Plastics Surgery: Remolding the Supply Chain

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In the face of a recession, plastics companies recognize the importance of efficient transportation and supply chain management.

2008 was a year of progress and change for the plastics industry. Despite rising commodities costs and fluctuating fuel prices, the plastics sector trended toward expansion and bullishness.

For example, companies such as Innoware Plastics, a maker of plastic food containers, and Cereplast Inc., a manufacturer of proprietary bio-based plastics, invested millions in new production lines, supply chain enhancements, and even new railroad spurs to speed raw materials in and new products out of their facilities.

Around the world, the story was much the same. In Eastern Europe, for instance, plastics production was robust, with several new supply-side projects coming online to serve the European automotive industry. China's hunger for recycled plastic pellets appeared insatiable, and rulers throughout the Middle East signaled their strong desire to diversify their economies by "cracking" plastic molecules from crude drawn from beneath the desert, adding a new chapter to the region's voluminous history as both a pivotal center for trade and a transit zone for raw materials.

Then came the global financial crisis, and the plastics sector slammed on the brakes.

Diversity can be the greatest preventive to the adverse effects of a bear market and an economic slowdown. But as the crisis on Wall Street has evolved into a worsening recession—idling everyone from assembly line workers in America's auto plants to the Chinese factory laborers who keep us in computers, toys, and electronic games—the plastics industry is moving into retrenchment mode.

Fewer consumer goods sold translates to less demand for the raw plastic distilled from biomass, petroleum, or recycled sources. And major deals, such as the much anticipated $17.4-billion joint venture between the Kuwaiti government and Dow Chemical, have fallen apart. The industry is currently so shaky that global management consultancy Bain & Company has declared that plastics manufacturers will face an unprecedented drop in demand this year.

SEIZING TRANSPORTATION OPPORTUNITIES

Yet in addition to challenges, these tough times also bring opportunities for managing and revising the plastics supply chain, according to Gordon Heisler, former transportation director for Sunoco Inc.'s polymers division and now a senior consultant for the Professional Logistics Group Inc. (PLG), a supply chain consulting and management services firm based in Oak Park, Ill.

"There hasn't been a better time in recent memory to renegotiate relationships with transportation providers—particularly railroads and motor carriers," Heisler says. "Given the decline in cargo volumes across the board, including plastics and raw materials, the time is right to take a close, hard look at all expiring contracts.

"The past five years brought a renaissance of the nation's railroads," he adds. "The rail carriers seemed to hold all the cards, especially when it came to companies that were served by a single railroad. But the pendulum always swings, and no one has all the leverage forever. That's where we find ourselves today."

The rail renaissance has benefited plastics shippers, however, because it drove the rail companies to substantially increase private investment in their infrastructure, which has improved capacity and overall rail service.

"Shorter transit times, combined with more consistent service, translates into improved railcar cycle times, and better equipment utilization for plastics shippers and equipment operators," Heisler adds. "This can mean that fewer railcars are required to deliver the same volume of plastics product. Periodic, data-driven fleet sizing helps optimize equipment usage."

Despite this modernizing, Heisler cautions plastics shippers who are negotiating new contracts to recognize that moving rail freight is still "an arcane science.

"To succeed in transportation contract negotiations, plastics shippers need to be in tune with current market conditions, understand the carriers' perspective and what's most important to them, and have well-developed logistics options," Heisler says.

Today's negotiating environment differs significantly from just a few years ago.

"Currently, carrier volumes for all modes are well below previous levels, and the freight negotiation pendulum is moving toward an 'equilibrium' position as service providers attempt to recover some of their lost volumes," he adds.

In such an environment, it is critical that plastics companies prepare extensively before negotiating a new contract with a transportation provider. If you're preparing for negotiations, completing the following tasks will help you gain the greatest advantage.

  • Do your homework. Ensure you thoroughly understand the market from two perspectives: yours and your service provider's. Familiarize yourself with the carrier's position.
  • Set priorities and expectations. Is achieving the lowest delivered cost the most important goal in the negotiation, or are you looking for a moderate price with high-quality service?
  • Get a handle on the marketplace. Benchmark recent market pricing. Develop competitive modal options and costs via these alternatives.
  • Define your limits. Decide whether you are willing to consider changing suppliers and modes if they represent the lowest-cost alternative. Can you endure the challenges that could accompany a mode shift?

