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.
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.
Price/cost/demand roundup
| Construction & Maintenance Supplies | Average Product Prices % Change During 12 Months Ending | Direct Manufacturing Costs and Margins Grade | Growth in U.S. End Markets % Change During 12 Months Ending | |||
| April 04 | July 04 | Costs are | Grade | April 04 | July 04 | |
| 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 | 0.94 | 1.94 | falling | F | -0.60 | 0.14 |
| Polishes & specialty cleaning preparations | -0.33 | -0.10 | stable | F- | -0.51 | 0.17 |
| Surface active agents & related agents | -0.39 | 0.14 | rising | D | 0.63 | 1.28 |
| Adhesives | 0.16 | 0.64 | rising | D | -0.38 | 0.94 |
| Lubricating oils & greases | 1.81 | 2.91 | stable | F | -0.21 | 0.68 |
| Rubber & plastic hoses & belting | 1.93 | 2.29 | stable | D | 1.64 | 3.79 |
| Abrasives-coated products | 0.56 | 0.63 | stable | C | 3.84 | 6.44 |
| Steel wire drawing | 0.91 | 1.43 | rising | A | -1.00 | 0.47 |
| Copper rolling, drawing & extruding | -1.60 | 0.80 | rising | F | 2.40 | 6.28 |
| Insulated wire & cable | -1.80 | -0.35 | rising | D | 5.48 | 8.64 |
| Heating equipment | 1.29 | 1.63 | rising | F | -0.55 | 0.73 |
| Fabricated metal plate work | 0.76 | 0.28 | rising | F | 8.32 | 10.82 |
| Bolts, nuts, screws, rivets & washers | 0.20 | 0.07 | rising | F | 4.55 | 7.03 |
| Industrial valves | 1.43 | 1.45 | stable | F | 0.38 | 2.57 |
| Fluid power valves & hose fittings | 1.41 | 1.36 | rising | F- | 0.38 | 2.57 |
| Metal & plastic plumbing fixture fittings | 0.85 | 0.82 | stable | F | 0.38 | 2.57 |
| Metal cloth, fence & other wire products | 0.50 | 0.32 | rising | D | -0.15 | 1.30 |
| Fabricated metal pipes & fittings | 1.79 | 1.49 | rising | A+ | -1.16 | 0.62 |
| Ball & roller bearings | 1.22 | 1.23 | rising | D | 0.71 | 3.04 |
Do you have experience and expertise with the topics mentioned in this content? You should consider contributing to our WTWH Media editorial team and getting the recognition you and your company deserve. Click here to start this process.
