It’s cliche but true – when milk is cheap, why buy a cow ? Peter Drucker said it is better to integrate upstream than downstream. The case for vertical integration play involves payback analysis and other factors. Henry Ford made his own power mainly because he was fed up with dirty intermittent power. I can relate.
The most common fallacy of vertically integrated PE film supply is not treating it as a stand-alone P & L.
Many companies opt to buy film even though they consume enough film to feed a grass roots film plant.
Procter and Gamble Clopay have had a symbiotic relationship for generations. When P & G puts up a diaper operation, a Clopay embossed film plant will pop up in close proximity. It’s only one item.
Custom flexible packaging has more moving parts. There are good reasons to buy PE film on the outside:
1. Lead time Using multiple extruders increases the likelyhood of finding a line which needs work. The New York tri-state area is the best example in the US.
2. Painless rejection Rejecting film which comes from an outside source does not generate the acrimony resulting from an internal rejection. Gotta keep the prima donna pressmen happy, right ? Finding another film source is easy. Finding a reliable pressman is not. If you don’t reject film outright, specious claims are a time-tested means to shaving a few cents off raw matierial costs. The extruder would rather take a discount than see the film show up on his dock.
3. Cash flow and turns Most bag makers do not understand the concept of borrowing to pay invoices timely. Line of credit ? What’s that ? It’s simpler to buy from multiple sources and string out your accounts payable. If you do hit your credit limit, buy from a different extruder.
Buying resin is more complex.
You have to:
forecast 90 days rolling
wait sometimes five weeks for the railcar to show up
pay bills timely
provide quarterly financial statements to the resin companies
If you’re on the wrong side of the market, every penny you’re off = $ 2,000. Film prices drop shortly after CDI comes out. Whatever is in the silos gets devalued. Why bother ? It’s much less risky to order film for each job.
4. Lowest cost Overcapacity in blown film is a time-honored tradition. Don’t just keep your supplier honest. Constant reverse auctions give new definition to keeping a supplier honest.
One of our successful alumni – Dave Frecka, founder of Next Generation Films – is betting big on yet another expansion literally the size of two homesteads. He’s betting that his customers will not make their own film.
Flexible packaging converters see making film as much simpler than their complicated processes which involve inks, plates, solvent recovery, adhesives, people, bag and pouch making. They visit a blown film plant, see an operator sitting down reading a book or taking a smoke break. The operator is sitting down because he’s exhausted from all hell breaking loose over the last two hours.
In theory making blown film is a simple, continuous process. If it was really difficult and complex, there would not be over 27,000 known blown film shops on the planet. The truth is making blown film is an art despite what equipment manufacturers proffer as “turn-key” lines. There is a learning curve.
Let’s look at how seemed to be a good idea at the time that led to a salvage play.
The same schedulers who won’t schedule a print job until the plates and film are both present hate to wait for film. The reason the printer has to wait is that a properly run film backlog prioritizes minimal scrap. When the backlog is set up on a first-in-first-out basis or disrupted by the printing plant manager who succumbs to an ultimatum from the cutomer who has threatened to cancel ( sticking the converter with the cost of the film and plates ), excessive transition scrap is the result. Scrap factors which are not captured in the in the justification for going vertical are transition scrap, internally rejected film, startup and shutdown scrap. The boffins pick up on the higher than projected cost of goods sold first. Until the day of accounting reckoning arrives, it’s a myopic free-for-all. Everybody feels good about percieved free film, controlling their destiny and not getting ripped off by their film supplier.
Of course, there are many successful vertically integrated operations. If the end product has ample gross margin, allocation of the cost burden is moot. I’m not making this up – many lucrative operations have an internal transfer cost of a penny over resin.
A blown film operation is capital intensive with inherent high operating leverage. It makes or loses money incrementally on either side of break-even. When volume falls short of the break-even, the “prisoner’s dilemma” follows. Running at a loss is better than shutting the line down. The penultimate desperate phase is scrambling for cheap work to maintain cash flow. Over the years, I have been to many industrial funerals known as auctions. We get notifications of liquidations every 6 weeks or so. We hear from leasing companies who ask if we are interested in lines they have “carved out” of a converting operation. When the line was first up and running, there was a party atmosphere – ” whooopee ! free film ! on demand ! “
So if you are contemplating making your own film either financed or with a few extra millions of extra cash, our advice is to be sure you have:
1. sales to feed the fixed cost beast
2. lots working capital and a line of credit
3. a strong plant manager
4. commitment to a 24 / 7 operation