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Pros and cons of an in-house compounding department

In-house compounding facility

Some 40 or so rubber roller manufacturers in Europe benefit from their own rubber-mixing department or are part of an affiliated company. Most competitors with no access to such a source envy them and deplore their own fate, high rubber prices and a lack of specific competence requested from the market.

The blessed brethren in the business have advantages over the competition regarding:
  • Developing time of new rubber roller, manufacturing time
  • Price of the rubber
  • Information exchange with the market
  • Realising necessary changes of the rubber roller
  • Handling rejects
  • Optimising production conditions and product needs
  • Independence from third party suppliers
  • Demonstration of core competence to the market

All major rubber roller manufacturers (in Europe) mix their own rubber compound. Subsequently the ability of mixing seems to be a question of size and it would appear that all small competitors would set up their own mixing department if only they could afford it.

Does size really matter?

There are however some holes in the above argument. The first is the correlation with size. If size was the main concern then all major rubber roller manufacturers one day reached a certain size and started their own compounding.

But this sequence is wrong. All of the rubber roller manufacturers in question either worked in rubber mixing before they entered the rubber roller business or purchased a mixing unit together with other assets, totally independent of size. So in general rubber-producing companies entered the rubber roller business and not the other way round.

The second issue is the alleged correlation between self-mixing and size. There are big rubber companies with small roller divisions and also small rubber producers with small roller business; there doesn't exist any restriction in opening a mixing unit; especially not the size of an existing business.

Third is a typical "background mistake": Once an assumption is made it is never questioned again and accompanies all discussions without ever requiring further validation. In our case it is the belief that your own mixing department is a genuine advantage. If we want to check this allegation we can use a simple test: Does mixing competence increase the core competence of a rubber roller company? If the answer is yes, mixing is an advantage, if it is no, there is none (maybe except price).

Mixing competence and core competence

Unfortunately "core competence" is a difficult subject. It is far easier to define what core competence is not than to give a positive definition. Let's proceed with our negative approach: core competence is not a question of the company's abilities and any judgement on core competence is never absolute.

The idea of competence is related to the point of view of the customer/market: Only they can bestow competence to a supplier; nobody can force a customer to concede competence to him. So the attribute of "competence" is a gift from the customer to the supplier. Competence subsequently is a matter of awareness of the customer. He creates to himself a picture of the supplier with strengths and weaknesses and the total impression includes the "competence". As we said above the "competence" is never absolute.

The alleged competence of one company grows in comparison with others and always is related to the needs of the customer. A supplier may be skilled in many aspects - if these are useless from the point of view of the customer, these skills are not perceived as core competence. Additionally the perception of competence depends on the frequency: If every competitor provides certain skills, normally they are not regarded as core competence. Let's terminate this difficult issue: Core competence can be defined as a bundle of attributes of a company that are important to the customers and where the company is perceived to be superior to other competitors.

Now let's come back to the question above: Is rubber mixing perceived as core competence? Though the answer is risky I would say no, with a few exceptions. The No is mainly based on the following experience. Customers are normally not interested in the skills of their suppliers that are related not to the manufacturing process but to the material they use.

In our case we have to admit that rubber knowledge is both rare and important to the function of the roller and that we can understand that customers would appreciate respective skills on the supplier's side. But these expected skills comprise knowledge of rubber chemistry and handling, maybe even interaction between the rubber in function and the media that get in touch with the rubber. But never do customers estimate the mere producing of rubber compound to be a specific interesting ability.

We have to accept that the likelihood for the existence of rubber skills increases with the presence of a mixing unit but it cannot be seen as a condition. If the supplier is able to communicate that he has both knowledge of rubber and access to rubber developing companies with superior expertise he will be able to convince every customer that his abilities are as qualified as a solution with a mixing department under his roof.

The question of cost

So the customers expect knowledge of rubber but not necessarily knowledge of mixing. As mentioned above nevertheless there are some exceptions to this rule. Sometimes customers expect certain advantages for themselves out of the fact that the supplier produces the rubber on his own. It is remarkable that nearly all discussions on this topic turn out to cost (and price) reduction, it is not the technical skills that are appreciated; it is the possibility to be cheaper than the competition. The reasons for this expectation are all mentioned in the entry of this article: But - and this is extremely important - customers in these cases do not argue that the supplier can fulfil technical issues in a better way, in a more qualified matter, they argue only that he must be able to do them less expensively.

One company, one overhead, short ways of communication, fast reaction on problems, using the whole potential of increasing productivity... all this must lead to cost reduction and better prices. (The simplest argument is that the customer doesn't want to get charged with profit both in the rubber and in the roller price.) The in-house mixing department subsequently mostly is an argument for price reduction.

Price discussions in the roller world are typical only in the original equipment business and are rare in the recovery business. The major rubber roller manufacturers hold the biggest portion of the OEM-business, thus it is easy to understand why we normally combine big roller companies with the ability of rubber mixing. What we are not aware of is the background that these companies need the mixing to be cheap and thus to keep their OEM-business.

Are the savings real?

