Brian's Blog

I have yet another story that demonstrates the challenges businesses face in today’s environment. I.D. Images is a drug-free workplace. We recently hired someone. He had worked for us for less than a week. One morning, out of the view of everyone, he hurt his foot. (Many work place accidents happen when employees first report to work, with no one watching. I’m not cynical about that at all.) Per our policy, he had to take a drug test. He tested positive for marijuana. We denied his claim for Workers’ Compensation. According to the Ohio Bureau of Workers’ Compensation, he should not receive benefits. Pretty simple, right? Of course not.

The Ohio BWC did not accept our denial, saying he is entitled to workers’ compensation. We protested. To do so, we paid (out of our pocket) an additional amount for an additional review of the drug test by a BWC certified doctor. The doctor concluded drugs in his system “significantly impaired his judgment and significantly contributed to his injury.” Much to our surprise, the BWC upheld the decision, saying the doctor’s opinion does not constitute the “legal standard” for denying a claim.

I called the BWC, asking what the legal standard is. They faxed me a few pages of legalese. His marijuana levels were 6 times the limit in the BWC’s regulations. Because the doctor used the word “significantly”, the BWC felt he was not drugged up enough. We get one more chance to appeal. If we lose, he will be granted workers’ compensation for his bruised foot (medically known as a contusion).

It is situations like this that make me ponder the wisdom of owning a manufacturing business in today’s day and age. Don’t get me wrong; accidents happen and workers’ comp is a necessary system. Workers should be protected. We do what we can to mitigate accidents, including being a drug-free workplace. We are very proud of our safety record. It is now potentially tarnished. Ohio rates employers on their safety record. The more accidents, the more you pay. We had not had a lost time incident in 1,758 days prior to this incident. Now, we will potentially pay more in premiums because a bureaucrat didn’t like the letter our doctor wrote. What these bureaucratic enterprises don’t seem to understand is everything they do to make employers’ lives more difficult endangers the future of their bureaucracy. They are killing their golden goose. Free enterprise is the goose that lays the golden egg from which bureaucracies extract their pounds of flesh.

As if on cue, an adhesive supplier sent out a price increase letter last week. Here are their reasons (taken verbatim from the letter):

• Global constraints of key petroleum based derivatives necessary for the manufacture of our raw materials
• Delayed impact of the escalation of costs along the end to end value chain
• Global demand continuing to outpace available supply
• Competition with higher value markets

I was not an English major. Can someone explain “Delayed impact of the escalation of costs along the end to end value chain” to me? It sounds like consulting-ese for, “We haven’t raised your prices in a while.” Maybe it’s just me. If they are referring to operating costs increasing, tough. No one gets to raise prices because operating costs increase. Remember, the Federal Reserves tells us there’s no inflation. Your operating costs aren’t going up because they say so. (Sarcasm intended.)

The supplier substitution game will begin immediately. We will get letters from laminate suppliers telling us about new constructions. Of course, all the lab testing will show why the new product is superior to the existing product. It will be until it fails and customers complain. We went through this a few years ago when acrylic monomers were in short supply and adhesives were changed out. It wasn’t fun.

As I’ve written in the past, I understand some commodity products are in tight supply. However, given big picture global demand appears tepid (Europe is in a recession and China is still slow), I don’t see others following the lead and trying to increase prices right now. We are leaning on other adhesive suppliers right now, as I’m sure everyone else is. As I’ve also written in the past, I’ve been dead wrong on pricing. So use me as a contradictory indicator and prepare for price increases on laminated products. Being consistently wrong can be as valuable as being consistently right. At least that’s how I rationalize my lack of a crystal ball.

