Customers take on manufacturer inflation burden

Manufacturing costs for a wide range of mechanical components and operating supplies that plant engineers buy regularly have been rising sharply over the last 12 months. Unfortunately, the typical components and supplies manufacturers are passing along a sizeable portion of inflation burden to customers.

Consider the ball and roller bearings industry. From July 2003 to July 2004, the amount spent to make a typical unit of industry output increased 8.8% while the average price increased 3.4%. That mismatch between prices and costs caused the bearing industry to earn a "D" margins grade, which means arguing for price concessions will be tough.

Suppliers of abrasive products are faring marginally better with an average "C" grade. Over the last 12 months, the cost of making a typical unit of output jumped 3.4%. Roughly half of this increase can be traced to higher spending on raw materials and the rest to rising production wage rates and inbound transportation costs. Despite attempts to lift output prices higher and despite strong productivity gains, industry margins have taken a hit, down $1.64 for every $100 of product sold over the past 12 months.

Meanwhile, prices for steel wire have exploded over the last 12 months, up an average 27.9%. Much of the surge in prices has a cost-based foundation. Since June 2003, per-unit spending on manufacturing activities has increased 24.4%.

The typical supplier of steel wire spends $66.10 on manufacturing for each $100 of output sold. Normal spending is considered to be between $67.62 and $67.90. Price target analysis concludes suppliers have an ability to discount current prices by 2.65% and earn a fair or average return on direct costs. We conclude that it may not be futile for buyers to resist expected price hikes in the latter part of 2004.