Webinar: Managing Cost Increases for Manufacturers

Highlights from the June 15 webinar hosted by Amy Reynallt, Senior Manager and Co-Director, HBK Manufacturing Solutions

Manufacturer Challenges

The surprise is not about the challenges themselves, including labor shortages, supply chain interruptions, and inflation, but how long they have persisted.

Manufacturers are struggling to hire as well as maintain workers. We are seeing higher turnover numbers because of:

• increases in compensation
• workers seeking a different environment or looking for more flexible workplaces, which is hard to offer for many manufacturers, including those with continuous processes.

Unemployment is low, at 3.6 percent at the end of May; anticipating unemployment will remain below 4 percent through 2024.

Growing compensation: Wage growth is slowing, but manufacturers have seen compensation increase dramatically in the past year. It continues growing if at a slower pace.

Supply chain disruption continues and the question now is how long into 2023 before we see some relief; the timeline is being extended. Imports are back up, but manufacturers using domestic suppliers still face significant challenges in terms of delays and cost increases.

Current trends:

• away from single source supply to having a second or third source to ensure availability
• away from just-in-time to just-in-case inventory

Costs and inflation:

• Cost of freight and fuel increasing significantly, but also for raw materials and labor—costs across the board
• Government will continue to make adjustments in an effort to address inflation, but increased interest rates will make borrowing more expensive.
• Capital purchases remain strong, but increased interest rates may level or decrease capital purchases

Increasing Prices

Considerations include the cost of making products is increasing due to increases in costs of materials, competitors’ pricing, customers’ demands, customers’ alternatives, contractual obligations which prevent manufacturers from changing prices, and projected costs. We look at these issues even under normal circumstances, but more critically in the current environment.

Customers expect price increases, so manufacturers shouldn’t have trouble passing along their increased costs. But it could be challenging with certain types of customers, such as larger customers.

Ways to increase prices:

• Some are using a surcharge as a way to pass along increased costs, such as a fuel surcharge; surcharges might be a quicker way to increase prices than raising product prices.
• Some tie increases to an index, but have to be careful about the timing of the index release and its relevance to your operation.
• Some are working escalator clauses into a contract for automatic price rises as certain costs increase.

Be cautious about using volume-based pricing in light of labor or supply chain disruption which could leave you unable to fulfill the volume discount.

Need to mitigate supply chain disruption:

• Forecasting will help you look for the best way to keep costs as close to current as possible.
• Quick pay discounts are a win-win option.
• Blanket orders have been a popular way to plan future needs, but manufacturers need to ensure you can meet blanket orders before offering them.
• Pressures on supply chains lead to questioning the value of lead-time penalties that could damage relationships with suppliers.

Best practices include giving advance notice to customers on upcoming price increases. But have to consider how to adjust when the trend turns around to decreasing prices.

Evaluating Performance

Carefully monitor key indicators of performance, including:

• Raw material costs as a percentage of sales
• Raw material price various/usage variance compared to price increases, including considering alternative materials. Have to keep an eye on the impact of changes on your costs, including overhead costs.
• Total compensation as a percentage of sales
• Labor costs variance: what you were paying previously versus now, but also other pieces than just wages, like increased employee taxes and employee insurance costs
• Freight costs vs. reimbursements: what you are being charged as well as what you are charging customers
• Margins: to ensure profitability levels are what they need to be
• Absorption vs. variable costing: a variable costs model as a management tool; determine contribution margin, then how fixed overhead and SGA costs impact that to determine operating income.

Forward-thinking

Use a continuous or rolling budget for a future focus:

• Similar to looking at trailing 12 months, but looking forward, changing the budget month by month
• Allows for continuously changing and updating for new circumstances.
• More time-consuming than calendar-year budgets, but a mechanism to accommodate changes and ultimately plan for what’s ahead

Keys Takeways:

• Continue to communicate with customers and suppliers.
• Actively manage your financial situation.
• Look at how your costs are changing, the impact on your business, and how to increase customer prices as quickly and effectively as possible.