Lead times, higher costs and balancing
Business has been holding steady and is off to a pretty good start in 2007. Given everything you hear on TV about interest rates, China, oil, and more I am pretty happy with how things are. Not relaxed, but happy. What keeps us from relaxing is higher cost pressures and longer lead times. Keeping an eye on these and planning will be critical to both keeping customers happy, costs in line and profitability.
What we do see in our business is lengthening lead times to get products, still some upward pressure on costs and manufacturers looking for longer runs and therefore larger orders. Our leadtimes have moved out a couple of weeks on average from about 10 days to over 3 weeks for our basic materials we fabricate. While it is due to a number of understandable factors, the industry does not always have the mechanisms in place to communicate the changes in longer supply times. As you move closer to the end user of the product, this compresses the time we all have to turn items around to meet the promise dates we all have. We can not ask customers to stock more as they do not have the space or are seeing the same economic predictions we see. For us, more inventory is a quick fix for this (but it takes time to build it up because you are playing catch-up) or doing more fabricating (cutting and adhesive coating in our case) and of coarse all this costs more. We do see competitors who do not have items in stock and their customers call us for supply, our challenge is to make these customers permanent, have supply for them and our current custmers. It is a balancing act and sometimes it’s tough to keep your balance.
Costs, notable electricity and fuel continue to climb like a rocket. Even with oil down from $75 to $60 a barrel, our energy costs have gone up more than 40% from 2006 and they do not seem to be headed down. After an inital spike of price increases at the end of last year, we are seeing folks try for another round of increases now, but they are not sticking as well as last fall and are not as aggressive yet. Companies are increasing the orders required for shipping to keep costs in line but eventually we see increasing costs for raw materials.
Whether its bigger shipments, higher costs, doing more or whatever, the pressure on costs and prices is coming. The fact the economy stays strong certainly helps with dealing with these pressures. The choices, while not always pleasant, are not the difficult ones we have all faced in the past. It’s just important to stay on top of things and make the best decisions to insure service levels and to meet our commitments.