The rapid and unpredictable cost increases over the past three years have caused tremendous hardship to our industry. Many manufacturers, such as Unger, utilise a basket of raw materials that are linked to the world commodity markets. If the price of Aluminum goes up, the costs for all producers who use Aluminum go up too.
In normal markets, commodities ebb and flow in cost increasing and decreasing in price gradually due to market forces. Over the past three years, the cost of all commodities have increased dramatically, sometimes 20% in one week due to speculation, the consumption trends of China and India and reduced supply due to war, fear and consolidation of competition. This has made the cost of products rise rapidly and changed the traditional pricing of products in the market.
In the past, manufacturers would increase their prices once per year to cover inflationary costs, ranging from raw materials, to labour costs, insurance, rent and new investments. This practice allowed for stability in pricing to the market where distributors and end users had one price for a 12 months period and then a small increase that would be fixed for the next 12 months. Passing increases along was a predictable annual event. Time and energy were dedicated to educating customers on new products and solving problems, not on price increases.
This pattern has been broken and manufacturers are now forced to pass along raw material increases frequently or to face losing money on the products they produce. Of grave difficulty has been the rapid rise in oil prices. The price of oil and all related energy classes, such as coal, electricity and gas have a significant impact on all products we produce and consume. For example: to produce steel, iron ore is dug from the ground with large machines that use diesel fuel in countries such as Australia or Brazil. The raw ore is then transported via ships or trains to steel processing plants where large amount of energy used to make the ore into usable steel. From there, the steel is transported to the manufacturers where more energy is used to change the raw steel into the products we would later buy. Energy usage for industry is comparable to the air that we need to breath without it the wheels of commerce would simply stop turning.
Rapid and unpredictable price increases are difficult for stable industries, such as the janitorial channel, to deal with. Manufacturers are faced with large daily price changes from their suppliers which must be absorbed into the cost of the product. As prices cannot be raised daily, the manufacturer must review margin calculations on a weekly basis to determine if the product remains profitable or not. Once the product margin falls below an acceptable level, the price must be increased or there is no reason for the manufacturer to continue selling the product. With an unpredictable future outlook on where costs will go, the manufacturers must raise price more frequently just to stay ahead of the spiralling cost increases.
This chain of reactionary pricing explodes once it reaches the distributor and end user as they are receiving increases from all suppliers on a continual basis. Just imagine that 50 suppliers, each providing 100 products, raise their prices every few months. Now 5,000 products need to be adjusted in the distributors’ and end users’ computer systems and systematically passed on. Sales representatives are explaining price increases to their customers where little value is gained. Recently, a distributor told me that the price of plastic garbage liners was now provided weekly by the suppliers this is the new reality we have had to cope with in our industry.
The rapid rise in commodity prices over the past three years has caused great hardship for the entire supply chain all the way to the janitor using the products. Time and energy are taken up coping with and passing along cost increases rather than adding value for our customers. It is hard to predict the future, however the age-old rule of what goes up fast will likely also come down fast is now causing havoc with our economy as we face the downward slope ahead. The age of excess where prices for everything can go up beyond economic reason has now hit the wall of reality.
Fortunately, cleaning will continue and creating healthier environments and using greener technologies is a long term trend that will survive through the downturn we now face. If we can back to adding value for our customers by helping them with their problems and educating them on better ways to clean, we will all get back on the right track.
Mark D. Unger, President Unger Global