The more homework you do before beginning the process, the more you will improve your chances of a successful negotiation with service providers.

IMPROVING ASSET UTILIZATION

But the polymer industry does not consist entirely of high-cost, high-stakes opportunities. Companies can do a lot inside the fence to improve logistics asset utilization.

For instance, Professional Logistics Group once worked with a plastics distributor that acted as the middleman between large plastics producers and those who used their end product—a fairly typical way major producers sell their polymers.

But the distributor had a problem. It employed 200 railcars to move the plastics, and paid $500 to $600 per railcar each month, but didn't have the transparency built into its system to ensure it was getting the most utilization from its rail asset expenditures.

What the distributor did know was that many railcars weren't unloaded immediately upon their arrival at destination, which meant it was paying for railcars that were being used to store the product customers had purchased.

The solution? Implementing a rail management system. By taking a proactive monitoring step, the distributor was able to reduce dwell times at customer facilities and reduce its fleet from 200 to 175 railcars.

"In another case, we found that the internal processes of a company we were working with weren't particularly efficient," Heisler says. "Its employees manually processed a lot of paperwork, with minimal systems integration between quality control, production, inventory, and shipping. And loading processes in the warehouse and storage area were redundant."

In the case of the paperwork, a simple integrated software solution eliminated about 20 minutes of manual entry per shipment. In the warehouse, a review of how cargo was loaded revealed that each railcar load had to be repositioned eight times before it left the plant.

"Reconfiguring the internal car handling process, which required minimal capital investment, reduced touches by almost half," Heisler says. "Sometimes the greatest dividends are achieved by simply envisioning a routine process in a different way."

MEETING FUTURE DEMAND

"The global recession and eventual recovery will necessitate many long-term changes in the polymer supply chain," Heisler says.

Despite the current economic slowdown, plastics supply chain managers concerned about slackening demand, "need to consider not only management of the current reduced volumes, but also management of a potentially very different supply chain once the world recession turns," Heisler says.

In the near term, plastics supply chain managers need to recognize and act on the fact that cargo carriers in all modes have excess capacity and are finally receptive to reducing margins to retain volumes.

But, however bad the recession gets, it will also most assuredly end, bringing a surge in pent-up demand with it.

America's logistics infrastructure will be insufficient to meet freight movement demand by about 2020, when freight volumes moved within the United States are expected to double from 2004 levels, according to a University of Tennessee study.

For the long haul, plastics supply chain managers should consider making changes to their overall logistics plan in light of dramatic improvements at U.S. ports, particularly those in the Southeast, and the expansion of the Panama Canal, which is expected to be complete by 2013.

GREEN LEGISLATION

Big moves and tough negotiations are not the only avenues to plastics supply chain efficiencies in the current anemic economy.

In December, Hawthorne, Calif.-based Cereplast Inc., a manufacturer of bio-based plastics, announced a supply agreement between Havi/Perseco, a packaging research and development firm, and Chipotle Mexican Grill, a chain of restaurants specializing in Mexican food.

Under the deal, Havi will provide Chipotle's Mibbrea, Calif., restaurant with "environmentally sustainable" cutlery manufactured exclusively using Cereplast's "Compostables" resin. A system-wide rollout to up to 800 Chipotle restaurants is anticipated later this year.

What's driving this supply chain decision? Legislative mandates aimed at curbing greenhouse gas emissions at the local level.

"The use of bioplastics will play a significant role in promoting compliance with these types of mandates," said Frederic Scheer, chairman and CEO of Cereplast, during a conference call with industry analysts and reporters.

Integral to Cereplast's expansion plans are production capabilities at its 105,000-square-foot facility in Seymour, Ind., which was previously used only as a distribution center. The plant's newly installed production line has an annual capacity of 50 million pounds of bio-resin.

The focus on production at the Seymour facility was driven by the efficiencies and lower production costs per pound that will come from a centralized manufacturing location in Indiana, and the capability to expand resin production capacity to as much as 500 million pounds per year.

THE MIDDLE EAST EMERGES

The Middle East will emerge as an increasingly important player in the raw plastics sector over the next decade for three reasons.

  1. Abundant petroleum and competitive prices.
  2. Efforts by entities such as the Saudi Arabian Basic Industries Corporation (SABIC), which was founded more than 30 years ago to begin diversifying Persian Gulf economies.
  3. Investors are seeking long-term finance opportunities in the region now that mortgage-based securities in the United States have gone bust.

