Inflation? You don't have to be a specator
by Frank Hurtte
Is inflation temporary or real? Those in the “temporary” camp cite global supply chain issues as the main driver of whatever inflationary signs we see today. The “real” camp is less optimistic. Politicians say “transitory,” yet most agree their costs have gone up a lot more than the numbers spouted by the government.
Those concerned about longer-term inflation point to continued increases in important products like steel, oil and the compounding effect of increased labor costs.
After giving this a great deal of thought and study, I have decided I am a distributor guy, not an economist. You’ll find no long-range economic predictions here. However, I do feel compelled to provide some ideas, just in case.
There are very few leaders in Distributorland who remember the last time our industry lived through any serious inflation. Most were young children at the time and inflation has blurred into a distant memory, akin to their big brother’s Farrah Fawcett poster. After three months of inflation charted at more than 7 percent, my clients are asking for some thoughts.
Join me as we tie today’s issues to past actions.
Price increases continue to roll out
Conversations with over 200 distributors and scores of suppliers reveal a couple of things. Our industry has gone from experiencing an annual “token” price increase to experiencing two, three — and occasionally four — escalations in the past 12 months. Average levels appear to be in the 9 percent to 11 percent range. Word from the supplier side of the equation points to more price increases. Some have gone so far as to say that distributors should expect price increases quarterly. Reports from supplier sales teams indicate special pricing agreements are receiving greater scrutiny than in the past and, while they still exist, levels of approval have changed.
Manufacturer profitability is being impacted by random price increases upstream in the supply chain that can no longer be absorbed. Since the mechanics of changing prices takes both time and effort, one can only assume the cost of labor and materials is putting a continued pinch on these manufacturers. Additionally, the costs of labor and transportation are rising. Again, we see further price increases.
For distributors, these price increases will create both opportunities and threats. If the distributor can pass the price increases along with “a little extra for the home team,” profitability could remain stable. That assumption comes with the understanding that distributors can control other costs (more about this later).
Drawing from my early years in selling back in the late 1970s, we went through a period of double-digit inflation. The joke amongst some of my young sales engineer buddies went like this: “There’s good news and bad news. The good news is I will make $100,000 someday. The bad news is it will take $500 to buy a beer after work.” It was so bad, the mortgage rate on my first house was 13 percent.
The situation was so intense that many manufacturers doubled their published list prices. They took this action so they could adjust prices by changing multipliers rather than going to the expense of publishing new catalogs every couple of years. The result was list prices that meant nothing.
Customers went through sticker shock. We were in an age when most distributors did not have computer systems, so pricing was generally done via a published (paper) system called Trade Service. Customer types and sizes were identified in columns. Customer complaints led to every customer being pushed to the edge-of-sheet pricing. This was the historical first step in margin erosion.
Distributor Actions tied to rapid-fire price increases
Now is the time to develop good processes around price increases. This is a short list of things we recommend for every distributor.
- Automate the pricing update process.
- Push back against supply partners that give less than a 30-day notice on price adjustments.
- Develop a plan to ensure price increases are passed along to customers immediately.
- Refuse any customer requests for long-term pricing. Don’t get sucked into year-long supply contracts.
- Customer quotations should have an expiration date.
- Make sure your salespeople (inside and outside) are prepared to explain the price increases.
Oil and Gas Prices are going through the Roof
I had to update this article before sending it off to the editor. Most of us are aware that gasoline prices are higher now than a year ago. Most, including yours truly, didn’t realize just how much higher they are and the current situation in Ukraine promises to push prices even higher. As of today, the price of a barrel of crude oil has gone from $47.62 to $112. A few pundits expect it to go higher to (hopefully) stabilize at $130 per barrel.
Going back to the gas pump, the cost of filling up my wife’s jumbo Buick may soon require a co-signer. But that’s just the tip of the iceberg. Oil is a key component in many of the products we sell. For example, a supplier of specialty cables recently made this quip about price increases: “Our stuff has been going up something like 8 percent a month in basis cost, and that doesn’t include the fluctuations in copper.”
He went on to say, his company does not know the cost of the copper rods which go into the actual conductors until they arrive at their facility. The company struggles to keep its pricing levels accurate due to the unprecedented number of changes.
What might a distributor do about massive oil and gas increases?
While some of these might be considered energy costs, the list consists of things that are directly impacted by massive rises in the oil and gas sector.
- Consider moving to more energy-efficient vehicles in your fleet.
- Look for ways to cut back on heating/cooling costs, and possibly look at solar panels for the roof.
