Steel, copper, and aluminum prices are all fairly stable — for now.
But fluctuating costs are always a concern for manufacturers, especially since material price is one element of the manufacturing process that can’t be controlled, emphasizes Jeff Shaw, sales manager for Curry Supply Company in Martinsburg, Pa.
“We haven’t seen any measurable change in buying behavior due to rising material costs,” Shaw explains. “This may be due to the fact that we have not passed any major increases in prices on to the consumer as of yet.”
Brett Collins, president of Venco Venturo Industries LLC in Cincinnati, is also noticing very minimal effects. “We’re actually looking forward to moderate inflation so we can get some much needed price increases,” Collins says.
Even in times when material costs aren’t volatile, manufacturers should still be prepared for the possibility of a price change. There are a few steps you can take when increases happen – or even before they do – that will help you prevent having to pass the price increase on to customers.
Build your inventory
“Depending on the volume or severity of the change, we might look at buying an entire truckload of material,” explains Walter VanLaren, general sales manager for Sioux Automation Center Inc. in Sioux Center, Iowa. “Typically, once you get into a truckload of something, or a whole coil, you can locate your price point and see if you can go up to the next price point without affecting input cost or margin and still be within your comfort range.” Many vendors will adjust cost for manufacturers who buy more material at one time.
Wilcox Bodies Ltd., based in Milton, Ont., always keeps a certain amount of stock on hand in case material prices increase. “We have an agreement with our metal supplier. If material prices go up, then they have to give us a long enough lead time to plan for it,” says Wilcox vice-president David Dick.
Examine processes
Price changes (or the anticipation of price changes) offer opportunities for process improvement and waste reduction. VanLaren recommends examining the materials you’re currently using to make sure they’re being applied as resourcefully as possible. “Ask yourself: Am I utilizing the steel sheets as efficiently as I can? Can I take this piece over here and make something else out of that?” VanLaren says.
He says it’s also worth investigating whether buying material in a different length and/or combining it with other material being used for another product would pay off. “It may save you from handling a piece of material three times,” VanLaren explains.
Operational excellence is a cost saving focus for Tulsa, Okla.-based Auto Crane as well. Product manager Matt Collins says process improvement can (and should) happen at all levels. “Ideas aren’t necessarily generated from the top; oftentimes they’re generated on the shop floor in terms of how we can do things better, improve layouts or efficiencies and workflow, and how much time it takes to assemble,” Collins says. Encourage staff to share their ideas for improving efficiency, or to communicate noticeable areas of inefficiency within their areas of responsibilities.
Any change you make that reduces theamount of material or energy used during production will help the bottom line. Volvo Trucks conducted U.S. Department of Energy assessments to identify where and how much energy was being used. Then, energy-saving tactics were put into place, along with a plan to reduce energy use for its paint operation. As a result, the plant reduced MMbtu per truck (the DOE’s metric for energy intensity) by 29.6 percent.
Budget for price changes
Price increases aren’t necessarily just a one-time event, explains VanLaren. There are regular increases you should count on and plan for.
“Just about every year, we can expect a one or two percent price change in our paint, for example,” he says. If you haven’t incurred a recent price change for common materials, assume it will happen in the next 12 to 16 months.
Planning and forecasting are integral pieces of managing material price increases. Use your staff to gather helpful information that will make planning and forecasting as accurate as possible. For example, when they call on customers and dealers, Auto Crane’s regional sales managers serve as liaisons to discover the types of orders coming in and what’s happening in the field.
“The information starts from them,” explains Auto Crane’s Collins, “and then flows through sales, marketing, and engineering, and then out to the plant.” The information is then used to plan and forecast orders.
Vendor and customer relations
Shaw says Curry Supply is always looking for more efficient ways to produce products and manage costs. “We regularly review material quality, delivery, and pricing with our vendors in order to manage manufacturing process and expenses,” he says. Building good vendor relationships may allow you the luxury of negotiating back on price increases, as well as suggesting options like the unbundling of pricing, possible discounts for quick payments, or payment term extensions.
Establishing and maintaining relationships with customers can also help you deal with material price increases.
“More than ever, fleet managers are closely evaluating spec configurations to optimize operator efficiency and total cost of ownership,” says Curry’s Shaw. “We work together with fleet managers to measure cost effectiveness vs. cost of ownership.”
While he says that some customers do shop on price alone, most customers are even more concerned about investing in products that will ultimately help them make money, so they’re looking for solutions with high cost/value relationships.
Consider a material change
While material change is an option, it’s typically a last resort — for several reasons. First off, a change in material may also require a change in machinery to process it. (The same equipment can’t be used to weld
both steel and aluminum, for example.) Is your staff trained to work with the properties of the new material? f not, what would it take to get them up to speed?
A move from one material to another may require different tools as well. Using the steel-to-aluminum example, increased gauge thickness may be required for aluminum to gain the same comparable strength as steel.
“Changing materials would be extreme, and I think a company would embark on a change like that only if the market were driving it … meaning that the consumer was the one saying they wanted a different material,” says VanLaren. “I don’t think the material price change in itself is a big enough push to make that happen.”
Dick says that Wilcox Bodies is close to using 85 to 90 percent aluminum, but it was the complete opposite 15 years ago, when the company used mostly steel. When managing a material change like this, it’s important to let customers know about the benefits of the new material.
“For us, aluminum is about 30 percent lighter,” Dick explains. “With that savings and weight, you’re also saving on fuel and vehicle maintenance, there are fewer emissions, etc.”
Even though most service truck manufacturers aren’t experiencing material cost increases, implementing some of these ideas can help protect your company when price fluctuations do occur. By preparing now, you won’t be caught off-guard down the road.
Leah Grout Garris is a full-time freelance
writer, editor, and marketing consultant based
in Cedar Rapids, Iowa.