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The Economics Of Plastic Distribution

02 Aug

Follow-up August 7th, 2007: Mel Ettenson @ The Global Plastic Newsletter suggested that I’d missed discussing WHY larger companies are happy to live on 3-5% – because of VOLUME! As your firm grows it will begin to enter into large blanket agreements for thousands, if not, tens of thousands of pounds of material over the course of the year. Consider a major manufacturer like Generous Motors who starts to use Lexan sheet for their car bodies. Makers of plastic, as a rule, avoid selling direct to the customers – they sell through distribution So, the manufacturer may spec their material with a large car maker but the actual sale will go through a distributor, which could be you. Large blankets may sound exciting but they’re not for the feint of heart. Consider that on a $1M deal you could be carrying $300,000 of that in receivables at any one time – are you prepared to risk your house as a security to wheel and deal with a mega-account who is truly in control of when and how much you’re going to get paid? The greater payoff is that you might be buying 20% cheaper than usual on that one customer and only making 4% but, because of the volume, you can make an additional 20% on all the OTHER business you do for that product. (Thanks, Mel)


The information here is offered as a generalization of the industry, as a whole, and does not reflect on the practices or polices of Warehoused Plastics Sales Inc. or its affiliates.

* * * ORIGINAL ARTICLE * * * 

Plastics distribution exists within the factor marketplace supplying unfinished, semi-finished, finished, and accessories to producers of manufactured and fabricated goods. That said, a lumber store supplies to the business of making/upgrading houses as much as to the business of homeowners desiring to maintain/upgrading their own homes. Similarly, Plastics distribution supplies to both consumer and industrial customer alike. Plastic compete to replace wood, metal, paper (insulation applications) and glass. It is a compliment to many end-products such as machinery making in the way of guards and wear plates, and architectural & marine projects in the way of accent pieces, fixtures, and furniture. After market potential is good in that most plastic parts eventually need to be replaced (and why they compete with metal and wood is that they usually last longer), especially in high wear applications such as pulp & paper and mining. Complimentary products beyond plastic sheet, rod, tube & film include cements, solvents, cleaners, fabrication accessories, and tools. Complimentary services can include cut-to-size, cut-to-shape, thermal forming, engineering & design, technical consultation, warehousing & logistics of finished parts, and installation.

The role of any distribution business is warehousing material in a larger geographic market and developing sub-distributors, or resellers, in smaller, localized markets. Distribution’s function is technical application expertise and, like a bank, it provides financing to sub-sellers so they can reclaim costs and maximize profits while minimizing up-front investments – very similar to buying futures on the stock market without paying for them at the time of the order where you’re hoping the price goes up before the close of the sale. That said, if you want to be taken as a serious player you’ve got to have a reserve of available credit/or cash to carry upwards of 25% or more of your sales for 60 to 120 days. For those who think they can establish a more disciplined approach to receivables then please research GE’s venture into distribution – they applied a corporate policy of 30 days or you get cut off. Coincidently, we doubled our sales at just about that time. This is still a business living in the days of the wild west where the guy with the fastest draw often wins, and in many cases its the customer. Power shifts back and forth from manufacturer to distributor to customer on an hourly basis. At the end of the day, the customer signs your paycheck so he’s the one with the juice.

Entry to the business is easy. You can buy plastic from any local supplier, turn it into a semi-finished or finished product and resell it to either a producer of a product or an end user. For example, you might have a lathe in your garage that you turn acetal into a roller which you resell to producer of conveyors. Similarly, you could buy acrylic sheet and turn it into a memoriabilia display and sell it to either the end user, such as a parent wanting to show off their kid’s winning baseball, or to a trophy store retailing it to a larger marketplace. To compete for the business of just sheet, rod, & tube you need be able to buy at the lowest price and, in most marketplaces, there are established distributors with exclusive manufacturer pricing relationships. You have to begin your venture competing on value other than price – and, when you get to the point where you’re moving more product then the supplier you’re buying from then suddenly you become a blip on the radar of the supplier they’re buying from – then you have leverage.

Investment can be minimized in the beginning by finding customers in advance and buying only what you need. Eventually you’ll need to keep an inventory of materials. Cash may be king but volume makes you a deity. As a casual piece-by-piece reseller/fabricator you’ll probably save 10-15% off retail. When you start buying skids or cases then you’ll probably be given a line of credit and have an inside account manger assigned to your needs. Once you reach 10k to 15k a year you’ll be assigned an account executive who will provide on-site technical support.
As demand for cut-to-size and cut-to-shape increases you’ll need to acquire a good CNC panel saw ($75k-$150k) and a CNC router ($50k to $125k). Don’t go cheap – reputations are built and lost on an out-of-square piece or missed order. And, of course, you’re going to need space – and making best use of it (up & down, side-to-side) is what can make or break you; Racking – thousands of dollars in racking. At the end of the year a small operator can make 10-20% including their salary. For a larger $5M+ operation plan on 10-12% net after taxes but be happy with 4-8% – there’s a reason a marketplace evolves to eventual oligopoly.

Market Segments include just about every business from oil refineries to the restaurant next door with acrylic table tops. The big segments include point-of-purchase-displays, plastic fabrication, store fixtures, machine shops, and the sign industry. Margins are higher on projects rather then simple product transactions – as volume goes up margins go down. Like most raw materials such as glass, wood, & metal, it comes down to what you can do for the customer that saves them more time and money then those offering similar products. Do you offer terms? Do you cut to size or shape? Do you provide semi-finished or finished pieces? Would you guarantee a fixed price if they commit to a a certain volume of products over a specific period of time?

Growth depends 100% on exclusivity. You want a product that even other distributors have to come to you for – usually small volume, high margin specialty products such as engineered plastics like Meldin, Rulon, & phenolics. Larger volume products can be exclusive too – manufacturers want to maximize their margins so there’s no use spreading out the product to every distributor because that would create opportunities for competitive situations amongst political allies and that never makes money for anyone. As you get bigger you’re going to have to compete on value beyond pricing because your margins will shrink – the big boys live on 5-8%.

Your ability to secure larger margins will depend on the strength of your relationships with your suppliers AND your customers where, because of your reputation and financial resources, you can go after large (huge?!!?) projects. Large projects allow you to coordinate the manufacturing of a product to a unique specification and then have it finished and installed by members of your customer base. Everyone wins and, most of all, when you do get into a very competitive situation in the future those manufacturers and customers you’ve fed in the past will protect you.

There’s no secret to the game. The strategy is simple – be at a level of curiosity and innovation that parallels that of your preferred customer. If you’re not thinking in the direction they are looking to solve the problems they have then they have no use for you. Network, network, network. Join the International Association Of Plastics Distributors and meet people achieving what you want to achieve – you’ll learn there’s a lot of heart ache, sweat, and anxiety but the excitement of discovering a new application and being the person who invents a solution is the rush that makes it all worth while. Membership also gives you direct access to the best suppliers too – they want to help out the new guy, the person with a true passion for the product. We all do.

In the beginning your customer chooses you. What you’re working towards is the day you can choose your customer and when you knock, they’ll open the door.

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2 Comments

Posted by on August 2, 2007 in Career, The Business

 

2 responses to “The Economics Of Plastic Distribution

  1. mel ettenson

    August 6, 2007 at 3:19 pm

    Shawn – you’re close…btw you misspelled Meldin and Rulon – more on this later when we talk.

     

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