The Middle East is already the world's third-largest producer of polyethylene and the fourth-largest manufacturer of polymers of all kinds. By 2010, the Middle East will likely account for 20 percent of the world's ethylene, while the share produced by U.S. manufacturers declines to about 24 percent, according to industry estimates.

In addition to Saudi Arabia, Kuwait, Qatar, Bahrain and Oman are all poised to increase their presence in the plastics sector. And the government of Dubai created the Dubai Multi Commodities Centre to provide industry-specific market infrastructure for a variety of commodities, ranging from raw plastics to diamonds and gold to energy. Polymers have been a particular focus of late, with Dubai's development of plastics futures contracts, launched on the Dubai Gold and Commodity Exchange on Feb. 5, 2009.

James Bernard, associate director of commodities at the Dubai Multi Commodities Centre, works closely with both the regional and global petrochemical and plastics industries to develop the new contracts. His plastics team has been involved in promoting the Dubai Multi Commodities Centre free zone, which offers international companies with 100-percent business ownership in the emirate a guaranteed 50-year tax holiday and freehold property options.

"Our goal is to attract industry-specific companies to have a presence in Dubai and to set up as member firms," Bernard says. "A number of plastics and petrochemicals companies are already established in the free zone, creating a substantial plastics hub where the industry can meet."

It can be difficult, however, to get a clear picture of the current global plastics distribution network.

"We saw a buildup of stocks in November and December 2008 as prices came down rapidly," Bernard explains. "Many companies either held off from purchasing, could not collect material due to financial issues, or had more serious problems.

"During the same period, several productions were put on hold as many companies could not justify selling at these levels and others could not find demand," he adds. "Demand has increased somewhat since then."

The current global market for plastics and plastic-related raw materials is still in "poor shape," Bernard says. "Obviously every region and company is affected differently, but, clearly, the supply side is shrinking and will continue to do so in some regions. In others, we will see new, lower-cost productions.

"In this climate, the overall balance must result in a reduction in production volumes or we will encounter continual over-supply," he adds.

Currently, Dubai is still on the sidelines of plastics and polymer production. Several other emirates comprising the United Arab Emirates (UAE) have stepped up production; Gulf Cooperation Council (GCC) countries are also producing.

Aside from its commodities market, Dubai has played its most active role in plastics and polymers as a facilitator of its trade throughout the region.

"Dubai's Port Jebel Ali is considered the gateway to the region, and many countries transship through the port in all directions," Bernard says. "The plastics and petrochemicals industry is extremely active in the Jebel Ali port and the region as a whole."

Given its rapid growth in recent years, the Middle East offers an excellent opportunity for plastics companies. With huge volumes coming online during the next one to five years, and the region becoming the focus of international polymer producers and converters, immense growth potential exists for the regional downstream plastics industry.

Currently, the UAE's petrochemical and polymer industry is ranked second among the GCC states, with Saudi Arabia leading the list. During the past five years, the number of plastics factories in the UAE rose from 507 in 2003 to 679 in 2007, an increase of 34 percent.

Despite the current economic slowdown, the plastics industry in the UAE alone is expected to witness a growth rate of between 15 percent and 20 percent over the next five years.

In fact, published reports emanating from the Persian Gulf suggest that despite a recent dramatic moderation in the price of oil, a number of polyolefin projects are still expected to come onstream in the Middle East during the next few years.

This buildup has inspired the Dubai Gold and Commodities Exchange to start plastics futures trading.

"Easy access to feedstock and proximity to Asian markets have ensured that the Middle East is the hub of global petrochemical trade, including plastics," according to the Exchange.

"Price volatility in recent months has put pressure on profitability across the plastics supply chain, and downstream firms are looking for innovative ways to minimize this impact," says Malcolm Wall Morris, CEO of the Dubai Gold and Commodities Exchange.

In light of that desire, the Exchange's plastics futures contract will provide industry participants with "a sophisticated hedging tool, enabling them to lock in futures margins," Morris says.

In addition, nation-states such as Qatar and Dubai will become significant players in the world's plastics supply chain in the years ahead because they build huge refineries and chemical plants without the environmental restrictions prevalent in the United States.

"As a result, they'll be able to land product here with a considerable scale advantage," Heisler says.

Still, it will likely be several years before displacement of domestic suppliers occurs.

