Where the price breaks lurk
By Staff -- Purchasing, 3/26/1998
Each quarter, the Industry Cost Escalation (ICE)-Alert newsletter reports on the Top 50 negotiating opportunities and hazards for industrial buyers. This quarter, opportunities are dominated by four major industry groupings: petroleum, chemicals, processed metals, wood and lumber. Biggest hazard industries are high-tech and paper.Opportunities, according to ICE-Alert, refer to markets in which buyers can develop strong cost-based arguments for reducing prices without high risk of damaging supplier profitability. Hazards, refer to industries that are likely to be working with margins well below the norm.
Among the Top 50 buying opportunities listed this quarter by ICE-Alert, 21 come from chemical and petroleum sectors. Most of these improvements, ICE says, "can be attributed to lower costs for crude and refined petroleum inputs."
Thirteen of the Top 50 industries fall under primary and fabricated metals sectors of the economy (however, these stand at the high end of this supply chain for example, rolled, drawn, or otherwise finished products). "By our calculations," says ICE, "these industries are achieving margin gains by not fully passing through savings from lower costs associated with copper cathode, aluminum ingot and billet, and primary nickel."
Lumber and wood categories take seven spots on the Top 50 opportunities list. "Strong product prices in a setting of fairly stable manufacturing costs is a common thread for this group of inflation winners." ICE notes that paper mills is the only paper category to make the Top 50 opportunities list (placing at 49 with a 1.4% annual improvement in direct manufacturing costs).
High-tech industries dominate ICE-Alert's list of top cost-structure losers for the last 12 months. Computers and semiconductors take first and second place because product prices for these items "are saddled with constant deflation pressures the way elephants are saddled with gravity." Fast-paced technology and rapidly expanding markets tend to drive prices downward while manufacturing costs remain more stable. "Though influenced by some of the same factors affecting product prices, cost declines are tempered by labor spending," says the ICE report. "Production wages seldom fall. Or if they do, the declines are seasonal in nature and are often more than recaptured within a year's time."
Beyond high-tech, ICE-Alert's Top 50 hazards list includes twelve segments from the paper, printing, and publishing sectors of the economy. "The reason behind this strong representation is twofold," says the report. "First, per-unit costs for basic sector inputs such as pulp, paper, and paperboard have been rising sharply over the last half-year. Second, downstream industries have been slow to pass on these increases to customers."
Also well represented on this quarter's Top 50 hazards list is the consumer durables sector. ICE-Alert counts six industry categories--four that would be classified under household appliances, plus lawn and garden equipment, and consumer audio and video. "All six of these industries share the same basic problem--product prices are falling and per-unit manufacturing costs are falling either more slowly or not at all."
A caveat
ICE says excellent negotiation opportunities exist only when short-run margin improvements push producer profits to above-average levels. "Such gains offer buyers an opportunity to construct a cost-based argument for achieving a price reduction (or at least an argument to prevent a future price increase." Hazards, meantime, are only significant if short-run damage pulls margins below their long-run average. By this rule-of-thumb, ICE says there are some on the Top 50 hazard list that should be viewed as "faux hazards": uncoated paper and multiwall bags, other structural wood members, manifold business forms, cordage and twine, other commercial printing, and metal sanitary ware. "These industries have experienced significant cost-structure damage over the short run, but still have solid margins when viewed over the long run," says ICE-Alert.
Readers of Purchasing Magazine can obtain a copy of the February 26 strategy report from the ICE-Alert newsletter (including both Top 50 lists plus current spending on manufacturing versus "normal" spending levels for all 318 industries tracked in the ICE model) by contacting Elizabeth Baatz at tel. (617) 298-6147, fax (617) 296-1614, e-mail thinkcap@delphi.com.
Talkback
Related Content
Related Content
Sponsored Links
View All Blogs
Now Playing:
