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FLEXO Magazine : February 2014
RAW MATERIAL PRICES As converters work with raw materials, Ernst & Young be- lieves they are placed “in a potentially vulnerable position in the value chain.” Specifically: • On the supply end, those who supply their raw materials, because of their large size and global presence, can pass on increased costs • On the customer end, consumer goods companies often do not want to pass on higher prices to their customers This leaves converters “between a rock and a hard place,” as the saying goes. The goal, then, is to maintain a stable in- flow of materials and pass on as much of the cost as possible (See Chart 1). The intense volatility and innumerable factors at work determining raw material prices makes this “a mix of art and science,” says Ernst & Young. QUESTIONS TO ASK: • Are we talking to multiple suppliers to ensure we have the best pricing? • How well does the procurement manager know the market and am I taking economic advantage of this knowledge? • Do I know the impact of raw material inflation on my bot- tom line and am I getting the maximum possible percent- age of price pass through? On the producer side, a healthy balance of purchase con- tracts and spot purchases is key to enabling flexibility. Deep knowledge of supplier business models and the overall com- modity market are crucial. Buying raw materials in groups from a single supplier can help drive costs down, but contin- gency plans should be in place to avoid supply constraints. On the customer side, “a good packaging management team will try to ensure that customer contracts have a raw material inflation pass through mechanism,” Ernst & Young writes. If these supplier side price increases cannot be passed through, they should be considered when a price increase can be argued for down the road. WASTE NOT, WANT NOT The rise in raw material pricing has had other effects as well. Combined with an overall concern over packaging’s environmental footprint, “it has become extremely important to reduce the amount of material used in the production of packaging both to packaging producers and their custom- ers,” says Ernst & Young. Prime examples of this waste free attitude are producers being expected to reduce scrap (See Chart 2) and down gauging—“ reducing the material content of packaging.” QUESTIONS TO ASK: • Am I recycling as much process waste as possible? • Am I working with my strategic clients to reduce the raw material content of their packaging? • How can I re engineer products and/or processes to reduce waste or raw material content? There are some easy ways to meet expectations here— Ernst & Young cites altering changeover operations to reduce start up waste—but the reality is that significant improvement will require equally significant capital expen- diture (capex), including new printing and extrusion technol- ogies, recycling equipment and wider machines. To make matters worse, forsaking gradual progress for long periods without improvement can lead to becoming uncompetitive and losing business. THE BEST BANG FOR YOUR BUCK Much of the machinery printers rely on is sophisticated, intricate and expensive. “ Management needs to be skilled at determining how much to spend on maintaining and adding to the capabilities of their machine park,” Ernst & Young says. Tipping the scale in either direction can be problematic: • Spend too little and competitiveness can disappear over time • Spend too much on the wrong projects and cash flow can suffer Chart 1: The raw material index can be beat, with market knowledge and use of contracts and spot purchases. Chart 2: Scrap rate can fluctuate from job to job. Reining in wasted material should be an ongoing concern. 58 FLEXO FEBRUARY 2014 www.flexography.org