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Managing the Supply Chain Squeeze

by Laurie Harbour

Harbour Results, Inc.

Supply chain management in manufacturing is by no means a simple process, and for the plastics processor it can be an even tougher challenge. Plastics processors experience what we like to call “the supply chain squeeze,” where they typically are in the middle of two much larger manufacturing companies – the end customer and a large resin provider. Processors constantly balance raw material costs and quality with product pricing.

This means it is increasingly important to identify and implement best practices that will help optimize the supply chain. Depending on what type of products are being produced and for which industries, there are a few tools that plastics processors should consider.

Commodity pricing index

Commodity pricing index is a strategy that is successfully utilized across many different industries. By pre-establishing a price based on the amount of raw materials purchased, companies mitigate the risk of price fluctuations and better manage profitability. For the plastics processor, a number of materials could be purchased with this strategy. However, to be successful, it will be critically important to accurately forecast future needs to ensure inventories are effectively managed.

Additionally, companies also can work with customers to contractually index product pricing that will increase or decrease with commodity (resin) pricing. This is another way to help mitigate risk for the processor, but the strategy needs to be part of the early customer negotiations to be successful.

Multiple suppliers

Oftentimes, businesses will have multiple suppliers that can provide the same or similar materials for production. By doing this, companies protect against potential raw materials cost increases that could eat into profitability. Again, looking at resin as an example, a processor’s strong relationships with resin vendors do not preclude those vendors from raising prices.

It can be time consuming and costly to ensure all vendors provide the same quality products that pass testing and PPAP, so it is important to be selective in this strategy to balance the cost vs. mitigating risk.

Vendor-managed inventories

Another strategy that might work is that of vendor-managed inventories, where the vendor is responsible for the inventory and the shop pays upon consumption. The goal of vendor-managed inventory is to provide a mutually beneficial relationship in which both sides will be able to more smoothly and accurately control the availability and flow of goods.

To be successful in employing this strategy, extensive information sharing between the manufacturer and distributor is required. Additionally, the plastics processor needs to be able to accurately forecast the required volume of the goods by month or year. In fact, vendor-managed inventories lend themselves to supplies that are low mix and high volume, such as packaging, fasteners and inserts. Although not widely used across the industry, vendor-managed inventories have the ability to reduce risk while managing cost.

Leveraging customers’ buying power

There may be situations in which a plastics processor can leverage its end customer’s size and purchasing power to help manage vendors within the supply chain. This strategy should not become a common practice within a shop’s organization, but – if utilized strategically – it could deliver cost savings for the processing company and the end customer. To be successful, it is important for the plastics processor to have a strong and open relationship with its customer and to work collaboratively to achieve a win-win for both organizations.

Managing the data

The single best practice that has the biggest impact on a company’s ability to leverage the supply chain is having an analyst and data-capturing system (such as an ERP) to manage the data. By collecting, reviewing and interpreting data – such as consumption rates, inventory turns and days on hand – decisions can be made quickly, risk can be mitigated, waste can be eliminated, excess inventories can be trimmed and shop leadership can be better armed for customer negotiations.

In addition to looking at internal metrics, companies should monitor economic information, such as the value of the dollar and the price of oil, which can significantly impact the plastics processing industry. Also, it is important to monitor the industries in which the processor operates. Take the automotive industry, for example: By leveraging information such as vehicle launch forecasts and production quantities made available by third-party analysts (such as LMC Automotive), companies can better manage their business forecasts.

Those plastics processors that are managing the inventory data commensurate with the product demand can achieve significant cost efficiencies through lean inventories, reduced warehouse space and avoidance of obsolete material due to engineering changes or other product changes.

The first step in determining whether the supply chain is being managed effectively is to review internal metrics and determine if the numbers align with the strategic plan. If not, the company should review its supply chain management strategies and processes. An analysis of what is working and what is not can oftentimes shed light on opportunities for improvement. Finally, making the investment to have someone dedicated to collecting and analyzing supply chain data on an ongoing basis will deliver the biggest return for any processing business.

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.