By now, regular readers will know I have major issues with our politicians/bureaucrats that seemingly have no clue how the real world works. We keep being told there’s no inflation by our policy makers. James Bullard, the president of the St. Louis Federal Reserve Bank said last week, “Inflation is running very low as measured by the personal consumption expenditures price index. I’m getting concerned about that.” He continued, “If inflation [gains] continues to go down, I’d be willing to increase the pace of purchases” of bonds the Fed is now engaged in, Mr. Bullard said. “This is not what I expected, and I think inflation should be closer to the target than it is,” the official said, adding he considers it just as important to defend the Fed’s 2% inflation target from the low side, as it is to keep prices from going over 2%.
So the Fed is worried about preventing deflation and will continue their easy money policies. Would deflation be terrible? Absolutely. Is it likely? I don’t think so. Oil prices have come down, but we have not seen relief in gas or diesel to any great extent. We all drive cars and every product we buy is delivered by a diesel truck at one point (or multiple points) during its journey to our houses. I understand that a new IPad is twice as powerful as an old one and almost the same price. That innovation does lead to lower inflation. But I don’t buy an IPad every day.
I understand that US monetary policy is quite complex and by no means am I an expert in monetary policy. I do know a few things. Most of us spend a lot of money on food and energy. Those products are excluded from the core inflation calculation! Food inflation is going to average close to 3% this year according to another government bureaucracy. (http://www.ers.usda.gov/data-products/food-price-outlook/summary-findings.aspx#.UYEJBaLCaSo) In an era with stagnant wages, this inflation has a dramatic impact on the amount of money people have in their pockets. (I also think they significantly underestimate food inflation, but that’s an argument for another day.) Ask any business owner if his costs have gone down, either operating costs or raw material costs. You will have better luck finding a unicorn. Ask any worker if his after tax, after living expenses pay has gone up over the last few years.
On a related note, we have gotten price increase letters on tag stocks from our vendors. It’s really fun to tell customers their prices are going up when the Federal Reserve lives in an alternate universe and tells them there’s no inflation. By the time the government acknowledges inflation is a problem, it will be too late to fix it. The medicine will be painful, as anyone who remembers the early 1980s can remind us.

In what was a somewhat strange announcement, Xpedx and Unisource, two of the largest packaging distributors in the US, announced they are exploring merging. The talks are far enough along that the companies felt compelled to announce the potential of their deal. Normally, deals don’t get announced until they are done. Of course, there is no guarantee a deal will happen. Even if it were to happen, it is not likely to close for 6-12 months. That is one of the reasons companies don’t announce deals until they’re done. The uncertainty created, perceived or real, makes employees, customers, and suppliers nervous. I’m pretty sure some other packaging distributors smell opportunities right now, either to hire people away or take customers away.

The packaging distributor industry has consolidated quite a bit over the last several years, with Xpedx and Unisource leading the charge. Bringing together the two goliaths will certainly change the industry dynamics. It will also spur others to think about their strategies going forward. We will most likely see even further consolidation in the packaging distribution side if this deal occurs. We will also see suppliers think about consolidating in order to service their ever increasing in size customers. Of course, the opposite will happen. Dislocation and frustration will lead to many folks starting anew – expect to see several new entities spring up as well.

The creative destruction that is capitalism is alive and well in our packaging world. Lead, follow, or get out of the way, just don’t stand still. In the words of the newest members of the Rock and Roll Hall of Fame, Rush, “If you choose not to decide, you still have made a choice.”

Remember the distant past of 2010 and 2011? It seems like we got a price increase letter every other week. We spent our time pleading with suppliers and trying to explain to customers that prices were going up. Demand was just starting to come back from the great recession. Customers thought we were nuts to increase prices with relatively tepid overall demand growth. It certainly wasn’t fun saying, “I know your other costs aren’t going up, but, boy acrylic monomers are really spiking, causing our costs to go up.”

Recently, a major pressure sensitive laminate vendor has announced a surcharge index for certain polypropylene components. While they don’t expect the index to cause an increase this year, that possibility now exists due to the trigger mechanism. A major plate manufacturer announced an increase of 3-7% effective June 1, citing increases in raw material and energy costs. While all this is going on, concerns about the global economy have sent most commodity prices tumbling. My bet on commodities earlier this year sure isn’t helping the kid’s college fund…fortunately, he’s young. Time is on my side.

