvine, CA. Milacron, headquartered in Batavia, OH, launched the technical center to expand its reach, extend its service offerings and increase its visibility throughout the West Coast. Bill White and Scott Merrill lead the new technical center, and customers in the region will experience improved service and accessibility to Milacron Aftermarket parts and services, as well as improved original equipment manufacturer sales support through the showroom and training centers offered at the facility. Expansion to the West Coast also will offer benefits to clients in Arizona, Nevada, Utah, Oregon and Washington. For more information, visit www.milacron.com.

Husky Launches HyPET HPP5 Husky Injection Molding Systems, Bolton, Ontario, Canada, has launched its next-generation HyPET® HPP5 preform molding system. Building upon the proven technology of the HyPET platform, recent enhancements make the HyPET HPP5 capable of delivering the lowest total cost to produce while providing exceptional preform quality. These enhancements allow for up to 12-percent productivity improvement over the previous generation system and are complemented by production flexibility, tooling compatibility and the industry’s first integrated solution for extended mold life. Designed to satisfy the needs of customers with a large installed base of tooling, HyPET HPP5 offers customers the ability to utilize molds from previous generation products. A key enhancement to the system is the addition of an integrated solution for extended mold life, which helps to improve performance and reduce maintenance costs. For more information, call 905.951.5000 or visit www.husky.ca.

36 | plastics business • winter 2014


product

Maxi-Blast, SABIC Collaborate on Media Blasting Solution

New Purging Compounds Improve Plastic Bottle Caps, Closures Production

Maxi-Blast, Inc., South Bend, IN, worked with SABIC, a Saudi Arabian petrochemical company, to create a new blasting media solution that maintains efficiency in cryogenic environments for longer periods of time. The new polycarbonate blasting media solution, made with SABIC’s LEXAN™ EXL resin, can be used in any industry that utilizes intricate, high-performing parts that require cryogenic deflashing. The process is used in parts consolidation in the auto industry and miniaturization of devices in the healthcare industry. It is less abrasive than traditional deflashing media and is a cost-effective solution that offers a better finish with shorter cleaning times. In addition, it allows users to automate the process and recycle the media used. For more information, visit www.maxiblast.com or www.sabic-ip.com.

Chem-Trend, Howell, MI, has developed two new purging compounds for plastic bottle cap and closure manufacturers. Lusin® Clean 1060 eliminates scrap resulting from material and color changes, while Lusin Clean 1061 prevents black spot formation. Lusin Clean 1060 removes residue from injection molding machines, ideal in manufacturing processes that perform frequent color or material changes. It also reduces the time required to clean machine parts. Lusin Clean 1061, a complement to Lusin Clean 1060, is designed for machine cleaning prior to scheduled downtime to ensure a scrap-free start-up. It is specifically formulated to remove resins left on machine parts that lead to black spot contamination. Lusin Clean 1060 and Lusin Clean 1061 are compliant with European Plastics Regulation 10/2011 and, according to FDA regulations, are considered safe for use as purging compounds in the production of articles intended for food contact applications. Both products also are ideal for use with all HDPEs, effective up to 550 degrees Fahrenheit (290 degrees C) and are hot runner-safe. For more information, call 517.545.7980 or visit www.chemtrend.com.

Maguire Vacuum Dryer Offers Increased Molding Productivity

Raytek, Ircon Offer Wide Range of IR Sensors

A new type of vacuum resin dryer from Maguire Products, Inc., Aston, PA, exhibits greater throughput than originally specified and achieves required dryness in just 35 minutes after a cold startup. The Maguire® VBD™ 150 vacuum dryer, originally rated for a throughput of up to 150lb. per hour, easily exceeded 200lb. per hour with hygroscopic materials such as ABS, acrylic, nylon, polycarbonate, polyetherimide and PBT during productionscale demonstration runs. Additional productivity enhancements are available with two features, which include an “EasySlide” mechanism that enables the vacuum vessel to slide out, giving ready access for cleanout, and an optional hopper extension with one cubic foot capacity that extends the throughput of the dryer by 25 percent. For more information, call 610.459.4300 or visit www.maguire.com.

