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R. L. Polk & Co.’s Ask the Industry Asks Manufacturers How They’re Handling Rising Raw Materials Costs

By the end of 2005, oil prices had risen 45 percent higher than they were at the beginning of the year. Gas prices took a similar route, rising about 23 percent in 2005 leveling out to a national average of about $2.30 a gallon. As an industry that relies on oil and natural gas for a variety of critical processes — from fuel for parts deliveries to oil derivative products used in manufacturing – the rising costs of raw materials are certainly having an impact on U.S. auto parts manufacturers. For this week’s Ask the Industry, we asked manufacturers: How does your company handle the rising costs of doing business today, given increasing raw materials costs?

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AKRON, OHIO — By the end of 2005, oil prices had risen 45 percent higher than they were at the beginning of the year. Gas prices took a similar route, rising about 23 percent in 2005 leveling out to a national average of about $2.30 a gallon. As an industry that relies on oil and natural gas for a variety of critical processes — from fuel for parts deliveries to oil derivative products used in manufacturing – the rising costs of raw materials are certainly having an impact on U.S. auto parts manufacturers.

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For this week’s Ask the Industry, we asked manufacturers: How does your company handle the rising costs of doing business today, given increasing raw materials costs?

Fred Gerle, General Manager, PaceSetter Performance Products:

“We are constantly monitoring transportation (outbound and inbound) and raw material costs. Our pricing to customers is updated annually to cover the impact of these costs. Much consideration is given to market position and product life cycle, as well as the supply and demand curves, before any pricing is changed.”

Rod McKenzie, President, Penray:

“To prosper in the world marketplace today, it is important for Penray to strive toward becoming an increasingly efficient manufacturer. To do this, we must diligently cut out all unnecessary costs to ensure our customers can compete fairly in their marketplaces. We have ongoing programs to do so and have been quite successful in the past. However, when we are faced with costs that are beyond our control, such as the recent increases raw materials, we must pass those costs along. If we do not do so, we will not be able to continue to serve either our customers or our employees into the future. The key is to always be honest with our customers and always have their best interests in mind as we make our pricing decisions. When we foresee changes coming that are beyond our control, we have honest, one-on-one discussions with each key customer, explaining the situation fully to them.”

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Eric Sills, Director of Headquarter Operations, Standard Motor Products

“As a basic manufacturer, Standard Motor Products has been affected by the rising cost of materials, including metals and petroleum-based materials such as plastic resins. While this has put pressure on our margins, our intent is always to offset these increases by containing costs elsewhere and by continuously improving our processes to be more efficient. We do this across all facets of our business, from manufacturing and distribution to marketing and administrative functions.”

Summary by Amy Antenora, managing editor:

In October, as gas prices rose to more than $3 per gallon, we asked WDs and jobbers how they were handling this challenge, particularly since gas is a daily necessity to a parts business, as WDs and jobbers rely on gas- and diesel-fueled vehicles to deliver parts to customers. For all but the biggest organizations, the WDs and jobbers we spoke with were unable to pass these costs along to customers. Instead, they felt it necessary to cut costs elsewhere or just simply absorb the costs. (To read more on this topic, click here.)

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Higher up the distribution channel, manufacturers are being affected by higher prices for steel, resins, in addition to high prices for gas and other raw materials. In 2005, rising raw materials costs had a major impact on U.S. automotive manufacturers. Here’s just a sampling of the reports that came across our desks in the past 12 months:

• Federal-Mogul says rising costs of raw materials for the first three months of the year resulted in a $21 million decline in gross margins for quarter.

• Timken’s Automotive Group, which recorded a loss in the first quarter of 2005, reported the “loss was due primarily to higher raw-material costs.”

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• From the tire side of the industry, “Cooper attributed the decline to the impact of…higher raw material costs…”

• OE supplier, Lear, reports that “high raw materials costs…caused most of the pain.”

Much like the WDs, the manufacturers we recently spoke with are also feeling the pinch and looking at ways to cut costs. Many manufacturers are now looking at improving processes and efficiencies as a result. This productive evaluation of business practices may be the only silver lining behind the dark and looming cloud hanging over us today.

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Click here to view the rest of today’s headlines.

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