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Rubber Roller company strategy: local supply approach vs. specialisation

History of rubber roller manufacturing

Generally rubber roller manufacturing companies are founded solely to meet a local demand. Rubber covered rollers are used in numerous industries and rubber is a material which is subject to wear. It is therefore understandable that nearly everywhere industry has settled there is a demand to recover the rubber layer of rollers used in manufacturing.

To be recovered the rollers must be transported to those companies that provide a rubber roller recovering service. And there we have the first crucial issue: the relation between the cost of recovering and the cost of transportation. The total amount defines, firstly whether it is purposeful to replace the old roller, buy a new one or have the roller recovered. Secondly it gives a rough idea of the maximum acceptable distance for a rubber roller recovering service.

Local rubber roller manufacturers

A near-by service provider is therefore preferable for the customer to any distant manufacturer - if there were no quality issues. Fortunately, normally there are no problems with the quality needed. This surprising fact is due to two causes:

  • The compound itself mainly provides the technical characteristics of the rubber surface. Compounds can be purchased from very experienced and skilled suppliers by any rubber roller manufacturer and thus the quality needed for any special purpose can be assured by every small rubber roller covering company round the corner.
  • The geometrical demands and the roughness of the surface generally can be achieved by average covering and grinding machinery. Thus any small company, with a little investment in used machinery, is capable of matching the main market needs.

Specialist rubber roller manufacturers

We have to take it for granted that rubber rollers exist, which require a very special compound that has to be developed in close relation between customer and compounding company. What's more, regarding the size and weight of such rollers, some of them exceed the average machinery available by far. All these rollers can only be recovered by specialised suppliers; but the percentage of rollers that have to be treated as 'special rollers' according to this definition is estimated to be less than 40%.

Features of the local rubber roller market

So 60 % of all recovery business is open to local rubber roller suppliers - and the advantages they can provide: remarkably quick delivery time, logistic service such as collection and delivery to the machine, emergency service over the weekend, cheap prices due to missing overhead costs and low transportation rates, etc.

So in the beginning every new company entering the roller recovery market finds itself surrounded by advantages and can almost be sure to generate attractive business. The problems emerge years later when the company has to face some obstacles generic to this market. The first is intrinsic to every local market approach: any supplier cannot successfully grow into the nearest competitors' area, where this company is 'local'. So all local suppliers forcibly remain small companies - in the rubber roller business they can achieve an annual turnover of maybe 2 million pounds; further growth requires a specialisation approach.

The growing roller rubber company

One big advantage in the beginning is the lack of overhead costs and the extreme flexibility of small rubber roller manufacturing companies. Extending the volume beyond one million pounds per year the company is forced to establish an internal structure, to install a professional sales force, to qualify the logistic service and to provide technical assistance to the customers - free of charge.

While in the beginning an overhead rate of 5-8% is typical, the growing business raises this rate to 15 or even 20% of the manufacturing / direct costs. In return this burden is the trigger for further need to grow and thus the company can enter a vicious circle.

As soon as a new competitor geographically comes close to an existing service provider he loses the advantage of being local and has to offer additional distinctive features. These, however, are rare and mostly expensive; higher quality, better logistic service, assistance to compound development, more preferable terms of payment, providing cores (and bearings) to the rollers, core repair service, and so on.

The main problem with these distinctive features is not their validity; it is the fact that these features in the perception of the customers are not deeply appreciated and thus do not generate a strong customer relationship. Even small price changes then can induce the customer to test another "local" supplier and so start a dangerous price war. So every business beyond the pure local business is vulnerable and less profitable than the former one.

Generally speaking the local supply approach is ideal for a start-up-company. When the annual turnover has passed one million pounds this concept loses its advantages. At first they diminish and when the volume exceeds two million pounds they can turn into disadvantages. It is therefore necessary to change the company strategy if growth is the main issue.

Specialisation in the rubber roller industry

The only possible direction for strategy change is the specialisation approach. This approach implies that the company can overcome the local restrictions due to a service that locally acting companies are unable to provide.

The service, accepted as specialised offer, can vary from customised compounds to specific surface treatment, machinery apt to handle very heavy rollers or cost reduction in combination with series production. Also the profound knowledge of the needs of a certain branch of industry is mostly seen as a specific skill and accepted as specialisation.

The specialisation approach changes the rubber covering company essentially. The technological knowledge - even if it does not include rubber-compounding skills - must be significantly above the average level of local suppliers.

The best way to argue this difference is providing both engineering and chemical skills, which cannot be achieved without cost increase. The additional expenses can be funded partially by the customers who normally accept to pay for advanced quality and know how transfer. But in general the earnings develop with a time lag and thus strain the profit rate. In consequence the company is obliged to grow the business beyond the local borders; this in turn creates the need of a specialised full time sales force, which causes a profit burden of 5 to 10% of the turnover. When far away business can be won, the logistic system has to be extended too and this extension also increases the cost volume of the company.

The hidden cost of specialisation

Starting from a simple decision to provide a special service, the company situation changes entirely. Costs are raised and the turnover has to follow. Since there is no profitable chance to grow the local business the company must concentrate on a specific branch, specific dimensions, specific compounds etc. and approach the national or even the international customer base.

Most managers underestimate the investment that is needed to grow into the position as a specialised supplier. The average investment varies between 30% and 50% of the subsequent real turnover, spent over a span of three to five years. This means that in order to achieve one million pounds of additional specialised annual turnover you have to invest (mainly in personnel) altogether £300,000 to £500,000 pounds in the preceding years.

A specialised company thus has to work with an extended time frame; it can no more look what will happen tomorrow, it has to pursue a multi-year plan, it is obliged to budget costs and earnings, it has to finance the investments and it has to develop a marketing strategy to approach the new target markets. It is easily understood, that this planning changes the company completely from a "garage manufacturer" to a qualified industrial supplier, which provides international abilities.

There is no way back from the specialised approach to the local supply approach. Once the costs and the organisation have increased and improved, it is nearly impossible to keep the expenditures stable or to even cut them down again. Companies, which passed the threshold of specialisation, are more or less condemned to growth.

The reason for this judgement is the fact that it is absolutely impossible to reduce the costs according to the needs, in other words to cut costs flexibly: fixed assets normally get purchased at the latest moment possible, when the overload of the existing assets cannot be tolerated any more. Thus we can avoid idle-capacity costs in the growing process. In the opposite situation, a decreasing company cannot reduce the investment and at the same time increase the overload of the remaining capacity due to resistance of the personnel and the interdependence of the asset components.

The step to specialisation should always be well prepared, founded on a solid market research and a supple equity. Every specialised company has to face the competition potential of all other rubber roller manufacturers which are willing to grow and on the other side has to be aware that it will be nearly impossible to attack the local suppliers. We have two completely different approaches to one single market where every competitor has to decide which stance to take.

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