Personally, I think it’s going to be a challenge to increase prices in the demand environment we currently face. I understand announcing the indexing mechanism. When inflation comes, it is going to be fast and furious. People throughout the supply chain will be scrambling to keep up with the rapid increases we will face. Given the global economic environment today, I think we’re several quarters away from that happening. Of course, you saw evidence of my psychic powers in the preceding paragraph, so take it for what’s worth. But now is the time we need to start talking about the global environment with our customers. If commodities continue to tumble, expect suppliers of components to our industry to react by finding other markets to serve (i.e., cutting capacity). Everyone has seen operating costs increase; we don’t get the opportunity to raise our prices because of those increases. Neither do our suppliers’ suppliers. They will hold their prices by reducing supply. Our industry hasn’t figured that trick out yet. When we do, the world will be a much better place.

The recent jobs report reflects stagnant growth in employment. The “drop” in the unemployment rate was a result of people dropping out of the labor force. By any reasonable analysis, job growth remains anemic and this is the worst economic recovery our country has ever experienced. The Federal Reserve continues to print money, hoping the increase in money supply will spur people to invest. It’s not working too well. “Free” money does not make investing risk-free.

We all view the world through our perspectives, which are inherently biased. I am no different; I own and operate a small business and view the world through that lens. I associate with lots of people who do the same. I’ve had lots of conversations with them that go something like I illustrate below.

To run a business requires capital. It seems like every day, the amount of capital required to run your business is increasing and earning capital becomes harder and harder. Without capital, I can’t invest in equipment or people to grow the business. It’s a pretty simple equation: we invest in hopes of better servicing our customers to stick around to get the opportunity to try it again tomorrow. Consider the following attacks on capital:

1. Obamacare – Our healthcare costs are going up as I documented last week.
2. Tax rates – Tax rates have gone up for most businesses that employ people. That increases the cost of capital by lowering returns. We get told we should pay our “fair share.” Every penny my wife I scrimped and saved to buy I.D. Images was taxed, every penny we earn is taxed. My definition of “fair share” probably differs from those who have never had to skip a paycheck to make sure their employees got paid and who never personally signed on a loan to buy something for their business.
3. Regulation – The amount of local, state, and federal regulatory agencies we deal with is mind boggling. I got asked by a state employee to speak to my real estate department about a permit issue. I told him I was the real estate department, assisted by our production manager. He was shocked that we were opening a location without an in-house expert. I politely told him my budget doesn’t allow for an in-house expert to open a business. Did we always need experts to start businesses? If you want another example, see my blog about Conflict Materials.
4. Employment compliance – We are a drug free workplace. We had a new hire who got hurt. He failed a drug test. He shouldn’t get workers’ compensation. That’s pretty straight forward, isn’t it? Oh, to the contrary. The BWC is investigating and we have been advised not to fight the BWC by the administrator we pay. I pay to be a drug free workplace (yes, we pay to participate) for the safety of our employees. Are they really protected? Am I really protected?
5. General antipathy towards business owners. When did we become the bad guys? The class warfare rhetoric is driving a wedge in this country. We’re not bad guys. We want to make a difference in our industries and hopefully make a few pennies along the way.

Hiring requires capital. If you want more hiring, start appreciating, not attacking, capital. Make it easier to employ someone, not harder.

As the Obamacare freight train rolls along, it is becoming more and more obvious that the supposed reforms aren’t going to do anything to rein in health care costs. Recent news articles have highlighted the issues small group plans (defined as 2-50 employee companies) are having with their insurance renewals. This group is getting absolutely hammered by increases right now, with some seeing a double of their health insurance premiums. I find it hard to believe that the coming health care exchanges will alleviate their pain.