"The global economy has hit a pothole," Heisler says. "Manufacturers of finished plastics products want to be closer to their suppliers, and suppliers are looking to be closer to the consumption point of their goods. This drive for efficiency will continue to grow."

PLASTICS MAKES PERFECT: STRIVING FOR RELIABLE FORECASTING

One factor making it difficult for domestic plastics suppliers to gauge their competitive footing in this new environment is the paucity of reliable forecasting. A major reason is the interrelationship between a large segment of the plastics industry and the petroleum industry.

"The oil industry is one of the worst in terms of forecasting because so much of what it does is driven by the price of crude, which is unpredictable," Heisler says.

"In addition, much of the forecasting in the plastics industry is done on a macro level and, as a result, can be extremely inaccurate," he continues. "The one thing companies can predict is volume. Companies that are close to customers should have a good idea which way volumes are going. Having a finger on the pulse of what's happening downstream is the best forecasting."

Beyond forging or maintaining that closeness with customers, Heisler offers one more bit of advice for plastics supply chain and logistics managers: "Look critically at every contract, and determine if it needs to be approached differently from your last two or three contracts," he suggests. "Make sure the carrier knows you have options and you intend to exercise them as you never have before."

Heisler believes that smaller companies don't do well at benchmarking.

"Small companies have a tendency, especially in this economic climate, to concentrate on day-to-day operations. But you have to strive to define best-in-class supply chain operations in your industry," he says. "Only then can you formulate a method to benchmark your supply chain against it, and develop a strategy to improve it."

BASF Molds Supply and Demand

When it comes to navigating challenging economic shoals, close and frequent communication among supply chain partners is a highly effective strategy at BASF, Florham Park, N.J., one of the world's largest plastics suppliers.

"In our markets, which include the automotive industry, consumer goods, construction, electronics, and household appliances, demand for our products has dropped in the current economic environment," notes Kathy Dennis, BASF's manager of communications. "Our suppliers are dealing with the same issues we face."

In light of those shared challenges, BASF is working closely with suppliers to help them reduce fixed costs while adjusting to lower demand for raw materials. "The goal we're all working toward is that no one holds excess or high-cost inventory," Dennis says.

Although it is a global plastics producer with facilities in Europe, Asia, and North and South America, BASF's current supplier base is primarily in the United States, with some raw materials brought in from Canada and Mexico. Typical customers are plastics molders who use BASF's resins to manufacture everything from auto parts to disposable dinnerware to vinyl siding.

OUTSOURCING FOR SMOOTHER OPERATIONS

BASF utilizes the services of several third-party logistics providers through its supply chain group, and relies on Logistics Management Solutions (LMS), St. Louis, Mo., to drive its package command center.

"The 3PLs consolidate loads from different facilities or manufacturing platforms located in a multi-purpose plant site," Dennis says. "They also review open orders from various regional logistics centers for consolidation opportunities, coordinate inbound and outbound loads, and try to reduce empty miles traveled by carriers."

BASF is also in the process of implementing a Transportation Management System (TMS) tied into its SAP system.

"The TMS will provide increased control over freight routings, ensuring that we not only achieve our internal goals but also meet commitments to our partners," Dennis says. "In addition, we use a third-party provider, Quality Transportation Services Inc., Ashland, Va., to help monitor and measure rail fleet performance."

One key to ensuring smooth operations in the current economy is relying only on those carriers who have been pre-evaluated and contracted with on the basis of service, operating efficiency, and cost.

"To ensure we utilize these carriers, we process all orders at specific command centers in the regions the delivery is moving through," Dennis says. "They offer loads to preferred carriers in specific lanes. Implementing the TMS will further strengthen this process."

Forecasting remains critical to shaping BASF's manufacturing and inventory deployment decisions.

"Our organization meets monthly to validate demand based on forecast. We use this demand in our sales and operations planning meetings," says Dennis. "Because the manufacturing schedule and cycle drives raw material purchases, accurate demand is critical.

"Unfortunately, customer forecasting across all products has not been reliable," she adds. "Certain products are more accurate than others, but as a whole there are variations from customer forecasts compared to actual order patterns."

And what are the tea leaves currently telling BASF?

"Consolidating customer operations could change our distribution network," Dennis says. "And transitioning to other products would require us to avoid maintaining unnecessary locations or using existing locations that aren't optimal in serving our markets."

