How to Manage Production Costs When There Are Price Increases

According to a recent poll by Forbes magazine, manufacturers are planning price increases. These increases are driven by continuing and persistent inflation, higher labor costs, and lingering struggles with supply chain disruption.

In another survey, 73% of manufacturing industry leaders expect to increase the prices of goods and services to offset higher input costs from raw materials, parts, and energy. Rather than boosting profits, these increases will protect or mitigate inflationary pressures on gross and profit margins.

During times like this, many companies (manufacturers included) will look to reduce spending. This may provide short-term relief but leave the business unable to capitalize on opportunities. Fortunately, there are better ways to mitigate the impact of price increases.

The Impact of Manufacturing Price Increases

As a business, you have limited options for managing manufacturing price increases. You can pass along some of that price increase, but in a competitive market, the need for stability rests in your ability to take actionable steps to ensure profitability.

In addition, sacrificing quality or producing more to increase sales may not be possible. It will only take your business so far.

Rather than tightening your belt and accepting lower gross and profit margins, you should increase your business’s long-term stability and profitability. Now’s the time for action, and there are steps you can take to boost margins, strengthen your business, and reduce production costs.

Preparing for the Future

While the first instinct for many business leaders is to cut costs and reduce investment during inflation, this can lead to future problems and leave the company more vulnerable. Rather than cutting costs, you should look at ways to boost margins and improve your business outlook. By taking strategic steps now, you can boost margins and set yourself up for future opportunities.

Here are a few strategies you should consider:

Stay Ahead of Maintenance and Repair Needs

Reducing maintenance and repair costs may seem like an easy way to increase margins. Waiting on equipment repairs, or holding off on downtime for maintenance, may over-tax machines and lead to a more expensive repair later to get back up and running. To increase margins, you might use an outside service company to handle repairs. This will reduce pressure on your internal team and potentially provide additional cost savings and benefits. That smaller investment in repair and maintenance can prevent a larger expense in the future.

Strengthen and Bolster the Supply Chain

Rather than purchasing smaller orders of raw materials or searching for the lowest-cost supplier, tactics that can put your business at risk, look at implementing a comprehensive supply chain strategy. Consider signing a long-term contract with key suppliers for cost protection. Provide price transparency with suppliers. Work with them on a comprehensive supply chain and purchasing strategy. Build relationships and establish partnerships.

Long-Term Equipment Planning

Take a long view of your equipment needs. Plan what you need to meet your business and production goals and be honest. Then work with a trusted supplier or distributor to develop a new equipment strategy. This could include investing in alternative equipment that meets your needs and is currently available. This will give the distributor time to find the right equipment and look at reducing or spreading out the cost. With time, they may be able to find additional savings.

Pre-Purchase Inventory

If there are parts and equipment you need, look at pre-purchasing to avoid rush orders and artificially higher costs due to temporary demand. This gives you and your supplier time to find lower-priced alternative parts and materials. You’ll ride out temporary inflationary price spikes and ensure uninterrupted production.

Vendor-Managed Inventory

While it may not suit every business, setting up vendor-managed inventory will often reduce costs, protect against inflation, and increase margins. Work with a distributor and service provider with the market knowledge and industry contacts to ensure you get the best price for the parts and materials. Depending on how the contract is set up, you won’t pay for a part until it is used. You also benefit from having parts on hand rather than the higher-cost rush orders.

Utilities as a Managed Service

Utilizing managed services, or using an outside vendor or supplier to provide and maintain an essential business service, has been a valuable option for companies. Today, it’s being used more frequently in the form of air as a utility. Manufacturers can eliminate unexpected repair, maintenance, and downtime costs with compressed air managed services. They receive compressed air at a stable price and often see significantly reduced energy costs.

Finding a Business Advantage During Price Increases

For many business leaders, the first instinct when inflation hits is to react defensively. Cut costs, stop investing in the business, and save money. That will provide temporary relief and a false sense of the business’s health, but it can lead to long-term problems. The cost of not investing or building a business strategy during inflation is much higher than many companies expect.

Work with your business suppliers and partners to create sustainable strategies to protect margins. See where you can reduce costs while strengthening the business. Look to the future, at business growth, so you are ready to seize opportunities as the market shifts.

From service and repair to utilities as a managed service and everything in between, OTC can help you increase your operational efficiency. Let’s customize a strategy for you.