Infrared sensors provide a fast and safe way to measure critical temperatures necessary for process control and automation. The Ircon® ScanIR®3 Linescanner reduces energy costs by allowing tighter process control and more efficient process heating. The ScanIR3 systems operate with a complete suite of application software for thermoforming, film extrusion, extrusion coating and lamination processes to provide a fast and complete noncontact temperature measurement solution. Raytek and Ircon offer a wide range of high-performance sensors, including the Modline® 7, Modline 4, XR and MI3 point sensors, as well as the ThermoView™ Pi20 thermal imager. For more information, visit www.raytek.com or www.ircon.com. n

www.plasticsbusinessmag.com | 37


outlook

After Gridlock, Plastics Industry Looks to Federal Policy Modernization and Cutting Red Tape

L

ooking back on 2013 – a year marked by partisan bickering in Washington that resulted in the first government shutdown in over 17 years – we in the plastics industry are hopeful that at least a few key issues are ripe for bipartisan solutions in 2014. Importantly, though, where consensus cannot be reached despite our best efforts, we must continue to defend our industry from unwarranted government intrusion and ill-advised legislative or regulatory proposals. Notwithstanding the 2013 political landscape, the United States plastics industry continued its positive growth and remains the nation’s thriving and robust third largest manufacturing sector.

by William Carteaux SPI William (Bill) Carteaux is president and CEO of SPI: The Plastics Industry Trade Association. Founded in 1937, SPI promotes growth in the $380 billion US plastics industry. Representing nearly 900,000 American workers in the third largest US manufacturing sector, SPI delivers broad-based issue advocacy, industry communications and promotion, and the fostering of business relationships through an extensive agenda of conferences. SPI also owns and produces the international NPE trade show, profits from which are reinvested into SPI’s industry services. Find SPI online at http://www.plasticsindustry.org and www.inthehopper.org.

Toxic Substances Control Act modernization (TSCA) Modernization of TSCA – the primary federal law governing chemical manufacturing and importation (and, accordingly, use) – must be undertaken in order to take advantage of 21st century advances in science and research methods. However, revisions to standing policy and regulations that ignore risk assessment and the significant socioeconomic benefits of products made with chemicals, such as plastics, could threaten our industry’s ability to develop and utilize essential materials. Currently in the US Senate, there is a rare opportunity for bipartisan reform of TSCA. The “Chemical Safety Improvement Act” introduced by Senators David Vitter (R-LA) and the late Frank Lautenberg (D-NJ) enjoys a growing bipartisan list of cosponsors. The proposal would provide meaningful pre-emption from states’ “mini TSCAs,” enable a risk-based approach to regulation and protect companies’ Confidential Business Information (CBI).

Medical device tax repeal The medical device industry is a unique American success story for innovators, manufacturers and consumers alike, and plastics play a huge role in that success. As we see further implementation of the Patient Protection and Affordable Care Act (ACA), the full impact of a $30 billion medical device excise tax encompassed within ACA will have adverse impacts on innovation, R&D and global competitiveness. Since the enactment of the ACA, a nearly 1,000-strong coalition of organizations has advocated continuously for the repeal of the medical device tax. Earlier this fall, House and Senate negotiators came close to an agreement that would have staved off the tax and its effects, but the effort ultimately failed. Nevertheless, there is a growing, bipartisan view in Congress that the tax must go. Congressional repeal supporters will continue to look for an appropriate legislative vehicle to address this important issue.

38 | plastics business • winter 2014


outlook

Regulatory overreach and Congressional oversight Our industry understands the need for responsible, science-based regulation. This must be balanced against economic realities and applied in a manner that avoids arbitrary and unnecessary regulation that needlessly diminishes innovation and growth. Out of necessity, SPI expends considerable resources advocating for a less-burdensome regulatory environment. Congressional oversight of federal agencies is paramount to ensuring regulations serve their purpose and include supporting scientific and risk-based evidence for implementation. Occupational Safety and Health Administration Regulation and standards activity has ramped up within Occupational Safety and Health Administration (OSHA), and SPI is engaging on issues such as the agency’s recently proposed rule to “Improve Tracking of Workplace Injuries and Illnesses.” OSHA seeks to require employers to electronically report certain injury and illness information, either quarterly or annually based on the number of employees. OSHA plans to post the information online, adding to a significant number of concerns, including how confidential employee information would be protected.