CASE STUDY: Driving Lessons for the Auto Industry

Companies supplying the auto industry today are in a bit of a bind. That's the first thing Jay Baron, president and CEO of the Center for Automotive Research, says when asked about the industry and the impact its travails are having on those who make and move plastics and plastics-related materials.

In the auto industry, suppliers of raw material plastics typically deal with a Tier 1 or Tier 2 supplier rather than the original equipment manufacturers (OEMs) such as Ford, General Motors, or BMW.

Over the years, the big car companies have been pushing lower-tiered suppliers to take on more engineering, which means assuming much more financial burden and risk.

These suppliers, specifically molding and tooling operations, have also largely been driving the supply chain. The bad news is, given the automotive sector's current economic straits, some weaker, less efficient suppliers are destined to go out of business. That will upset the supply chain apple cart for some.

But the dark and somewhat gloomy days that have descended upon automakers have not arrived without their silver lining for the plastics industry. One is the drive for greater fuel economy. Much of the discussion revolves around "light-weighting"—making cars lighter, which automatically translates into better fuel economy, says Baron, who serves on a National Academy of Science committee focused on the issue.

"Today the typical car comprises about 90 percent steel, but the number of plastic parts has slowly grown in recent years and will continue to do so as we strive to build lighter cars," he says.

A NEW BUSINESS MODEL

Another silver lining for the plastics industry is that when the big automakers get in a cash bind, they introduce fewer new models. When that happens, they tweak existing models, creating another opportunity for plastics.

"Automakers want the car to look different when it is really the same," Baron says. "The platform—the underbody and engine—is the same as cars already on the road, but the 'top hats'—the body shape and details—are different. And many of those details are plastic."

One unlikely shift is a wholesale migration of materials suppliers from Detroit's Big Three to international automakers, such as BMW and Honda, which have opened large assembly plants in the United States.

International manufacturers typically opt for the security of long-standing relationships rather than forging partnerships in their new countries. "They're taking a risk and making a huge investment by doing business in a new country. They don't want to start from scratch in every respect," Baron notes.

"For example, BMW, which opened a huge facility in Greenville, S.C., looked to Canada-based Magna, a global supplier of technologically-advanced automotive systems, components, and complete modules, and suppliers such as Siemans and Bosch, with which it had established relationships," he adds.

THE EFFECTS OF LOYALTY

Japanese carmakers and some Tier 1 and Tier 2 suppliers also stick with established relationships in their home countries. As a result, international suppliers tend to follow the OEM by opening plants in a given region, creating tough competition for smaller domestic suppliers of plastic resins and other raw materials.

"To be competitive in this market, plastics suppliers must sharpen their supply chain and logistics abilities," Baron says. "The launch of a new vehicle rides on the supplier's performance. Automakers want to know that their trust is well-placed."

Things Go Better with SC Efficiencies

Among those looking seriously at supply chain modifications that will affect raw plastics providers in the years ahead is Coca-Cola Enterprises (CCE). After a 120-day internal review aimed at bolstering its North American business, in December 2008 the bottler and distributor announced its intention to combine some supply chain functions with The Coca-Cola Company, producer of the Coke syrup concentrate.

The review by CCE, which bottles about 80 percent of the Coca-Cola drinks sold in the United States, was launched in response to both the slowing economy and the rising costs of commodities including plastics, aluminum, and sweeteners.

Also driving the revamping of the supply chain is the dramatic increase in the number of beverages CCE delivers to customers.

The new supply chain initiative with The Coca-Cola Company represents a "first step toward remaking the system," according to Steve Cahillane, president of CCE's North American Group.

The two companies will initially work together on infrastructure and production planning, sourcing, and transportation.

Tweaking the supply chain is nothing new for CCE, which four years ago began a $200-million IT initiative, called Project Pinnacle, which expanded the use of SAP applications from managing the intake of raw materials and other functions to improving delivery of product to stores.

Those moves were seen as a way to replace the company's old transaction system with an entire SAP suite and improve processes, execution, and information availability. But now CCE indicates that it needs to bring bigger, and perhaps more fundamental, changes to how it manages its supply chain.

While no decisions have yet been made to close or combine plants, that's one of the options to consider in bringing the two companies' supply chains together.

"We can't promise that for the next year, but we clearly are looking in that direction because we have great opportunities to rationalize our supply chain in the future," Cahillane says.

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