The Price Of Success

It's one of the most common announcements in the industry these days—another manufacturer is announcing a price increase. For distributors who are also facing record energy prices and other escalating costs of doing business, it can be tough to swallow.

Welding & Gases Today recently sat down with three manufacturers—SafTCart Director of Marketing Jim Herring, Select-Arc, Inc. President Dale Stager, and Motor Guard Corporation President David Barleen—to discuss the trend of rising manufacturer prices. They offered their perspectives on what's driving the increases, how their companies are trying to contain costs, and what distributors can do to relieve the pressure.

W&GT: Why is your company raising prices?
Jim Herring: Fuel costs are driving a lot of increases for SafTCart. But we're also seeing our steel costs rising. SafTCart purchases steel from four different service centers, and I'm getting a new price sheet every two to three weeks.

Dale Stager: Select-Arc is experiencing across-the-board major increases on most of our raw materials. It's coming from all corners—steel, just about all the minerals we use, packaging, even freight. With the cost of gas, freight's going through the ceiling.

David Barleen: Yes, freight company surcharges are tremendous now. For Motor Guard, increases are occurring in three categories: raw materials, energy costs and liability insurance. But the insurance is insignificant compared with raw materials and energy. One of the most commonly used materials in the welding industry is copper, which in 12 months has tripled. Some of my product prices have gone up by 30, 40, even 50 percent because of the content of the material.

When did you start seeing your costs go up?
David Barleen: Primarily in the last year at Motor Guard

“We, as manufacturers, have to be careful not to put too much pricing pressure on distributors, or they're going to look elsewhere.” Jim Herring SafTCart

Jim Herring: For SafTCart, it was probably the third or fourth quarter of 2004. Of course, steel prices started out high in 2005, but then they backed off and prices actually came down a little bit. In 2006, they started up again.

Dale Stager: Select-Arc saw prices begin to spike about a year ago, but it's starting to have a new round now. Steel, chemicals, packaging—it's happening all over again.

How frequently have you been raising prices?
Dale Stager: This summer was the second time this year that Select-Arc raised prices. We used to look at pricing only once a year, but we look at our margins on a monthly basis, and we knew we couldn't afford to hold off any longer.

David Barleen: Motor Guard does an annual evaluation, and in many years we don't raise prices at all. But the last couple of years, we certainly have.

Jim Herring: SafTCart generally looks at prices just once a year as well. We once went three years without raising prices, but in 2004 we raised them twice to cover our cost of goods, because steel prices were going up ridiculously.

What is causing steel prices to go up again now?
Jim Herring: There are a lot of rumors about expected shortages, which drives up the demand. There's a lot of market manipulation. You also hear that scrap prices are going up because all the scrap is going overseas.

David Barleen: That's true. There's a lot of demand in Asia, but the price increases are also caused by market speculators and by hoarding. If people see prices increasing, they say, “Let's get an extra six months' or year's supply,” which causes a huge supply problem.

Are there products you haven't been able to raise prices on?
Jim Herring: SafTCart's price increases were across the board, but we've tried to stay fairly competitive.

David Barleen: There are some products, like filtration components, that Motor Guard can't raise prices on because of the competition. Many of them are sourced from outside the U.S., so right away they have a price advantage. Sometimes we have to just eat it.

Dale Stager: It's difficult for Select-Arc to raise prices on any products for the automotive industry. They want their vendors to reduce prices, not raise prices.

Do your price increases equal your cost increases?
Dale Stager: Yes.

Jim Herring: For the most part, ours do, too.

David Barleen: In general, yes. But, as a manufacturer, you set an acceptable level to maintain margin, and you have to gauge that very carefully. Competition drives the price.

“Passing a price increase on to customers is very simple to do, but it's sometimes not wise. You have to look at your efficiencies and at how well you're servicing your customers.” David Barleen Motor Guard Corporation

How else are you absorbing cost increases?
Dale Stager: At Select-Arc, we've been able to increase productivity by coming up with new processing, so we've eaten a lot of our raw material costs. We also spent a lot of time recently looking at our packaging, and we're doing more bulk packaging to reduce costs.

