Falling costs give buyers negotiating leverage
By Staff -- Purchasing, 9/2/1999
The impact of falling manufacturing costs coupled with rising or stable price trends means margins in many industries have ballooned recently. Buyers who understand these industry margin gains fare better during price-setting negotiations with suppliers.Among 318 U.S. industries studied by the cost analysts at Thinking Cap Solutions in Port Angeles, Wash., estimated margins grew among 213 manufacturing industries between June 1998 and June 1999. Generally, declines in direct manufacturing costs were largely responsible for recent margin shifts. In fact, 88% of the 213 margin-winning industries saw direct manufacturing costs drop.
Case in point: manufacturers of fabricated structural metals. This industry segment saw its direct manufacturing cost bill decline 6.2% between June 1998 and June 1999 thanks to the falling cost of steel. Meanwhile, the average price the industry charged for its products rose 0.7% over the same period. The combined effect of sharply falling costs and stubbornly high prices means margins in the fabricated structural steel industry are estimated to be up by $4.59 for every $100 of product sold.
Industries that make primary metals and fabricated metal products have been among the biggest margin winners. Along with the fabricated structural metal industry, very large margin gains were also enjoyed by five other metals-related industries:
- Malleable iron foundries saw margins grow between June 1998 and June 1999 by $3.50 for every $100 sold.
- The miscellaneous metal work industry, which makes custom roll form products, enjoyed a $3.09 per-$100 gain.
- The copper rolling and drawing industry, riding a wave of falling copper costs, pumped up margins by $2.87 per $100.
- The metal barrels and drums industry grew margins by $2.70 for every $100 of product sold despite weak end-market demand, which should have given buyers some negotiation muscle.
- Finally, manufacturers of steel wire and related products gained $2.64 for every $100 of product sold even as buyers enjoyed a 4.8% price decline in carbon steel wire and a 5.6% drop in the price of stainless steel wire.
Buyers of metals, however, are not the only ones who have some margin analysis to do before their next supplier negotiations. Producers of other construction and building-related products also top the ranks of industries harboring huge windfalls.
At the top of the list, the softwood plywood industry clearly is vulnerable to attack by buyers. Producers of softwood veneer and plywood struck it rich in June 1999 as margins rose from May by an estimated $6.15 for every $100 of product sold. An 11.4% hike in softwood plywood product prices drove this margin gain.
Current industry prices in the softwood plywood industry now rest 42.8% above year-ago levels. Producers are enjoying a 1987-1999 record-best margin position and have no cost-based defense against buyers' arguments to lower tags.
Ranking all 318 industries in TCS's Industry Cost Escalation model by their June 1999 versus June 1998 margin gains, the next four after softwood plywood all have parlayed strong construction demand into big margin-enhancing price hikes. For example, general sawmills and planing mills hiked average prices by 9.7% and garnered a $7.21 margin gain per $100 of product sold.
Further down the supply chain, manufacturers of particleboard, fiberboard, and other reconstituted wood products also raised average prices a whopping 11.1% between June 1998 and June 1999. A 0.9% decline in direct manufacturing costs over the same period helped the particleboard industry gain $6.88 in margins for every $100 of product sold.
On the non-wood front, average product prices of gypsum board and mineral wool industries also rose 16.5% and 11.4%, respectively. With costs rising 0.8% in the gypsum industry and holding flat in the mineral wool industry, margins grew by more than $5 per $100 of product sold.
Buyers who try to attack these particular margin gains, however, must beware. Strong end-market demand appears to be the motivating force behind building industry price hikes. Upshot is that suppliers may have some counter leverage as buyers try to get their share of the margin windfall.
Suppliers in industries with big margin gains and weak end-market demand may provide buyers with their best opportunities to bargain. These include:
- The uncoated paper and multiwall bag industry, which enjoys a $3.19 per $100 margin windfall.
- The inorganic pigments industry, which harbors a $2.48 per $100 windfall.
- The metal barrels industry, which as discussed above, has seen a margin gain of $2.70 per $100.
Buyers interested in learning more can contact TCS at: telephone (360) 452-6159, FAX (360) 457-2913, or e-mail: thinkcap@olypen.com.
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