If you are reliant on bespoke machinery to fill and pack goods faster and more cheaply than any of your competitors, then enjoy your market position while you have still got it for there may come a time soon when you may no longer be able to enjoy that luxury. Rodney Abbott reports
The situation has become so worrying that it recently forced COPAMA (Confederation of Packaging Machinery Associations) secretary general Andrew Manly to voice their growing concern that major multinational end users are placing packaging machinery suppliers under ever-increasing pressure with onerous terms and conditions and unreasonable price demands.
In the past most companies had standard terms and conditions of contract and these formed the basis of buying and selling a piece of equipment.
There were certain norms that were adhered to over many years. Companies that didn’t have terms of their own might borrow them from others. The system was by no means perfect but it worked.
Certainly, the PPMA was aware that members were spending inordinate time and resources on negotiating contracts, almost line by line.
Discussions with other COPAMA members revealed this was not uncommon anywhere. The standard terms were 30.60.10 – 30% on placement of order, 60% on delivery and 10% on completion.
Similarly, there were standard periods of guarantee – for example, one year for single shifts, six months for double shifts and four months for continuous running.
But familiarity breeds contempt and, over a period of time, those well-accepted terms became corroded.
Other topics, including the amount of spares held in stock, also became a big issue, certainly with some of the large drinks companies.
It is not unheard of for a packer/filler to insist that it has to have two years’ worth of spare parts sat at its premises, stubbornly refusing to pay for them until they are actually called off shelf to replace worn parts.
Today, it is not uncommon to come across terms and conditions of purchase that border on blackmail – agree to our conditions or you will not be placed on our preferred supplier list or you won’t get our tender documents are two favourites.
So there has been quite a dramatic hardening in the stance of the purchaser. Machinery suppliers quite rightly point out that this is unrealistic, particularly when one compares the variation in the sizes of the companies involved.
Companies like Tetra, Krones, Bosch and GD Automatic Machinery may well be able to look after themselves when dealing with the purchasing power of global networks operated by Unilever, Coca Cola, Glaxo SmithKline Beecham, UDV, Merck, Sharpe and Dohme, Elida Gibbs, Nestlé and Danone.
But the majority of machinery suppliers world-wide are small to medium enterprise companies and these terms are eroding away their cash flow.
Remember, the more elaborate machinery becomes and the more bespoke it is, the more SMEs need money up front to fund the actual build process.
This can be quite complex, time consuming and expensive, especially if it is in some kind of research and development stage.
Today’s very hard-nosed approach is going to drive some machinery suppliers out of business because they simply can’t sustain those kinds of contract terms. In this instance, it isn’t good business to tell SMEs to stop whinging and rely on market forces to determine just who survives and who doesn’t.
Price negotiation may have been with us since time immemorial but what we are now seeing is a further hardening because machinery users are under intense pressure from retailers to shave their margins.
So just what is a packer-filler to do? By passing the costs on to the machinery supplier, the problem is merely aggravated and not solved.
Supply and demand makes fools of us all. When a company hasn’t got anywhere else to go for its particular machine technology all the onerous terms and conditions suddenly fly out of the window.
So it would seem reasonable that, where terms and conditions are concerned, there has to be some compromise.
To help bring that about the PPMA and several other COPAMA members have sought advice from contract lawyers and, as a consequence, produced standard reference documents for their members. Legislation to protect SMEs in terms of payment has been mooted several times.
The PPMA believes that government has to do something, even in the face of very stiff opposition.
Certainly, the machinery sector must accept some responsibility for certain contractual problems.
By setting out to meet customers’ ever-increasing demands for complex machinery operated by simple controls has led to a decline in the need for engineering capabilities in the packer-filler sector.
Remember that it is the buyer who signs the contract. How many buyers do you know who have engineering qualifications?
Remember margins are more critical to buyers than technologists. Today, the big packer-fillers and retailers employ fewer and fewer technical people. In Germany, the engineer is much revered. Sadly, this is no longer the case in the UK. What does this say about today’s buyers.
Regrettably, it says that there are less people at the buying end who understand what can and what cannot be reasonably achieved. Now the world is populated with ex-packer-filler engineers employed as consultants by the companies who made them redundant in the first place! There’s irony for you.
So there is a fund of expertise out there that is available at a price but, if it is not being replaced, where is the next fund coming from?
It would seem that there has to be some structural change within the machinery sector to ensure its survival.
But, by change, I for one don’t envisage large numbers of SMEs being swallowed up into large amorphous companies for it has already been proven that this will do little to promote packaging chain development.
While Andrew Manly believes that there is bound to be more consolidation across the UK market, he would also like to see more companies making appropriate partnerships or getting together on a more permanent basis.
“It is a time for better communication,” he says. “There is evidence that some partnerships have worked and worked very well. A few years ago some PPMA members got together to build a line for a project in Italy.
“They formed a company to supervise the project. It went very well. Then they disbanded the company when they finished the project.
“But turnkey operations usually involve one machinery supplier handling the whole installation on behalf of several others and there have been several instances where smaller companies have caught a cold if they have to bear penalties for any lack of performance or failure to deliver by another company.
“Even so, while smaller companies have to be very sure that they can manage such projects, the demand for single solution projects is becoming much more prevalent in the industry.”
Large companies no longer wish to deal with a multitude of suppliers to build their line. They want to deal with no more than one or two main suppliers who will then manage the project. That opens up all sorts of other implications for SMEs.
For example, companies wanting solutions have been known to demand privileged use of cutting edge technology.
This denies the opportunity to roll out the benefits elsewhere and locks up the machinery companies ability to profit from the technology.
Surely, it would serve any firm’s interests better to invite suggestions for line improvement on a continual basis.
And this is only one step away from being asked to run and maintain production lines on a global basis. Now there’s a thought!
In the UK the PPMA is looking for regular contact with the Food and Drink Federation, the International Society for Pharmaceutical Engineers and organisations of that ilk.
SMEs need dialogue with their customers. Innovation is a complicated thing. It is difficult to deliver. But, if it is to be delivered at all, it has to be done in concert with the customer.
The road to innovation is littered with the corpses of new fangled machinery that nobody wants.
Machinery magic is best woven by companies who understand their customers’ mindsets and where they are going.
The PPMA, following the example of other COPAMA members, is now embarking on a forward buying survey in the hope that it will pave the way to starting a dialogue.
When businessmen get used to sharing information discreetly, life will be a lot more productive for both sides.
“We believe this problem has got to be addressed and the sooner it is addressed the better,” says Andrew Manly. “We need to release the pressure on SMEs. Profit is not a dirty word but others must accept that SMEs have to make a profit too.
“Innovation will become harder to justify except where it is driven by an end user seeking a specific solution.
“Blue Sky R&D will be the province of academics with limited benefits for SME’s unless they have access to such projects as the Faraday Packaging Partnership.
“Over the last 15 years I have marvelled at how many SMEs have survived storm after storm, not only in the UK but Italy and Germany as well. “Today, I do not think those SMEs will weather a big storm. There is not enough flesh left. If there was any fat in the first place it has gone.”