Between A Rock And A Hard Place

Precision Machined Products Industry Faces Raw Material Challenges

When the subject of “material challenges” or “material difficulties” is brought up in manufacturing, one instantly suspects difficulties in machining or cutting the material. But the real material challenge facing the industry today is the following 1-2-3 punch:

1) Fixed-price contracts to our customers mandate price and delivery while. . .

2) The supplies of critical raw materials to make our feedstock have increased in price (in some cases more than 100 percent) and . . .

3) The increased demand for these same materials by the wakening manufacturing sector in China has drained the world’s inventories of available material.

Fixed-Price Contracts

Fixed-price contracts with no provision for material cost escalation have been the sole offerings of many of our customers. In the past, all market power was in the hands of customers: “This is the contract, accept it or we’ll find another supplier.”

Today, with several suppliers threatening to stop shipments, our customers have turned to the courts to save themselves from the consequences of their lean, no in-process inventory systems. The court action is also designed to enforce existing contracts despite huge double- and triple-digit price run-ups in the raw material used to produce the parts.

This need for court action indicates that the market power has shifted, and that the fantasy of customers being forever free from the realities of the marketplace has come to an end. Wise shops will realize that without firm and enforceable pricing agreements for their raw materials, they will not be able to offer their customers agreements holding firm and non-negotiable prices.

Raw Material Price Increases

The precision machined products industry manufactures highly engineered component parts by machining metallic bars of the appropriate material. Aluminum, brass, stainless and steel are widely used materials for making a range of parts, including anti-lock braking system components, airbag system parts, medical components, fasteners, shafts, couplings and other critical parts that make today’s technologies run.

To get the proper-quality barstock for machining, barstock producers need to obtain various raw materials. At the time of this writing, the cost of aluminum was up 29.95 percent since June 2003.* During the same period, brass and copper costs have increased about 80 percent, while the price of nickel is up 73.55 percent.

Steel makes up a large percentage of industry shipments, and it can be produced by two different processes: electric furnace (scrap-dependent) and blast furnace (coke dependent). Steel scrap (#1 bundles) is up 67.84 percent since June 2003, and the price of coke is up approximately 400 percent over the same period.

Inventories Drained By Demand

The increased demand for materials by the developing manufacturing sector in China is not only behind the run-up in prices, but it has also served to make delivery and availability a hot topic for industry shops today. Prices are extraordinarily higher than they were a year ago and, in many cases, the material you need just cannot be found. I have had a number of conversations with companies trying to determine what, among the few items they can find, would be a reasonable equivalent for the material they need but cannot get for 8-, 10-, 12-week or longer lead-times.

We Will Survive

Our industry can survive the 1-2-3 punch of fixed-price contracts, increasing prices for raw materials and decreasing availability. There are already some signs that prices for some raw materials are starting to decline. However, the changes in global demand make it a sure bet that they won’t be anywhere near June 2003 levels anytime soon.

This 1-2-3 punch has done us all a world of good by opening our eyes to the vulnerability of our businesses that results from the folly of assuring firm or decreasing prices to our customers while we have no assurances of price stability. Just as reducing cycle time was the critical organizational competency years ago, today, wisely negotiating supply and sales contracts may be the most important differentiator between companies that are successfull and those that aren’t.

*All prices quoted in this article were from the Materials Impact Report available on the PMPA Web site.

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NETWORKING

How many times have you run into a roadblock with a project, and then found an alternative path because you knew someone with more expertise? Or perhaps you’ve shortened a path to a solution because you knew someone who could put you in touch with the right person. That’s called networking! The PMPA is all about networking and bringing together people with common interests to find solutions to challenging problems.