My friend wanted to expand the size of his garage to make room for a large woodworking shop. At the beginning of the pandemic, a contractor gave a $22,000 estimate. However, the job was postponed for reasons unrelated to the cost. Recently, he decided to move forward, and the same contractor returned with a new quote last month: over $45,000.
Persistent inflation, supply chain troubles, inventory shortages and increased labor costs are putting pressure on manufacturers, while eating away at their bottom line. These pressures are forcing many to pass the increased cost of doing business onto their customers.
The Consumer Price Index increased by 7% in December of 2021; by April 2022 it was 8.3% — the highest in 41 years. Additionally, input costs for manufacturers (costs incurred to create a product) have seen steep increases, influenced by many factors. For example, West Texas Intermediate crude rose 35% in one month (December 2021-January 2022); in February, aluminum prices struck an all-time high-- escalating 25% since December.
With no end in sight, input costs are expected to maintain pressure on the economy. According to a January 2022 PwC Pulse Survey, “68% of manufacturers agree that inflation is likely to remain elevated at the end of 2022. To offset increasing input costs of everything from raw materials to parts and components, to energy, 73% of industry leaders expect they’ll need to increase prices through 2022, presumably to protect both gross and profit margins.”
With inflation at a 40-year high, executives are attempting multiple tactics to manage their eroding margins caused by supply shortages, rising commodity/oil prices and higher wages. As previously described, the impact is forcing most manufacturers to impose price increases.
However, businesses are also increasing investment in categories they believe are the best avenues to growth. According to the PwC survey, “77% believe the ability to hire and retain talent is most critical to achieving growth.” While “less than a third (31%) expect talent shortages to ease.” That means getting to the best potential talent pool before they drift away.
Reported by the IHS Markit, an information services provider merged with S&P Global in 2022, the JPMorgan Global Manufacturing PMI revealed that average factory input prices have been rising at the third-fastest rate over the past decade.
Initially, the rise in costs was linked to suppliers increasing prices during widespread shortages of goods, creating a sellers' market from electronics and hydraulic components to basic raw materials for construction products. Average global supplier delivery times continued to increase at an unprecedented rate.
Not Just Manufacturers--Distributors Too
Most medium-to-large industrial have embraced an eCommerce strategy. With advancements in technology and an aggressive push, e-business has increased tremendously since 2020. The pandemic compelled many businesses to increase their online presence and capabilities, transitioning away from more traditional (and expensive) ways of doing business. Ultimately, this creates new opportunities and efficiencies, allowing distributors and manufacturers alike to meet their customers where they are. Newer digital commerce solutions have also injected an increase in visibility to customers, by providing greater insight into inventory and available services. This leads to faster predictability in supply needs and more efficient control of their operations.
According to Forrester Research, the escalation of B2B eCommerce has been so impactful that “the US B2B eCommerce market will reach $1.8 trillion by the end of 2023, surpassing the $529.7 billion for B2C.”
Reclaiming Control Over Margins
Manufacturers are being hit from all sides and must look beyond conventional cost-containment to maintain, or even reclaim, margins. JIT (just-in-time) inventory management and maintaining pricing that aligns with the cost of materials are no longer the viable strategies of the past. Manufacturers must adapt or die. It’s only by being agile that they will not only survive but have a viable chance of achieving growth.
In order to tackle the challenges ahead, here are some tactics manufacturers can consider to protect margins:
Repairing the supply chain one link at a time:
- Take off some of the pressure: Companies may consider longer-term contracts and allow more cost transparency with suppliers to amicably work together. This leads to closer relationships with suppliers by having increased data-sharing to improve supply chain transparency. Consider the automotive market’s demand for PCB chips. Some of these OEMs sourcing products requiring semiconductors are establishing longer-term blanket orders to secure inventory availability. This lowers input cost and eases product availability.
- Hold back the tide of rising inflation: As the price of materials continues to rise, manufacturers must mitigate the impact on cost of goods sold. With the many tactics that can be employed, reassessing contracts should be among the top strategies. Whether indexed contracts for commodities, contracts that should be fixed-priced or renewal contracts that should be renegotiated, reassessing your position with vendors and customers is imperative in these turbulent times. It may result in evaluating alternative suppliers that will offer more attractive pricing or better availability due to their proximity to your operating facilities.
- Strategize price increases: This can be an extremely difficult undertaking. With so much uncertainty around rising input costs, manufacturers are finding it difficult to decide whether to pass these costs on to their customers— and if so, by how much. The bottom line is, we can’t be scared to cross that bridge to protect, or at least control, margin shrinkage. Chances are, most customers are passing on price increases to their customers, too. It comes down to what products get a price increase and by how much, how long do you project to hold the higher price (though it may never go down) and the big crystal ball question: how high can the price of a product go before you see customer abandonment?