Medical Device Link.

Originally Published PMPN December 2001

PHARMACEUTICAL

Some end-users are seeking alternatives to new machinery purchases to meet productivity demands.

Erik Swain, Senior Editor

The slow economy and the events of September 11 have led to questions about whether Americans are willing to spend money at this time. Similar questions are being asked about corporate spending. And in the healthcare packaging industry, pharmaceutical and medical device firms are asking whether they should reduce their capital budgets for items such as packaging machinery and seek alternatives to buying new equipment, or stick to their budgets as planned.

The answers seem to vary widely. Each supplier's experience depends on who their customers are, and each drug and device firm appears to have adopted their own approach to handling packaging machinery purchases in this climate. But there is evidence that many end-users are concerned with productivity as much as with cost.

The Packaging Machinery Manufacturers Institute (PMMI; Arlington, VA) is tracking sales of packaging machinery for 2001, but the figures won't be released until the spring of 2002. PMMI's purchasing plans study, released in spring 2001, called for flat growth overall but 5–7% growth in the healthcare sector for 2001. As of now, PMMI says it is too early to tell whether those projections will hold.

Indeed, many suppliers say that their customers' purchasing plans have not changed much, and that they are sticking to their budgets. Some are even reporting better-than-expected sales in recent months. However, there does appear to be more interest in alternatives to new purchases and in changing the practice of purchases. Some are exploring purchasing used equipment, rebuilding existing equipment, or plugging in spare parts to extend equipment life, as well as using other methods to increase the efficiency of the machines they already have. Others are altering their financing plans or asking suppliers to allow them to defer portions of payment until the next fiscal year.

"We have been observing a general weakness in the demand for new machinery across most of the machinery market segments we serve," says Mel Bahr, chief executive officer of MGS Machine Corp. (Maple Grove, MN). "But we have noted that our pharmaceutical customers appear to be the least affected by all of this. In addition, we have noticed a lengthening of the placement of the final order. Projects are approved, but people at the higher level seem to be delaying them. In the last quarter, inquiries were very strong, but order placement was still a little soft," says Bahr.

STAYING THE COURSE

Figure 1. An assessment of whether packaging productivity increased, decreased, or remained unchanged from 1999 through 2000. (Click to enlarge.)

One factor in favor of sticking to purchasing plans is that the acquisition of packaging machinery is a long-term process that fits within a company's overall capital-spending and production strategy. Therefore, timetables for the acquisition of new machines are often set far in advance of the actual purchase, and firms may find that deviating from them harms productivity.

"One does not wake up and say, 'I need a case wrapper,'" says Matt Croson, PMMI's director of communications. "You tend to have a program for your line. End-users should always consider upgrading regardless of the economy, because productivity will increase substantially. And the cost is often not large relative to research and development. In the end, productivity is the lifeblood of the operation."

Mike DeCollibus, manager at the U.S. office for Dividella (Wareham, MA), agrees, noting that he has not seen much change in purchasing plans. "People with new products to launch seem as intent on pursuing them as they have been [in the past]," he says.

New machines are needed for more than just new products, though. In fact, Walter Berghahn, director of sales and marketing for Uhlmann Packaging Systems LP (Towaco, NJ), says he had expected recent sales to be almost entirely driven by new product launches. But surprisingly, that has not been the case.

"I expected to see orders driven by new drugs that have to be packaged now," he says. "But there has been an almost even split. Some are for new products, some are replacements for old equipment, and some are for expansions of existing capacity."

PRODUCTIVITY GAINS

Another factor in support of new machinery is that packaging productivity has been growing, partly due to such new machinery, according to a recent PMMI study, and that means "a direct bottom-line impact to the [end-user]," Croson says. The study reported that packaging labor productivity, which is a measure of packaging output per unit of labor, grew 7.8% in 2000, and that packaging multifactor productivity, which is a more profit-oriented measure that includes employee benefits and wages, packaging material costs, and capital costs, grew 6.4% in 2000.

PMMI attributes the growth to "dramatic improvements in output and efficiency derived from new machinery technology" and "greater emphasis that end-users are now placing on all aspects of productivity management and enhancement." In fact, according to the survey, 88.6% of end-users reported that they pursue deliberate steps to improve packaging productivity. This includes purchasing new equipment and parts.