Environmental Protection Agency EPA has increasingly expanded its chemicals management activities, and sustained industry engagement is needed to ensure EPA does not overreach by unfairly targeting essential chemicals for use restrictions or, worse yet, outright bans. SPI will continue to monitor and respond as warranted to EPA’s regulatory chemicals management proposals. We also must ensure that EPA does not overstep its authority in determining the scope of “waters of the United States” under the Clean Water Act, an issue that could dramatically expand EPA’s regulatory reach if done wrong. We continue to remind EPA and all regulatory agencies that informal guidance documents are not the favored approach to sweeping policy decisions; when broad action truly is warranted, the appropriate mechanisms are formal rulemakings that ensure the plastics industry’s right to be heard.

Food and Drug Administration This year, the SPI-led Food Packaging Coalition will continue conversations with Food and Drug Administration (FDA) officials concerning the agency’s proposed rule

page 40 u

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outlook t page 39 change and implementation of sections in the Food Safety Modernization Act on the Foreign Supplier Verification Program (FSVP). This program will require costly administrative burdens without commensurate gains in food safety.

Securities and Exchange Commission (SEC) Conflict Minerals Ruling The SEC has published its final rule regarding the conflict minerals provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

The FSVP is designed to align with the Hazard Analysis and Risk Based Preventive Controls (HARPC) program to ensure that food imported into the US is subject to the same degree of scrutiny and protection as is food produced inside the US. Food contact substances, however, are excluded from the HARPC rule, and they present a very low risk to the safety of food.

As the rule is written, the definition of conflict minerals may be misinterpreted to include metallic compounds that are materially and chemically distinct from the specific derivatives listed in the rule (tin, tantalum and tungsten, called the “3Ts”). Many plastics industry companies may use small amounts of these metallic compounds in their manufacturing processes. Holding such compounds to exhaustive new reporting requirements would expand the rule’s reach without increasing its effectiveness – counteractive to the rule’s humanitarian goals. The process to correctly report these compounds would require complicated and costly tracking through the product’s supply chain.

At no time in history has a foodborne illness outbreak originated with food packaging. In preliminary conversations with FDA, officials have expressed openness both to making the FSVP and HARPC rules consistent with respect to food contact substances and to avoid misdirecting agency and industry resources from areas of greater importance for ensuring the safety of imported food.

40 | plastics business • winter 2014

For over a year, SPI and a number of partner industry associations have been awaiting a response from the SEC confirming that metallic compounds derived from 3Ts are exempt from the reporting requirements in the final rule. n


solutions

Why ERP Systems Fail to Perform

by Glenn Nowak IQMS

Glenn Nowak is vice president for IQMS. For the past 25 years, IQMS has been designing and developing manufacturing ERP software for the repetitive, process and discrete industries. Today, IQMS provides a comprehensive real-time ERP software and MES solution to the automotive, medical, packaging, consumer goods and other manufacturing markets. The extended single-database enterprise software solution, EnterpriseIQ, offers a scalable system with complete business functionality, including accounting, quality control, supply chain, CRM and eBusiness. With offices across North America, Europe and Asia, IQMS serves manufacturers around the world. For more information, call 805.227.1122 or visit www.iqms.com.

Y

ou have invested in a new ERP system, endured the implementation process and began using the software solution to manage your business. But, somewhere along the line, you start to lose momentum. Slowly, without realizing it, employees begin reverting to their old ways and processes. Frustrations with the system surface and suddenly, you find that the ERP software is not performing as envisioned. As more time goes by, you realize that the ERP system is failing your needs. How did this happen? Unfortunately, there is no magic bullet to explain why ERP systems fail to meet expectations. It typically is a series of minor problems that lead to a downfall. It can happen to any size of organization, large or small, and while some failureprone issues are out of your hands (for example, the ERP vendor goes out of business or stops providing updates), most pitfalls can be avoided with care and attention. ERP systems can develop failure triggers at three different stages: ERP selection, implementation and post-go-live. Below are the most common reasons ERP systems fail to perform and recommendations for preventing a breakdown at your business.

Stage 1: ERP selection Mitigating ERP software’s potential to not meet expectations starts at the beginning during the ERP selection stage. The number one reason for ERP failure may be the selection of a poor-fitting solution. However, a bad decision can be prevented in a few ways. First, be aware that an ERP implementation is not an IT project – it is a business project – so begin by carefully selecting a steering committee that is a diverse representation of your company. A good ERP system will touch every aspect of your business, so gather input from all departments, including accounting, human resources, quality, sales and the shop floor. As a bonus, by allowing the key end users to be involved in the decision-making process up front, they will have more buy-in during implementation.

