New Cost/Price Dynamic Means Opportunity for Supply Chain Managers

Cost of manufacturing falling in many sectors, but wholesale prices not following same path, putting greater negotiating power in buyers' hands

Port Angeles, WA — December 3, 2008 — The cost of manufacturing fell sharply among U.S. manufacturers in October, but wholesale prices that manufacturers charged for their products often did not follow the same deflationary path. As a result, margin performance from September to October exceeded expectations, and strategic supply chain managers now are enjoying new negotiation power, according to the latest ALERTdata report from Thinking Cap Solutions.

According to the most recent solve of the cost model, 427 manufacturing industries saw their production costs decline from September to October. Sixty-nine industries saw production costs drop 5 percent or more.

Wholesale prices, meanwhile, have not fallen as fast, or have not declined at all. The U.S. Bureau of Labor Statistics reported that 169 manufacturing industries dropped their average prices from September to October. Another 238 industries, however, actually increased their average wholesale prices.

"In this uncertain economic environment, U.S. manufacturers apparently are holding back on passing through cost cuts in an attempt to shore up their margins," said Elizabeth Baatz, economist and editorial director for ALERTdata. "Rapid changes in cost escalation and economic uncertainty are creating new opportunities to renegotiate contracts at lower prices. Companies that have a strong supply chain management team can take advantage of these conditions."

Analysis from ALERTdata of the latest October price/cost trends shows margins improved in 419 industries. Only 38 industries saw their manufacturing margins deteriorate from September to October.

"Supply chain managers and purchasing pros who track these volatile cost/price trends may now be in a position to push for price cuts," said Baatz. "Margin analysis finally is favoring buyers in some 150 different industries."

Food manufacturers number among the biggest margin winners. In October 2008, 20 industries saw their manufacturing costs plummet by 9.5 percent or more, and 11 of these were food producers. Soybean processors enjoyed the biggest cost drop at 22.5 percent. Five others — flour milling, rice milling, malt made from grains processing, oilseed processing and wet corn milling industries — also saw costs drop by anywhere from 17.4 percent to 15.5 percent.

But while soybean production costs in October dropped 22.5 percent from the previous month, wholesale prices charged by soybean processors fell by only 13.7 percent. The result: margins in the soybean processing industry increased by $7.33 for every $100 worth of product sold. Looking at soybean price/cost trends compared to a year ago, the data favors buyers even more dramatically. Soybean buyers now are in a position to argue for a 20 percent price reduction.

Other manufacturing industries now are benefiting from the rapid decline in oil-related costs. Plus, some also did a fairly good job of passing along cost hikes when oil prices were soaring. As a result, negotiation opportunities for buyers abound.

For example, cost analysis from ALERTdata shows that to return industry margins to levels held a year ago, the fertilizer industries have room to cut their average industry prices by as much as 48 percent for phosphatic fertilizer manufacturing to 28 percent for nitrogenous fertilizer manufacturing. Likewise, big energy users like aluminum rolling plants and newsprint mills could cut their average industry prices by a respective 19.9 percent and 18.9 percent.