CNJ PLASTIC ENTERPRISE

Blaire Ann Arenas and Ronchi Noel Reselosa

I. Company Background

History of CNJ Plastic Enterprise

CNJ Plastic Enterprise is a family-run business. It started in 1992 under the business name Coy & Jay and
was founded by the family’s patriarch, Mr. Joel Embuscado. Initially the business was operating as a
small plastic dealer. Basically, they buy plastic scraps from material recovery facilities (MRFs), or more
commonly known as junkshops, and sell them to the plastic recycling factories. In other words, they
serve as the middle man of junkshops and plastic recycling factories. The company started with 1 truck,
an open space and initial funds from Mr. Joel’s father.

During the early years, the company is faced with tough competition against many other plastic dealers,
not only for clients, but more of getting plastic scraps from the MRFs. Competition in this kind of
industry is based on the dealers’ buying price. The higher your bid for the buying price, the more chance
of contracting the MRFs to supply you with needed volume. MRFs also prefer the best service, meaning
high turnovers in terms of pickup of the plastic scraps. Also, to keep up with competition, Coy & Jay then
provides funds to MRF to buy plastics from individuals with no interest and payable when able. It is very
risky and really needs a lot of capital to finance the company as well as their suppliers, but that’s how
they play the game in their field. They have to maintain a pool of suppliers to comply with their own
requirements.

Given that MRFs have no loyalty, meaning they can contract with other dealers even if they have
existing contract with you, Coy & Jay then made sure that they strengthen their connection with their
partners. Building relationships and strong rapport is also very important. They make sure that they
give something to their suppliers during special occasions aside from complying to the minimum
requirements of dealing with them, i.e. acceptable buying price, service and enough funds.

After 10 years of operation, the company had enough funds, and then evolved into a plastic recycling
facility and the birth of CNJ Plastic Enterprise. The plastic recycling facility is located in Baisa, Project 8,
Quezon City. They own the warehouse and the land where their recycling facility is located. The
company now has six (6) hauling and delivery trucks and 100 employees. From being a mere middle
man, it now produces quality single (big) and double (small) grinded polypropylene (PP), high-density
polyethylene (HDPE), and polyethylene terephthalate (PET) plastic flakes. CNJ now buys plastic scraps
from upscale dealers, city transfer stations, and big MRFs and processes and transforms the plastic
scraps into plastic flakes, which are to be reused by plastic manufacturers. At this level of the whole
plastic manufacturing process, CNJ’s finished products are actually raw materials of the plastic
manufacturers. Average annual production in terms of weight and volume is about 3,000 tons
(3,000,000 kg).

II. Current Scenario

Jerico Embuscado, the eldest son of the founder, has joined CNJ in 2008 and assumed the role of the
Chief Operations Officer (COO) and ultimately became the Chief Executive Officer (CEO) after two years
when his father semi-retired. His brother, Jay, then assumed the COO position when he became CEO.

Organizational Chart

Owner/CEO
Jerico Embuscado

Manager/COO
Jay Embuscado

Finance Operations
Department Department

Supervisor 1 Supervisor 2
Accountant (Warehouse and (Factory and
Logistics) Maintenance)

60 37
Accounting
Workers Workers
Assistant

Secretary

Sourcing of plastics

They have direct contact with local government contracted garbage collectors. They already have
negotiations with these institutions. Right now, they are the only plastic recycling facility that has
contract with Cavite, Las Pinas and Cainta where 150 tons of their plastic scraps per month are coming
from. Before the waste collected from the households are directed to the designated dumpsites, the
contracted garbage collectors will segregate the plastic scraps from the rest of the garbage waste in
their transfer station for CNJ to pick up. They also have contracts with big MRFs (50 tons) and some
plastic dealers (50 tons).

CNJ uses all 6 trucks to cover all the collection and deliveries. They have their own dispatcher that
manages the logistics. Trucks leave the warehouse as early as 4 o’clock in the morning and are
averaging 2-3 trips per day.