- If you run a value-add shop, review the cost of sundry items containing plastic.
- Make sure your application engineers charge for travel – even if just across town.
The rising cost of freight and deliveries
Inflation first hit fuel. But that is not the extent of the escalations in cost. One distributor told me his new delivery truck has been on backorder for five months and still the expected delivery date is a month away. With this kind of shortage, the truck dealers aren’t overly anxious to make price concessions. Count on delivery truck prices going up in the future.
On top of your own delivery truck, long-haul truckers are facing fuel and vehicle issues and they are running “a quart low” on drivers. When drivers are in short supply, wages go up. Our incoming freight issues move forward, and the cycle turns into what looks an awful lot like – inflation.
This brings us to one more point. According to our surveys of distributors, the cost of new truck drivers represents the employee segment which has experienced the greatest percentage increase. Thinking more about this, a truck driver with a good driving record and a commercial driver’s license (CDL) is the most transferable employee on your team. They are qualified for running almost any kind of route regardless of the industry. Job search organization, Indeed.com, reports driver salaries have increased by 38.5 percent in the past year.
Some action items on freight and delivery costs
Distributors serve as one of the critical hubs in the supply chain, so we must always work to manage our costs. This is particularly true during inflationary times. Here are a few things to think about in your business:
- Evaluate orders based on freight terms provided by suppliers. Free freight is worth more now than ever.
- Renew your efforts at capturing incoming freight costs. If the customer orders a non- stock item, consider charging for the incoming freight.
- Analyze the costs associated with deliveries. Can you pick consolidated shipping days rather than shipping every day?
- Some of your customers should be paying for deliveries.
- Be more aggressive with drop-ship orders.
- Monitor the costs of branch-to-branch transfers. If transferring products for a customer, why not ship them directly to the customer and charge for the freight.
People are a distributor’s biggest investment/asset
Everybody uses that statement as a figure of speech, but for distributors, it is true in the most literal sense. According to numbers produced in distributor association benchmarking reports, the costs of people represent something like 67 percent for high-tech automation distributors, and somewhere close for others. This is a healthy outlay, and it’s headed in an upward direction.
In our research with distributors, we focused on the compensation levels of entry-level inside sales/customer service, warehouse and technical specialists coming into the distributor organizations. We compared late 2021-22 hires against 2019-20 hires. The results point to compensation increases in the 20 percent to 27 percent range.
Many factors are pushing this number forward and none come from traditional competitors. For instance, Amazon is building regional distribution centers with starting salaries advertised as $22/hour and upward. Target just added fuel to the inflationary fires by announcing they would be paying $24/hour for some positions in their facilities. Every time a new person is hired at a higher salary, everyone in the department ends up with a raise. Salary inflation is here.
What can distributors do to minimize inflation?
Saying it again, people are the lifeblood of our business, but it’s our job to ensure the lifeblood is used properly. Here are some points every distributor should think about:
- Are there sections of your warehouse that would benefit from reorganization?
- Would technologies like wave picking make you more efficient?
- Could some activities be automated in the customer service group?
- What would be the impact of pushing some customers to e-commerce?
A few final thoughts
I hope this convinces you to begin factoring some of this into your business plan. For instance, I suggest any distributor experiencing real growth needs to see sales growth of at least 10 percent just to stay even with the market. Real growth comes on top of that first 10 percent. On the other side of the ledger, assume people costs will grow at least 12 percent. Failure to factor these into your plan may bring some unpleasant surprises later this year.
Take advantage of the still-low interest rates. The latest news from the Fed indicates they plan to raise interest rates. Some suggest political pressures will keep the increase low, but the trend is in that direction. Long-term financing on something big today will turn out to be a bargain later.
One last thought, distributors grew and prospered back in the ’70s when inflation was double digits strong. They just did things differently.
Straight talk, common sense and powerful interactions all describe Frank Hurtte. Frank speaks and consults on the new reality facing distribution. Contact Frank at frank@riverheightsconsulting.com, (563) 514-1104 or at riverheightsconsulting.com.
This article originally appeared in the May/June 2022 issue of Industrial Supply magazine. Copyright 2022, Direct Business Media.
INDUSTRIAL SUPPLY MAGAZINE
The November/December issue of Industrial Supply magazine features an in-depth cover story about Kimball Midwest. Plus, we're featuring articles by contributing writers Dirk Beveridge, Frank Hurtte, and Mike Marks, as well as interviews with numerous product and distribution industry experts.
