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What Challenges Lie Ahead in 2006? (Part 3 of 4)

What issue or issues most greatly affected your operation and, more generally, your specific industry segment during 2005? What are the primary issues that your operation and your industry segment will face this year?HOTEL/MOTEL LAUNDERING & LINEN SUPPLY: Bill Kartsonis is chairman of Superior Linen Supply Co., Kansas City, Mo., He's certified as a Master Hotel Supplier by the American Hotel & Lodging Association (AH&LA). His company warehouses and distributes linens and uniforms in addition to washing and renting them.
2005 was a good year for the hospitality industry. Hotels had increased occupancy and were able to increase the amount they charge for a night’s stay. When hotel volume increases, laundry volume increases – finally.
Actually, laundry volume had decreased in recent years due to the success of “green” programs in hotels. Hotels convince guests that they’re helping the environment by not having their sheets and towels changed every day. The name “green” is correct, though, as the hoteliers get to put extra green in their pockets due to spending less on labor changing linens, and less laundry – up to 40% less!
2005 brought huge increases in energy costs with devastating effects. Already at record levels, natural gas costs more than doubled. It’s now documented that gas costs are manipulated by speculators, instead of being steered by supply and demand.
The gas situation detracts from the otherwise rosy outlook for 2006. The U.S. economy is on a roll. Hotels and restaurants project continuing increases in volume and profitability. Fundamentals are in place for well-managed linen suppliers to have a good year – unless the labor supply collapses.
The majority of U.S. hotel workers and a large number of laundry workers are foreign-born. Employers know their worker are reliable and trust that their proper-looking documents are, too.
We’re proud that a number of our employees have become naturalized citizens. When I was studying economics in the early ’70s, it was known that we would have to expand immigration to maintain economic growth.
If Congress goes on to enact border restrictions and all that is in the bill that just passed the House, without guest worker visas, the economy will come to a halt and employers will be called criminals!  There are 10 to 20 million workers who keep the economy going by performing needed work. The current restrictions on immigration are ridiculously tight. Further, the rules were written and enforced with a winked eye.
I encourage you to call, write and see your congressmen. Tell them you believe that America should continue to be the Land of Opportunity. Tell them we should legally welcome new workers. Share your personal story with them.
My U.S. senators are servants of the people and know who I am. Don’t allow the media to make you think that our government is essentially corrupt and listens only to special interests. All interests are special. Make your interests known.EQUIPMENT MANUFACTURING: Ed Kirejczyk III is the president of EDRO Corp., East Berlin, Conn. He's been employed in various sales and marketing positions there since 1990 and been involved in designing EDRO's shipboard washer-extractors, water reuse systems and washer control technology.
EDRO Corp. is a third-generation, family-owned laundry equipment manufacturer. The biggest issues affecting our operation this past year were the continuing dramatic rise of operating costs, in particular utilities, materials and employee benefits.
These increases would have been extremely hard to predict as, understanding our business model, we have become accustomed to being able to forecast, with a reasonable amount of accuracy, our results for the coming year. Some issues we expected to materialize did occur, while others caught us by surprise.
Who could’ve predicted the natural disasters (Asian tsunami, Atlantic hurricane season, Indian/Pakistan earthquake) and the subsequent spike in energy prices? This has had a ripple effect on almost every part and component we purchase, as seen in surcharges for freight, dramatic increases in raw materials and instability in subcontracted services.
In addition, increasing competition from low-wage countries in the Far East, which is revolutionizing industry around the globe, coupled with soaring energy prices is simply compounding the problem for U.S. manufacturers.
From our customers’ standpoint, higher energy costs erode business profits and the amount of money available to spend on durable goods, such as laundry equipment.
We look at our business in three areas: (1) customers; (2) employees; and (3) suppliers. Although we can’t control our customers’ buying habits, with new technology we can provide more efficient machines that can save on resources.
Things we can control, we seem to have weathered well. EDRO is fortunate to have a stable work force. And our long-term relationship with key component suppliers enables us to work through pricing issues through forecasting and planning.
I recently read an article comparing operating costs over a five-year period in the U.S. manufacturing industry. The results showed tremendous rises in costs with limited increases in selling prices – a definite economic imbalance.
Looking forward, higher energy, material and benefits costs, coupled with increasing competition from low-wage countries, will force us to reinvent our business. Since it’s difficult to pass on such price increases, we need to streamline our processes and drive change that will increase our value to customers.CHEMICAL SUPPLY: Steven Tinker, the director of research and development for Gurtler Industries, South Holland, Ill., has more than 30 years of experience in laundry chemistry research, development and marketing. He's secretary/treasurer of the Healthcare Laundry Accreditation Council.
The most significant issue chemical suppliers faced in 2005 was the tremendous cost pressures and shortages in basic raw materials. Everyone is aware of the big increases in the price of oil during 2006, especially when they make that trip to the gas station to fill up their tank. Chemical suppliers got hit with these cost increases in multiple areas.
First, many of the basic chemicals used in modern detergents are petroleum-based. Surfactants, the backbone of our cleaning technology, require both crude oil and natural gas to create the basic molecular building blocks in their synthesis. But there’s a double impact, because these processes also require energy (heat) for the molecular reactions to progress during synthesis. In addition, several of the other building blocks for detergents such as sodium hydroxide and phosphates require significant amounts of energy during their production. So, these materials have had significant cost increases during the last year.
Then, the “double whammy” of Hurricanes Katrina and Rita hit the U.S. chemical and energy markets in the last months of 2005. Besides disruptions in basic oil and natural gas production and refining, key chemical plants in the Mississippi delta and the Houston Gulf Coast were shut down for months.
Two key plants that produce surfactants were out of commission until early this year. That meant a tremendous decrease in capacity that translated into shortages and much higher short-term prices. Surfactant “spot” prices increased by nearly 50% in just weeks.
Every chemical supplier in the nation was affected by the shortages and the cost increases in 2005, and we all did our best to keep our products available while controlling prices. We all realized that as the key chemical facilities in the Gulf came back on line, the “pipelines” would begin to refill, and the short-term price increases would begin to roll back. But, most of the forecasts for 2006 indicate that the average pricing will still be higher than the averages for 2005.
Energy in 2006 is forecast by one company to stay between $11 and $12 per MMBtu (million British thermal units, a standard measurement of energy that can be derived from gasoline, fuel oil, natural gas, etc.). In comparison, the cost of energy by this calculation was about $7 per MMBtu one year ago. This increase of more than 50% will continue to affect the chemical market. We believe the shortages we experienced at the end of 2005 are mostly behind us, but the price increases will linger into this year.
Another major industry concern is the potential increased pressure from regulatory agencies at the local, state and federal levels to modify the industry’s basic surfactant chemistry to supposedly more environmentally friendly materials.
There’s a significant amount of controversy in this effort, because the science behind this move is not universally accepted. So, as with many environmental questions, we have to try to determine the cost of the changes versus the value of the changes. There’s a potential 20% or greater cost increase with such changes but, maybe more importantly, there are questions about the overall efficacy of the newer, more environmentally friendly surfactants.
For those who may remember the moves in the 1970s by various states or municipalities to regulate phosphates, most detergent companies were forced to make changes to technology that was less effective and more costly than the phosphates that were banned or limited.
It may be possible that we’ll see the same impact in the industrial and institutional laundry market if governmental agencies decide to force changes in the surfactants we use. 2006 may be an important year in deciding how this effort may progress.
 

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