Inside the profit margin picture
Over the past year, manufacturers have faced some significant inflation challenges, such as sharp price hikes in aluminum, copper, and energy costs.
Over the past year, manufacturers have faced some significant inflation challenges, such as sharp price hikes in aluminum, copper, and energy costs. Now factory managers who buy equipment and tools will be hearing from suppliers and distributors who want to increase the prices they charge for a host of products. Should factory managers be prepared to increase their budgets for equipment and tools? Not necessarily!
Consider for example the transformers (SIC 3612) industry. For every $100 worth of product sold, manufacturers of power and distribution transformers saw their average margins decline by nearly $1 between March 1999 and March 2000. Rising costs for everything from magnet wire to steel and refined petroleum products have taken a toll on manufacturers' cost structure over the past year. But when we look at the industry's cost structure over a longer 3-yr time horizon, then the picture looks quite different. Indeed, between March 1997 and March 2000, the industry has enjoyed a $3 windfall in profit margins (per $100 of product sold). So factory managers who don't look into their supplier's long-term profit picture may end up paying more than they need to pay.
1Average product price changes are calculated from the producer price index for each 4-digit SIC (standard industrial classification) industry from the U.S. Bureau of Labor Statistics.
the average producer in an industry. Grades of A to A+ mean plant engineers may be able to strike a better bargain with suppliers and better control plant costs.
3Growth in U.S. end markets data are from the ICE model and are estimates of output for the domestic end markets which purchase a given industry's products.
All data prepared and presented by Thinking Cap Solutions, Inc., Port Angeles, WA (telephone: 360-452-6159; e-mail: firstname.lastname@example.org).
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