Counting Costs

IF YOU’VE been studying your supply bills, you’ve probably noticed increases in raw material costs over the past few years that have easily outpaced inflation. Are your raw material suppliers taking advantage of you?

Not at all—they’re seeing their own costs rise as well, often at astronomical rates. While the Consumer Price Index (CPI) rose 18 percent from 2000 to October 2006—a rate of roughly 3 percent annually—the cost of silver has risen 158 percent over the same time period, and aluminum has gone up 71 percent since December 2003.

“Almost all of the components used to make our overlaminate and adhesive products have risen [in cost], from the base film carriers such as PVC, polyester and polypropylene to the major acrylate components used in the adhesive,” says Angie Mohni, director of marketing for Neschen Americas. “These acrylates are the main components in adhesive and have risen 18 percent to 30 percent since December 2005. The final major component of overlaminate and adhesive products is paper-based release liner. Domestic pulp paper pricing is up 18 percent year-on-year through November of 2006.”

“We have seen unprecedented increases in substrates and adhesives in the last two years,” adds Gideon Schlessinger, vice president of marketing and engineering for GBC.

The real wallet whomper, though, are petroleum-related cost increases, since petroleum products are both used as raw materials and required to transport materials. Liquefied petroleum gas is up 168 percent since 2000, and refined petroleum products have risen 187 percent. The ink manufacturer Flint Group, for instance, says that 98 percent of its ink raw materials are derived from processed oil or natural gas; add in the transportation costs of these materials and pay the cost increases twice.

Price increases in raw materials often come from unexpected sources. Key materials in blue and green pigments in ink, for example, are cuprous chloride and phthalic anhydrate, both of which are based on copper—which costs 60 percent more than it did at the end of 2005 due to increased global demand and a strike at Chile’s largest copper producer.

Look East, Young Man

While increased petroleum costs have definitely played a part in the rising cost of raw materials, two other relevant factors—which are simultaneously less obvious and more important in the long run—are increased demand and flatlining production capacities. Schlessinger, for example, cites a dramatic increase in material demand, particularly in Asia.

“The explosion of the Chinese market, and to a lesser extent India, has really started to change demand worldwide,” says Dr. Joe Webb, president of PrintForecast.com. “There haven’t been shortages so much as more people wanting to buy the same things. The ability to produce these materials hasn’t gone up in concert; it can take five years to open a new plant.”

Despite the increased demand for certain resources, manufacturers aren’t in a rush to boost production capacities. After all, by the time a new production plant comes online, the demand might have dropped away or shifted to alternative resources, which means the manufacturer could never recover its costs.

Rising Costs Leads to Flat Prices?

Surprisingly, increased material costs aren’t automatically passed on to a manufacturer’s customers. “When you talk to a lot of manufacturers, they feel like they’re behind the curve in covering their costs,” says Webb. “When we look at the consumer price of ink, the price has gone up only 9 percent.”

Manufacturers have counterbalanced some of the rising costs by increasing productivity or lowering transportation costs, says Webb (e.g. having materials delivered by rail instead of by truck). At some point, though, these companies will need to raise prices or else watch their margins disappear completely. Smaller margins strain cash flow since manufacturers have to lay out more funds up front for the same return—a situation no business can endure for long.

“Drytac does what it can internally to absorb as much of the increases as possible,” says Jerry Hill, the company’s vice president of sales and marketing, “but we have passed through some of the costs during the last two years.”

With increased raw material costs being passed on to in-plants, they might feel that they face the same dilemma as manufacturers: Shave the margins or pass on the costs? Luckily, the situation isn’t so stark, and other price-saving options are available.

“Eliminating waste and increasing efficiencies is a good first step,” says Hill. “Drytac can perform yield analysis for customers and make recommendations for the best workflow. Substituting similar but less-expensive laminates is one option. Using water-based for shorter term applications and solvent-based for longer term can save 10-15 percent.”

One Source = Better Pricing

Neschen Americas’ Angie Mohni recommends sourcing as many products as possible from a single manufacturer.

“Many manufacturers may be willing to negotiate better prices based on volume,” she says. “Buying many products from a single source may also allow you to take advantage of free freight programs based on purchasing a certain dollar amount of product at one time. Finally, approach your salesperson and ask whether there are any new products available or new ways to produce your graphics more efficiently.”

Whatever steps you take to respond to increased prices, don’t feel locked into your current mode of business.

“Printers don’t just have competition with other printers, but with all other kinds of communication material,” says Webb. “The cost of Internet service relative to the amount of material you can send online has dropped 30 percent over the past year. Computer technology is still dropping at a significant rate, so any type of printing has to compete with these other methods of getting that information to others. E-mail servers, PDF files, Intranets and all these other things end up reducing the amount of print customers use, which basically changes the cost of getting information distributed.”

The Benefits of Rising Costs

In addition to pushing inefficient producers and printers out of the market, rising costs also compel businesses to find improved or alternative ways of doing business.

“The increased cost of materials might finally force someone to buy an information and workflow system that allows them to better manage their waste,” says Webb. “They might switch from an offset press to a digital system where documents are produced only on demand or distributed electronically.” This allows your customers to print documents in their office or view them on the road, possibly eliminating storage and shipping costs.

“Don’t take for granted that printing is the best way to reproduce content,” continues Webb. “The real question is how you get that information to the right people at the right time, and I believe that in-plants can serve an important role in managing those digital documents.”

If instead of managing a physical document—with all its attendant costs for ink, paper, presses and more—you can focus on managing the information, rising material costs won’t even be an issue in the years ahead. IPG