42 | plastics business • winter 2014


solutions

Once the selection committee is assembled, proper vetting and research into a variety of ERP software systems is a must. You are on the hunt for an ERP solution that was designed with your specific business processes in mind. Trying to shoehorn a system that was designed for a different market into existing company procedures will not work. You will forever find yourself struggling to make processes fit the software, rather than molding the software to work for you. Remember to look forward and consider how you want to do business in the future, rather than focusing on how operations were performed historically. Search for a solution that meets all of your needs both now and in the future. Once the search has been narrowed to a final few, be sure to check references. Ask fellow manufacturers about how the vendor handles software updates, training, implementation timeframes and technical support accessibility. Inquire about ease of use for the employees, productivity increases, return on investment and cost decreases. If possible, tour a manufacturing facility that utilizes similar processes and study the software as it is actually being used. If you are utilizing a consultant in the selection process, be sure to select one that is objective. While there are many good consultants available who will honestly analyze your business and offer a few solid ERP vendors to choose from, some consultants are sponsored by a specific ERP vendor or offer implementation services of specific software and will push their system, no matter the fit.

working. Don’t bring over bad habits. Excellent ERP solutions offer multiple ways to accomplish the same result so you can tailor the software to fit exactly what you need, rather than settling for the old way. An ERP software’s failure to perform also can come from a lack of resources. Don’t forget that unless there is a dedicated ERP implementation team, your employees are trying to do their “day jobs” in addition to implementing and learning a new system. To prevent ERP disappointment, set realistic deadlines and allocate extra resources when needed to execute the implementation correctly. Give users time to learn and experiment with the system on a training database, as well as learn how their new processes will work. Finally, don’t go it alone. Many businesses, in order to save a buck, opt out of training or implementation services. ERP systems are complicated and having a dedicated specialist on your team to help implement the system correctly the first time is worth every penny. A good ERP vendor has a special, page 45 u

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Once an ERP selection has been made, it’s time to begin addressing potential pitfalls in the implementation stage that contribute to ERP failure.

Stage 2: Implementation Not only is upper management support critical to a successful implementation, it also lays the foundation to prevent future ERP collapse. Implementation teams most always are more engaged if upper management shows an interest and takes a hands-on approach. This doesn’t mean that the CEO should be involved in every single configuration detail, but upper management should at least be aware of any issues and delays. An active management team will keep employees engaged and dedicated to the project. When setting up the most impactful areas of the new ERP software, such as inventory structure, bills of material (BOMs) and process workflows, be sure to closely evaluate old processes and look for ways of improvement. The switch or investment in new ERP software was made because the old ways were not

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Two Great Events Molding the Future of Plastics

March 26–27, 2014 Boston Convention Center Boston, MA

PLASTECNewEngland.com

April 15–16, 2014

Charlotte Convention Center Charlotte, NC

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solutions t page 43 internal implementation and training team (not a contracted third-party reseller) that is in place specifically to help you succeed. Their goal is to offer as much assistance as possible to ensure your success with the software and long-term happiness with their company.

training and improvement will help you use the solution to the fullest. Many successful manufacturers conduct a yearly application analysis to discover gaps in the system, explore new modules and receive process improvement recommendations to ensure the ERP software is doing all it can for them.

Stage 3: Post-Go-Live Just because implementation has concluded doesn’t mean you can sit back and let the ERP system ride. Another critical pitfall that can lead to an ERP breakdown is failure to update. Good ERP software is continually improving and developing with the latest technology to offer more tools, reports and features. As the manufacturer, you have a responsibility to keep current on software updates and prevent the system from becoming stale.

Achieving long-term success ERP software failure is not inevitable. There are manufacturers across the nation that have been happy with the same ERP vendor for more than 20 years! But, it takes both parties to achieve long-term success. Your ERP vendor needs to be a partner and provide good training, technical support and regular software releases to keep you competitive. As the manufacturer, you can contribute with upper management support, a fair allocation of resources, realistic implementation deadlines and continuous improvement when it comes to training your team and updating the software. Taking a proactive approach and selecting an ERP vendor that is the best fit for your company will set the stage for an ERP software solution that improves operations and ultimately, your bottom line. n

In addition to updating the software on a regular basis, your employees also must be kept up to date. Allocate a bit of money every year to ongoing training and staying current on what’s been added to the software. Additionally, a culture of continuous

www.plasticsbusinessmag.com | 45


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Plastics Business - Winter 2014  

Plastics Business - Winter 2014