To make sure that all trucks collect and turnover the correct volume they have truck scaling equipment
to double check each truck’s canvass report.

The Production Process

The production process starts with hauling the plastic scraps from the big MRFs or transfer stations. The
plastic scraps are then brought into the factory and is unloaded in the receiving area. The plastic scraps
are then washed and cleaned and put into a centrifugal dryer. After drying, the plastic scraps are then
segregated according to resin type of plastic whether HDPE, PP or PET. Sorting and grouping plastic
materials by type is an important step because contamination can make an entire batch of plastic
material un-reusable. Then it is classified further by its Plastic class/quality and color. It is then stored
again in the storage area where it is ready to be flaked in the grinding machine or granulator.

Plastics usually needs to be cut into smaller pieces or flakes in order to allow further processing and to
provide easier packaging, transportation and distribution. This cutting also presents challenges as many
plastics are abrasive to the metal blades of the granulator causing its downtime or failure.
The 1st stage of grinding produces big flakes. These big flakes are then packaged into rice sacks that are
not of good quality because it may further be grinded into small flakes. These big flakes will be
inventoried and may already be shipped out to customers requiring big flakes. If further grinding is
required, the big flakes are then fed into the 2nd stage of grinding which produces small flakes. The small
flakes are then packed into smaller and nicer rice sacks and are inventoried. It is then brought into the
warehouse and is now ready for delivery.

Business Operations

As a plastic recycling facility, they were able to secure regular clients who are mostly plastic
manufacturers (the finished product makers), who buy the small grind plastic flakes; and some plastic
pelletizers, who buy the big grind plastic flakes (plastic pellets is another kind plastic raw material).

They don’t have marketing or sales person to get new clients. Jerico and his dad go to Valenzuela
personally, where most plastic manufacturers are operating, and give out their business cards and
samples to potential clients. They feel that there’s no need for them to set up a group for this task.

They continue to strengthen relationships with their business partners, the MRFs, city transfer stations
and customers. They ensure that they deliver the best service. They make sure that they are on-call and
are ready to pick up plastic scraps from the stations and MRFs to increase turnover rates. It is important
for suppliers to free up their space since plastic scraps takes a lot of it. If the plastics are not picked up,
MRFs would not be able to collect new batch of scraps since they don’t have enough space. This hinders
the whole operation.

They also maintain more than enough funds to support their operation and their suppliers. In this kind
of business wherein they deal with informal institutes and the industry is deregulated, it is important
that they have healthy cash flow. A quarter of the plastic recycling players have shut down due to lack
of funds.

On the other hand, the company has been facing problems with high employee turnover. Also, another
challenge is that most of their employees belong to the Socio-economic Class D and in terms of skill level
they are on the lower proficiency. With this kind of skill level, their employees are prone to deception in
pricing and scaling from MRFs, transfer stations and dealers.

Another operational problem the company is facing is the high machine downtime. There’s a minimum
of three machine breakdowns in a month. Every time there’s a machine breakdown, there’s also a
disruption in the whole operation. Since they cannot process the collected plastic scraps, they will have
to stop collection because there will be no available space for new collections. Constraints in the
warehouse space prohibit them to collect more than their quota per day. No collection means, no
transactions with MRFs and transfer stations and therefore risk of losing their contract.

They don’t have a stay-in technician unlike other facilities as it is too costly for them to keep one. They
have to contact a technician who would come from Valenzuela and this prolongs the downtime. CNJ
does not consider changing the machines since selling price of these machines for disposal are only at its
scrap value. They only consider buying new machines just to increase capacity and efficiency and are
planning to keep the old ones. The best thing they are doing is a once a month scheduled maintenance.

III. The Plastic Manufacturing Industry

Industry Overview

Plastic
Manufacturers

Pelletizers

Plastic Recycling Factories

Plastic Dealers

Big Materials Recovery Facilities

Small Materials Recovery Facilities

The diagram shows the hierarchy of players in the plastic manufacturing industry.