I met with our health insurance advisor today. (It brought back memories of the Supreme Court decision labeling Obamacare a tax – we met that day as well.) Vince has been a trusted advisor and friend for many years now. As we joked, I try to fire him every year or so by meeting with other brokers, but he’s like a cockroach – he somehow survives. In all seriousness, with his help, we have been able to manage the cost increases in health care over the last several years. Health care is a big line item for us and of big importance to our employees, so we treat it as such. As an industry dominated by small businesses, health insurance is a critical cost component for most of us. We can’t increase our label prices because our health care costs double. Given the profit margin profile of our industry, something else will have to give. For a lot of companies, that will be investments in new equipment, raises, and other activities that generally increase employment and create new products. The implementation of Obamacare is one more factor that will drive consolidation in our industry. If you are in that group of 2 – 50 employees (a substantial part of our industry), you now have a decision to make: Opt out of offering benefits and paying the penalty (and potentially losing good employees) or being at a cost disadvantage by offering health care. Not good options.

Here’s an interesting fact he pointed out to me. Structurally, Obamacare added roughly 6% to premiums off the bat. Reinsurance fees and premium taxes are part of the legislation. If anyone thinks insurance companies are not going to pass those on, please refer him to a psychiatrist. So before any other changes are factored in, we’re at a 6% increase for the year. Add in healthcare inflation and we’re facing double digit increases yet again. What is so sad about this (and many other government schemes) is there is no accountability. Imagine you promised your customer savings. You would be held to what you promised via a contract in many cases. At the very least, you would be fired if you didn’t deliver. Yes, we hold elections, but people a lot smarter than me have mathematically documented the incumbent bias. We got promised savings by Obama, Pelosi, Reid, and the rest of them. The savings haven’t been delivered and they’re still collecting paychecks (signed by us, the US taxpayers, I might add.). Something’s going to give very soon.

Two things that happened today reminded me of the parallels that exist in raising a child and being in business. (A shameless self plug – I wrote a book that covers that subject quite a bit. See more at www.goodjobairplane.com.) As new parents, we struggled with the TV thing. Should he watch TV? What shows should he watch? We started out with PBS – you know, the learning shows. That quickly gravitated to cartoons that Dad used to watch – Scooby Doo, Tom & Jerry, etc. By the time he was 3, our son could operate the remote control better than the two of us. (He doesn’t watch excessive amounts of TV; he’s just more technically competent than us.) Soon, he started navigating the channels. Inevitably, the question would come: What is appropriate for a child to watch? Demonstrating his mother’s strong will, his view of what is appropriate and ours is often quite different. We probably had the only 3 year old that could use appropriate properly in a sentence and launch into a dissertation as to what is appropriate for a 3 year old to watch and why. (Yes, his mother’s intellect too.) Now that he is 7, the conversations are even more interesting about what is appropriate. He is now asking to watch “The Bible” on History Channel. After watching it, we deemed some content is a little too much for a seven year old. It’s tough to win the logic argument that it’s not appropriate when he goes to a religious school. It is certainly fun to see him articulate a view and back it up with facts, even if we don’t want to accept those facts. Life was a little easier when “Curious George” was his favorite show. It certainly wasn’t as intellectually challenging, however.

Today, I met with a friend who started and built a successful business. He is now gearing up to “take it to the next level” and grow rapidly. He knows that means he will need help to accomplish his goals. He has laid out an ambitious growth plan. He has a few employees. He asked me directly, “What is appropriate to share with them? What if I give them my plan and we fail to get there? What do you do?”

I responded that I share my goals with our team on a regular basis. I ask for their input on what we should strive to do with the business. They are often more optimistic than I am and set the bar higher than I would have. We certainly don’t hit all of our goals. If we hit every goal we set, we probably weren’t being aggressive enough in setting them. We set goals that are realistic but challenging to meet. There’s nothing wrong with telling your team you didn’t make it, that you “failed.” None of us is perfect and you are more respected as a leader if you recognize that fact. (If you are continually wrong, your judgment needs to be questioned and that’s a separate subject.)

