With all the change that has occurred in the industry, let’s take a look at how much actually has changed. Let’s compare 1998 industry data to 2006 industry data1. Many of the changes were expected, but some were surprising. More importantly, the changes demand that you consider what the next eight years will bring. What will change in eight years? Should you anticipate and become an agent of change yourself? Are you prepared to change?
Looking at the 1998 data, it appears that many of the concerns that now plague our industry were afterthoughts. Moldmakers (as we called them back in 1998—are now primarily referred to as mold manufacturers) offered the concerns listed in Figure 1 ranked by importance.
Foreign competition was ranked the ninth most important concern while customer consolidation was thirteenth. Today customer consolidation may actually become customer liquidation. If we knew in 1998, what we know now about foreign competition, would we have been better prepared? Have the few that determined that supply chain management was important become the premier mold manufacturers of today?
What is most surprising is that 85 percent of the 36 companies2 that participated in the 1998 study are still in business. With all of the tooling companies we hear going out of business, you would have thought the attrition would have been greater.
The Time Difference
To be certain, the competitive landscape for mold manufacturers has become intense. In 2006, the typical mold manufacturer has become bigger and is roughly doing twice the amount of sales with the same number of employees as 1998. In addition, the molds have become three times as complex to produce while their leadtime has shrunk 25 percent. It is surprising that the leadtime was not cut in half. The following highlights the major differences between 1998 and 2006.
|Concerns of the moldmaking industry:||Composite Ranking|
|New sales opportunities||1|
|Extended trade receivable terms||10|
|Workers' compensation costs/regulations||11|
|Supply chain management/transformation||14|
|Moldmaker concerns ranked by importance.
Guy DiPonio from Valiant Tool in Windsor Canada shares that the remaining tools have become increasingly complex, fast and large. Being from Canada, Guy quickly coined the acronym CFL. Clearly, our data supports this observation. The average mold in 1998 was approximately $55,000 while in 2006 it ballooned up to more than $125,000. Size and complexity, not inflation has contributed to the rise in the average mold selling price.
Today, most mold manufacturers have moved away from the simple, slow or small (SSS) molds as these have become the domain of low-cost countries. Some of the larger mold manufacturers still receive tooling packages with some CFL and some SSS tools. They have developed their own supply chain relationships with other mold manufacturers globally. It is extremely difficult to compete on wages, so why not engage the low-cost countries to serve your customer?
Mold manufacturers have embraced supply chain management (SCM). Most customers do not really want to go to China or some other low-cost country to get the best price. They would prefer that their mold manufacturer do that for them, but the industry was slow to act. As a result, the customers are the ones that drove global sourcing. The customer would prefer their mold manufacturer take responsibility for the tool, including engineering changes, tryouts and launch assistance. The low-cost country mold manufacturer is at a severe disadvantage serving the customer in these areas.
Today’s mold manufacturers produce almost $107,000 of value add per employee (sales minus material and outside processing divided by all employees) as compared to $80,000 in 1998. This productivity could not come simply by working harder. Today’s mold manufacturer has embraced lean principles to drive waste out of the system. In 1998, the average mold waited for the next operation more than 90 percent of the time. A mold can actually be designed and produced in two weeks if you remove the wait time.
The increased productivity was not from lean activity alone. Technology has also helped with concurrent engineering, better machining centers and lights-out burning and cutting operations. The average mold manufacturer in 2006 had invested over $1 million more in fixed assets than 1998. Today’s successful mold manufacturer is not afraid to invest in their future.
Marketing has become a core competence. In 1998, 46 percent of the molds were delivered within 100 miles and only a handful of customers generated 80 percent of sales. Relationships drove the purchasing decisions. Today, almost a dozen customers are needed to arrive at 80 percent of sales and the reach of the marketing effort has extended beyond 500 miles.
Altman Z Score
Working capital / total assets x 0.717
Retained earnings / total assets x 0.847
EBIT / Total assets x 3.107
Stockholders’ equity / total liabilities x 0.420
Sales / total assets x 0.998
In the early 60s Edward Altman, using Multiple Discriminant Analysis combined a set of 5 financial ratios to come up with the Altman Z-Score to predict a company’s probability of credit failure. The measure used here is for private companies where the GREY zone is between 1.22 and 2.91The Altman Z score definition.
Chart courtesy of Plante & Moran.
The Remaining Challenges
The mold manufacturer of today still struggles. The balance sheet has become more leveraged, with almost 70 percent of the companies failing the Altman Z score definition (see Chart 1) of a healthy company.
The Altman Z Score is a composite financial measure that many bankers use as a predictor of bankruptcy. Also, the foreign competition is getting better and more aggressive. How many unsolicited e-mails does your customer receive from tool shops around the globe? Lastly, there are still too many tooling companies in North America to produce the CFL tools, resulting in additional industry attrition.
So What about Another Eight Years?
There is risk in extrapolating the last eight years forward, but there is even greater risk in ignoring these trends. Not every company can become a mold manufacturer with supply chain management skills and a million dollars to invest in new equipment. However, with global tools being sourced by well-meaning—but naïve—customers, there will be an abundance of poor performing tools that will require a skilled artisan to try to “make a silk purse out of a pig’s ear”. These artisans don’t need a full regiment of high productivity tools to meet the customers’ needs—instead they just need a few really skilled “moldmakers”. They will have lower investment in tools and inventory and thus low overhead and act more like car mechanics than car manufacturers.
For those willing to be the mold manufacturer, there will be continued productivity—where the average mold, from concept to production, takes less than eight weeks (then six, then four, etc.). Certainly, many shops can boast that they’ve already accomplished this feat, but not as an average time including design, approval and tool acceptance. And with the plethora of new global mold sources, the customer will soon find it much easier to work through the mold manufacturer to vet these shops, then work around them. The faster turnaround times will demand a modular design approach with standard manufacturing processes and components.
There also will no doubt be additional complexity with the tools as well—new materials, cross process pollination (i.e. injection compression) and in-mold assembly/decorating. A handful of enterprising mold shops will invest in R&D to identify new ways to boost productivity or functionality for the customer. Innovation will create more value speed, but will also be slower in customer acceptance, and thus perhaps the riskiest of future business models.
Mold production in North America is not dead. It is a terrifying yet exciting time for those looking to make a bold move. It also is a dreadful time for those not willing to change. The choice is yours.
1 Plante & Moran 1998 and 2006 study.
2 In 2009 these surviving companies will be invited to participate in a special study to see just how well they are performing and what they have done to become and remain competitive.