David Barleen: Cost reduction within is an everyday job. I call it the three “re”s: re-engineering, re-sourcing and re-training. We constantly go out to bid on materials, and we re-engineer to take some material out of the product or use a more cost-efficient material. The people aspect is training—how good are we at producing these products? And how good is the equipment we're using? At Motor Guard, we've considered automating some of our manufacturing, but we have to look at return on investment.

How do your rising costs affect your competition with offshore manufacturers?
Jim Herring: One advantage of the cart business is that a cart doesn't weigh a lot, but it takes up a lot of space. You can't fit a whole lot of them on a container, so the advantage is not for the offshore manufacturers to send over container loads of carts. Plus, the demand, even though we at SafTCart think it's pretty good, isn't what offshore manufacturers are looking for.

David Barleen: As a U.S. manufacturer, Motor Guard has to sell our features, advantages and benefits. Service is an important component. I service my products. I warranty them. I have a no-questions replacement policy. I make it really easy to deal with me. That's what keeps us competitive.

Dale Stager: Service is also Select-Arc's major advantage. We worry about offshore pricing because they have some labor advantages, and there may be some cases where they have a raw material pricing advantage. So far, we've been able to hold our own against foreign competition, but it's getting tougher and tougher to do that.

Is there a value-added you're offering when you present a price increase?
David Barleen: Not specifically on the price increase. It's volume-based. Motor Guard does run special promotions for our customers.

Dale Stager: Select-Arc has value-added because of the way we service the customer by providing technical and application help to find ways to help the customer save money.

Jim Herring: SafTCart uses good material and we powder coat instead of wet paint, so our product is going to last longer than a lot of others. Everything is assembled here in the United States. Plus, we're ISO 9000, so all our processes are standardized.

“One way distributors can try to offset price increases is to buy larger volumes so that there's a savings on freight.” Dale Stager Select-Arc, Inc.

If prices are going to continue to spiral upward, what can be done to stop the spiral?
David Barleen: The only way to hold margins in an environment of increasing material costs is to get smarter in the manufacturing. Do it better, and do it more efficiently.

Dale Stager: The root of those increasing costs still goes back to basic economics: supply and demand. If everything stays in short supply, I would hope that there will be more money spent on research and mining to cut down on the shortage.

Jim Herring: I hate to say it, but I think the only way to bring down the price of steel is to bring in more foreign steel. But the only thing that will stop the rising costs everywhere is for the economy to start doing poorly, and we don't want that to happen.

What is the impact of your rising prices on your distributors?
Jim Herring: It's affecting everyone. Distributors are pretty understanding because they're seeing price increases everywhere and they know what's going on. But we have to be careful not to put too much pricing pressure on them, or they're going to look elsewhere.

Dale Stager: I think we're all in the same boat. We all have to tighten our belt and do whatever we can to reduce costs in our operations, whether we're a manufacturer or a distributor. It's got to flow down the chain. The manufacturers can't eat it. The distributors can't eat it. Eventually it stops with the end-user.

David Barleen: The end-user is the one who ends up with the bill, but everyone's reducing margins, including both manufacturers and distributors. You have to be careful that the customer has perceived value of the product. If it gets too expensive, they might say, “Do I really need this?” You don't want to be there.

Dale Stager: Again, it's about adding value to the end-user. You have to be of service to the end-user and show him that you have value-added.

David Barleen: Once a price increase is put through, it's basically unavoidable, so the distributor is faced with the same problem that the manufacturer just went through: How am I going to protect my margins? Can I just pass the price increase on to my customers? It's very simple to do, but it's sometimes not wise.

What advice do you have for distributors who are facing price increases from their manufacturers?
Dale Stager: In these times of rising costs, it's increasingly difficult for Select-Arc or any manufacturer to quote prices out any length of time, so as far out into the future as distributors can look when placing orders, the better. One way distributors can try to offset price increases is to buy larger volumes so that there's a savings on freight.

Jim Herring: With a growing economy, we just ask distributors to bear with us that we do have a value-added product. Distributors understand what the market forces are.

David Barleen: The distributor has to look at their efficiencies and at how well they're servicing their customers. It's an incredibly competitive market on their end.