Small Materials Recovery Facilities (MRFs) also known as “Junkshops” are the smallest unit in the
Industry. This is where the “kariton boys” and “magbobote” sells their scavenged materials whether it is
paper, metal or plastics. The Big MRFs are just an upscale version of the Small MRFs.
The Plastic Dealers are the middle men or traders which buy from the MRFs and then sell it to the Plastic
Recycling Factories. These factories produce plastic raw materials in the form of plastic flakes for the
pelletizers or to the Plastic Manufacturers.

Plastic recycling factories produce two kinds of raw materials – the big grind and the small grind. The big
grinds are commonly used for low quality plastic finish and the small grinds are used for high quality
finish. The pelletizers are capable of producing pellets using recycled raw materials from the factories
and utilizing new or “virgin” plastic raw materials. The pellets are preferably used for creating plastic
that are of high quality finish. And ultimately, the plastic manufacturers create the finish product either
from plastic flakes or pellets.

In the early years, each player has defined their roles in the industry. They keep their position and it’s
almost an unwritten rule that one player cannot do multiple functions within the hierarchy. That is, each
player performs within their own niche.

But due to increase demand for plastic raw materials and decrease in supply, and emergence of Chinese
plastic manufacturers, there has been a disturbance in the roles within the industry. The new Chinese
plastic manufacturers are doing a backward integration. They are now by-passing the plastic recycling
facilities; they go direct to the dealers and big MRFs, and buy assorted plastic scraps at a higher price.
The manufacturers are now processing the plastic scraps themselves. This in turn hurts the plastic
recycling players. They are losing their suppliers because they cannot compete with the price offered by
the manufacturers. Or they are left with a very small margin if and when they increase their buying
price. This makes the clients now become competitors.

Another threat is the continuously increasing of buying price. Since the industry is deregulated, it is very
easy for new players to enter the industry. Setting up junkshops is very easy and is evident in the
sprouting of several MRFs in almost all municipalities. More players in the field increases competition
and prices.

Industry Trend

In 2008, the Mayor of Los Baños enforced the plastic ban in the university town and since then close to
60 other towns and cities have followed the movement and have passed their respective ordinances.
Local ordinances to enforce plastic ban have been passed by the Local Government Units in Lucban,
Quezon, Tanay, Bacolod, Davao and recently Muntinlupa, Las Piñas, Marikina and Makati. This has really
great a big impact on the Plastic Industry; however, they are still finding ways to mitigate the impact of
the plastic ban. The Plastic Industry has been a top contributor of government revenues and
employment generation and is now facing challenge.

On the other hand, this could also be an opportunity for the plastic recycling businesses since plastic
manufacturers are proposing to forego production of thin, disposable, and single-use plastic bags for
thicker material that can be reused and recycled.

Challenge

The company has no problem with sales per se. Everything that goes in their factory is being delivered
to clients. However profit margin has been decreasing.

Profit Margin
8.00
7.00
6.00
Million PHP

5.00
4.00
3.00
2.00
1.00
0.00
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
3.30 4.50 4.77 6.75 6.00 6.90 4.50 3.00 2.70 2.10

The decline started in 2009 and has not recovered since. They are attributing this to the backward
integration of some of their clients and increase in buying price of plastic scraps. They are now
reconsidering going down the hierarchy and become a plastic dealer once again.

They are now finding ways, especially Jerico, on how to bounce back and regain profitability given
the constraints and emerging trends. He feels the pressure of keeping the success and existence of
their company. He also wants to make his father proud by creating, not only significant, but
exponential growth to the company. Jerico has already managed to increase their capacity by 35%
and reduced operational cost by 40% since he joined in 2008. However, he wants to do something
more.
Recently, he made a bold and risky move. He has closed a deal with a Korean exporter. The new
client ordered a huge volume of plastic flakes from CNJ with a risky payment term but will give them
a very good margin. He hopes that the business theory -- high risk – high returns – will reward CNJ
through this transaction.