Having conversations about what is appropriate is fun, with your kids and with your team. Ask them what they think. Their answers might surprise you.

At the recent TLMI Converter meeting, a very thought provoking presentation took place. The speakers were from a company called Bridgeworks that specializes in “Solving the Generational Puzzle.” They help employers understand the differences and dynamics of generations interacting in the work place. Their website, www.generations.com, provides a synapses of the generations:
? Traditionalists (born prior to 1946) are retiring and taking valuable knowledge with them creating a brain drain.
? Baby Boomers (1946-64) are heading into the peaks of their careers and forcing companies to think about how to replace their vast numbers and skill sets.
? With a much smaller population of Generation Xers (1965-81) available in the work force, organizations are not only scrambling to recruit, engage and retain them, they are looking to other generations to fill talent gaps.
? And finally, the leading edge of Millennials (1982-2000) is entering full-time employment with very different expectations for how they want to be engaged and managed.

To illustrate their point, their speaking team was comprised of a Baby Boomer, a Generation X member, and a member of the Millennial generation. With a lot of self-deprecating humor, they illustrated the differences in what each generation values and how to effectively communicate with and motivate each generation.

They used one example that really hit home with me. They asked each generation their first impression of NASA and the space program. For the traditionalist (pre baby boomer generation) and baby boomer folks, it was landing on the moon. This event was a major accomplishment and source of pride and demonstrated how when we work together, anything can happen. For my generation, the Xers, the memory is of the Space Shuttle Challenger exploding. This event made us cynical and not trustworthy of big projects/big government. The Millennial generation really hasn’t had much exposure to the space program, other than the occasional article about budget cuts at NASA.

One example creates several different attitudes from people, depending on when they were born. While this is clearly a generalization, I believe it is directionally appropriate. I vividly remember the Space Shuttle Challenger, probably the same way many Baby Boomers remember JFK’s assassination. I can tell you exactly where I was, what I was wearing, and who I was with when we got the news about the Challenger. As a kid, I remember my parents relaying the same facts about JFK’s assassination.

As I’ve written in the past, it is clear to me our industry faces a talent gap in the not too distant future. Talk to a Millennial about labels and their first reaction is, “Print is a dying industry.” While we know that to not be true, we need to do a better job educating

I was all set to think about a creative topic to write about this week. I got an email today from our quality department. One of our customers, who is a public company with a rather large compliance department, is requiring us to participate in a conference call regarding “conflict mineral” usage.

Here is an excerpt from our customer’s email:

“The purpose of this call is to discuss the Dodd-Frank Wall Street Reform & Consumer Protection Act of 2010, and what this means to our industry. As a publicly traded company Standard Register is required to report the existence of “Conflict Minerals” in the products it provides. If you would like to pre-read on the topic please visit www.sec.gov/news/press/2012/2012-163.htm. Please plan on attending this call. Concluding the call a survey will be sent that will capture your response in regards to ‘conflict mineral’ usage. Your response to this survey is extremely important so please be sure to complete promptly.”

Straight from the SEC Website:

The Securities and Exchange Commission today adopted a rule mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act to require companies to publicly disclose their use of conflict minerals that originated in the Democratic Republic of the Congo (DRC) or an adjoining country.

So, as a result of “Wall Street reform”, I need to have someone fill out a survey about our usage of “conflict minerals” that originate in the Democratic Republic of Congo or adjoining countries. How the two are connected is beyond me. I’m sure the banking industry will be much more consumer friendly as a result of companies disclosing their use of conflict minerals. This rule will surely help prevent another financial crisis.

This legislation is yet another example of the government quietly killing small businesses. The costs of compliance with meaningless regulations are getting out of hand. As I wrote after the election, I voted against every national incumbent on my ballot in 2012. I will do the same in 2014 and 2016.