Cost savings difficult to find

Trying to find ways to save money in your budget for operating materials and supplies may be like searching for a needle in a haystack. A look at the latest round of price and cost data for the industries that make factory supplies shows margin conditions deteriorated among 10 of 19 industries. Now, 13 industries show direct manufacturing margins at record or near-record lows (see industries wi...

By Staff July 14, 2003

Trying to find ways to save money in your budget for operating materials and supplies may be like searching for a needle in a haystack. A look at the latest round of price and cost data for the industries that make factory supplies shows margin conditions deteriorated among 10 of 19 industries. Now, 13 industries show direct manufacturing margins at record or near-record lows (see industries with a D to F-minus margin grade).

Savvy plant engineers who are willing to invest some research into their supplier’s cost conditions will find only three industries worth investigating. These are lubricating oils and greases (SIC 2992), industrial valves (SIC 3491), and other valves and pipe fittings (SIC 3494). The last one is the industry that makes metal fittings and flanges for piping systems. All three have a margin grade of B.

To restore manufacturing margins to average levels typical of the past five years, makers of lubricating oils could decrease their product prices 3.6%. Industrial valves producers could cut tags 0.7%. And manufacturers of metal pipe fittings could withstand a 2.1% average price cut. But to make a case for price cuts, buyers will have to delve into the materials budgets of their suppliers. The bill of materials for industrial valves, for example, shows a wide range of possible attacks. Costs for steel castings, extruded copper, iron and steel forgings, and miscellaneous other nonferrous metals all declined from April 2002 to April 2003. The cost for steel mill products, however, increased 8.6% over that time period. Pulling too hard on the materials trigger could backfire.

The tricky nature of negotiating price cuts, plus a forecast that shows end-market demand growing again next year, explains why price inflation remains alive and well. Our forecast for industrial valves calls for average valve prices to rise 1.8% in 2003 and 1.4% in 2004.

Price/cost/demand roundup

Average Product Prices1 Change, %, During 12-Mo Ending… Direct Mfg. Costs2 and Margins Grade Growth in U.S. End Markets3 Change, %, During 12-Mo Ending…
Industry SIC Jan 03 April 03 Costs are… Grade Jan 03 April 03
1 Average product price changes are calculated from the producer price index for each 4-digit SIC (standard industrial classification) industry from the U.S. Bureau of Labor Statistics.
2 Analyses of each industry’s direct manufacturing cost changes are from Thinking Cap Solutions, Inc.’s proprietary Industry Cost Escalation (ICE) model. The “grade” indicates that recent price/cost changes have produced record high (A+) margins to average margins (C) to record low (F-) margins for the average producer in an industry. Grades of A to A+ mean plant engineers may be able to strike a better bargain with suppliers and better control plant costs.
3 Growth in U.S. end markets data are from the ICE model and are estimates of output for the domestic end markets which purchase a given industry’s products.
All data prepared and presented by Thinking Cap Solutions, Inc., Port Angeles, WA (telephone: 360-452-6159; e-mail: ebaatz@ice-alert.com).
Wood Pallets and Skids 2448 -2.20 -0.92 stable F -0.95 -0.24
Polishes and Sanitation Goods 2842 -0.36 -0.23 rising F 0.02 0.33
Surface Active Agents 2843 -1.38 -1.02 stable F- 0.20 0.61
Adhesives and Sealants 2891 0.21 0.12 rising F- 1.59 2.29
Lubricating Oils and Greases 2992 1.03 0.92 stable B 0.00 0.34
Rubber and Plastics Hose and Belting 3052 0.33 0.77 rising D 0.83 1.87
Abrasive Products 3291 -0.28 0.05 rising F- 1.56 3.22
Steel Wire and Related Products 3315 0.31 1.26 rising F- -1.91 -1.80
Copper Rolling and Drawing 3351 -3.29 -2.25 falling F -3.11 -1.68
Nonferrous Wire Drawing and Insulating 3357 -4.13 -3.50 rising F- 2.87 5.03
Heating Equipment, except Electric 3433 0.61 0.81 stable C -1.79 -1.61
Fabricated Plate Work, Boiler Shops 3443 0.81 1.12 stable D -5.11 -3.18
Bolts, Nuts, Rivets and Washers 3452 0.21 0.15 stable F 3.34 5.68
Industrial Valves 3491 1.25 1.31 stable B -2.67 -2.03
Fluid Power Valves and Hose Fittings 3492 1.07 1.12 stable C -2.67 -2.03
Other Valves and Pipe Fittings 3494 0.77 0.16 stable B -2.67 -2.03
Miscellaneous Fabricated Wire Products 3496 -0.11 -0.09 stable F- -0.66 -0.22
Fabricated Pipe and Fittings 3498 -0.19 0.48 stable D -2.67 -2.03
Ball and Roller Bearings 3562 0.65 0.90 stable C -1.00 0.50