The study found that the installation of more-automated machines and systems was a major factor in boosting productivity, as it not only reduces labor costs but also makes better use of the remaining line operators' time. And 81% of end-users reported that, when they installed new machinery, it improved productivity as well as or better than expected.

It is not surprising, then, that 46.1% of respondents reported that steps taken concerning machinery and equipment had the most positive effect on improving productivity, and 46.4% said that addressing machinery and equipment issues offers the most potential for further productivity gains.

FACING ADVERSITY

Figure 2. End-user assessment of the effects of new machinery on packaging productivity in 2000. (Click to enlarge.)

But just because packaging engineers recognize the need for machinery purchases does not mean they have the funds, or the support from their corporation, to do so. Therefore, those who need new equipment but are unsure as to whether they can get it should talk to purchasing and financial personnel about what steps they can take to avoid being "behind the curve," Croson says. This is especially crucial in the healthcare sector where firms have so many regulations to comply with, and they cannot afford to have an imperfect packaging process as a result of old equipment, he says.

In this environment, suppliers on the average are trying to "keep in contact with customers without making pests of themselves," says Bahr. Representatives often call or drop by and ask whether they can help or provide any more information.

As part of that effort, suppliers may come into a customer's plant and make suggestions about how to improve its lines. This could certainly be of some help to packaging professionals, as drug and device firms have cut back on their technical staffs, and plants may not have as many engineers as they used to, he says.

Berghahn agrees that there is "a growing trend toward increased support of the customer. It comes from the increasing complexity of the machines, among other factors." At the extreme, he notes, there are some drug manufacturers that have begun to subcontract out large aspects of their packaging operations to the manufacturers of the machines. "Their reasoning is: we are the experts in making the drugs, and you are the experts in packaging," he says.

Nonetheless, Croson says, "we do see some companies that are pinching pennies to meet internal financial goals by not purchasing new packaging machinery."

ALTERNATIVES

Sometimes even the best relationship between supplier and end-user doesn't result in an order for new machinery. Given the economy, packaging professionals are considering alternatives.

Richard Frain, president of Frain Industries (Addison, IL), which provides a variety of alternatives to the purchase of new packaging equipment, says he has noticed a great leap in demand for used equipment, rentals of equipment, and other methods. This applies even to the healthcare sector, where mergers and other factors have made firms especially cautious about the bottom line, he says.

"Borrowing, in which we rent a machine to a customer and they can return it at any time, has gone through the roof—up 60–70% recently," he says. "This works for firms that have a new product but aren't sure how many they will sell and how many packaging lines they will need for it. It is also a good method for those companies that have money in their operating budget but not their capital budget. And if they make a mistake in judging the demand, they can return the machine, and there is no foul."

Another advantage, he notes, is that most rentals can be delivered quickly, while ordering a new machine can take a year or more. This also helps explain the increased demand for used machinery, which is "up triple digits," he says. "There is such pent-up demand, and people can't wait for the lead time to buy new."

The new or used issue is also dependent on what kind of equipment is in question, notes John Lewitt, vice president of sales for medical heat-sealer manufacturer Emplex Systems Inc. (Toronto). "With our machines, people run them until they can't work anymore. Given the costs involved, and that our machines are not expensive, it is often cheaper to buy new."

THE FUTURE

Even if conditions in 2001 prove too barren for some firms to justify machinery purchases, virtually no one is projecting a long-term slowdown for the industry.

"People tend to hold on to their money until they see the light at the end of the tunnel," Frain says. "By that standard, things seem to be picking back up again. On the first of the year, they were saying they didn't need anything, but now we are finding more people want to talk to us, even if it's to say ‘I need this, but I can't pull the trigger yet.' So our overall sales are up 30–40% over the beginning of the year."

Others agree that the slowdown in business is only temporary.

"You might expect some dampening effect for capital equipment, but machinery tends to follow long-term demand, especially in healthcare," says John Merritt, managing director of Tiromat Medical Packaging (Frisco, TX). "I project growth."

Image of Stealth Cartoner Courtesy of MGS Machine Corp.

Copyright ©2001 Pharmaceutical & Medical Packaging News