This conclusion intrinsically says that every in-house mixing unit can provide rubber cheaper than third party; it confirms the expectations of the customers. Can we prove this? Not with the emphasis, we would be expected to show. The price of a kilo of rubber is composed of material, labour, machine usage and depreciation, maintenance, space, overhead, and profit. Most of these costs (per kilo rubber) depend on the volume of production. Since even the biggest roller manufacturers produce and consume "only" 3000 tons per year and thus less than 20% of the big compounding companies, they cannot use the advantages of economies of scale.

On the other hand, the cost differences between 1000 tons of rubber production per year and 3000 tons per year are remarkably small; this proves that both machinery and organisation can be optimised already to this smaller volume. In other words: A big mixing unit is twice, three, four or five times a small mixing unit. Growing the volume in such cases does not reduce the costs (of equipment, maintenance, etc.) significantly. Instead it puts additional mixers and their environment to the existing ones. Taking into consideration all aspects we must say that between small and big rubber compounding units there are only little cost differences regarding material, labour, machine usage and depreciation, maintenance, and space as well.

Substantial differences are expected to exist in the overhead costs. They are said not to grow with production volume. They are said to remain small when the "customer" is part of the same company, when ways are short, understanding is high, knowledge of each other is perfect and targets are identical. Unfortunately all branches of industry show that all these arguments fade in comparison to one opposite matter of fact: the growth of complexity.

Whenever a company adds to any type of business not more business of this type but a differing kind of business, then it increases the overall complexity of the company. This is caused by the fact, that the existing skills are hardly usable, that new skills - and persons - in purchasing, production, sales, even accountancy and controlling are needed and that no scale effects can be achieved. Mostly such an extent of business turns out to be the mere geographically putting together of two strongly different companies.

The increase of complexity normally is not only opposite to cost avoidance, very often it worsens the overall overhead relation of the company compared to the situation prior to the business extent.

An exception to the rule

There is one exception to the above argument above: sales. When a mixing unit "sells" its products to a sister unit, it doesn't need any sales organisation that is always required when it addresses a third party. A modern sales force can be expensive and consume up to 15 % of the total costs and so there is a cost difference between an own mixing department and buying from elsewhere that can sum up to 10 to 15 %.

We can see all over our industry that the price differences between home mixing and rubber purchasing are far higher than 15 %, they often reach 25 % or sometimes even more. Trust me, these price differences are not related to cost differences; in other words: the affiliated mixing unit is selling below full costs, and it is thus supporting the rubber roller production.

Often this wrong price calculation occurs unwillingly because costs are not allocated correctly due to the fact that their origins are not known. Sometimes the costs are well known, but the calculator does not dare to allocate them according to their provenance. In some cases it is company strategy to support a business unit by another, sometimes it is policy to show the costs of a "standard" capacity usage, which normally is above the actual usage and thus shows only part of the real costs.

Disadvantages of an in-house compounding facility

These and other reasons prevent the correct cost allocation to the mixing department and are responsible for the belief, that self-mixing is cheaper than mixing by third party. But cost issues are only one aspect to a reluctant judgement of self-mixing; another one is the loss of flexibility.

You cannot get rid of your investment when business declines and when you already have to finance the missing cash flow in the rubber roller division; so in many cases a liquidity problem emerges, that companies without mixing units can avoid. Another aspect is the quantity of rubber you have on stock and the time to replenish the stock. In a self-mixing company normally the rubber stock in the roller division is high and so are the delivery times (and the related costs do not affect the mixing department!!) When third party does the mixing for you, you can reduce your stock and the delivery times as well - which explains already part of the higher price.

Another important aspect is the interface between mixing and roller manufacturing. The alleged advantage of being close to each other and being able to work quickly and non procedural quickly turns into its contrary when there are quality issues, delivery time problems or discussions on who is going to cover costs. In these cases a clear separation between mixing and roller manufacturing is always advantageous and also more cost effective. And it is my personnel conviction that also the impact to innovation is higher when an external company is fighting for your favour.

In conclusion

When we review all considerations up to here we come to a strange conclusion. Apart from the saving of sales costs there seems to be not one argument in favour of self-mixing of rubber. Maybe we should admit that mixing next door simplifies the development process and helps to avoid useless steps in improving existing compounds. Anyway, the disadvantages prevail by far. Any solution with rubber knowledge and no mixing are preferable to self-mixing. Any solution where the roller manufacturer can concentrate on his (engineering) issues and does not have to care about chemistry will improve his competitive situation.

Let's be brave and risk uttering an idea never mentioned before: maybe most of the roller manufacturers with their own rubber mixing unit do argue that mixing is advantageous to them only because they did not find an opportunity to get rid of it yet. Maybe they became aware already of the fact that an old competence dies prior to a younger one and that mixing is the oldest one they have.

There is one last argument against self-mixing, but at the same time it is the strongest and the proof to all our deliberations as well; the permanent increase in specialisation. This increase of specialisation is an economic law and it says that any pressure on prices and costs will always lead to a reduction of complexity and this in turn is achievable only by reducing the range of things that are affected in one single organisation.

This law in the end will be responsible for a more or less complete separation of rubber mixing and roller production. I would just like to add an experience made in many branches of industry: the companies that can reduce their complexity prior to others are more successful than their competitors; those who keep their complexity even risk to die.

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