Inflation, is it temporary or a longer-term challenge? Those in the “temporary” camp cite global supply chain issues as the main driver of the inflationary signs we see today—once these supply chain issues are alleviated, the rate of inflation will slow. Those concerned about longer-term inflation point to continued price increases for important products like steel and oil and the compounding effect of increased labor costs.
There are very few leaders in the world of distribution who remember the last time our industry lived through any serious inflation. Many were young children at the time and inflation is most likely a distant memory.
Join me as we tie some of today’s issues to actions of the past.
Price Increases Continue to Roll Out
Our conversations with more than 200 distributors and scores of suppliers revealed a couple of things. Our industry has gone from experiencing an annual “token” price increase to experiencing two, three and occasionally four escalations in the past 12 months. Average levels appear to be in the 9-11% range. Word from the supplier side of the equation seems to point to more price increases. Some have gone so far as to say distributors should expect price increases on a quarterly basis. Reports from supplier sales teams indicate special pricing agreements are receiving greater scrutiny than in the past and while they still exist, approval levels have changed.
Manufacturer profitability is being impacted by random price increases upstream in the supply chain that can no longer be absorbed. Because the mechanics of changing prices take both time and effort, one can only assume the cost of materials is putting a continued pinch on manufacturers. Add to this the rising labor and transportation costs. Again, we see additional price increases.
For distributors, these price increases will create both opportunities and threats. If the distributor can pass the price increases along with “a little extra for the home team,” profitability could remain stable. That assumption comes with the understanding that distributors can control other costs—more about this later.
During my early years of selling in the late 1970s, we went through a period of double-digit inflation. The situation was so intense that many manufacturers doubled their published list prices. They took this action so they could adjust prices by changing multipliers rather than paying the expense of publishing new catalogs every couple of years. The result—list prices meant nothing.
Customers went through sticker shock. Because we were in an age when most distributors did not have computer systems, pricing was generally done via a published (paper) system called Trade Service. Customer types and sizes were identified in columns. Customer complaints led to every customer being pushed to the edge of sheet pricing. This was the historical first step in margin erosion.
Distributor Actions Tied to Rapid-Fire Price Increases
Now is the time to develop good processes around price increases. This is a short list of recommendations for every distributor:
- Automate the pricing update process.
- Push against supply-partners who give less than 30 days’ notice on price adjustments.
- Develop a plan to ensure price increases are passed along to customers immediately.
- Refuse any customer requests for long-term pricing.
- Give customer quotations an expiration date.
- Make sure your salespeople (inside and outside) are prepared to explain the price increases.
Oil and Gas Prices Go Through the Roof
Most of us are aware that gasoline prices are higher now than a year ago. Most, including yours truly, didn’t realize just how much higher they would go and the current situation in the Ukraine promises to push prices even higher.
Going back to the gas pump, the cost of filling up my wife’s jumbo Buick may soon require a co-signer. But that’s just the tip of the iceberg. Oil is a key component in many of the products we sell. For example, a supplier of specialty cables recently made this quip about price increases, “Our stuff has been going up something like 8% a month in basis cost, and that doesn’t include the fluctuations in copper.” He went on to say that their company does not know the cost of the copper rods that go into the actual conductors until they arrive at their facility. The company struggles to keep their pricing levels accurate due to the unprecedented number of changes.
What Can a Distributor Do About Oil and Gas Price Increases?
While some of these might be considered energy costs, the list consists of things that are directly impacted by massive price increases in the oil and gas sector.
- Consider adding more energy-efficient vehicles to your fleet.
- Look for ways to cut back on heating/cooling costs, and maybe look at solar panels for the roof.
- If you run a value-add shop, review the cost of sundry items that contain plastic.
The Rising Costs of Freight and Deliveries
Inflation first hit fuel. But that is not the extent of the escalations in cost. One distributor told me their new delivery truck has been on “back order” for five months and still the expected delivery date is a month away. With this kind of shortage, the truck dealers aren’t overly anxious to make price concessions. Count on delivery truck prices going up into the future.
On top of your own delivery truck, the long-haul truckers are facing all the fuel and vehicle issues and they are running “a quart low” on drivers. When drivers are in short supply, wages go up. Our incoming freight issues move forward, and the cycle turns into what looks an awful lot like—inflation.
This brings us to one more point. According to our surveys of distributors, the cost of new truck drivers represents the employee segment that has experienced the greatest percentage increase. Thinking more about this, a truck driver with a good driving record and a commercial driver’s license is the most transferable employee on your team. They are qualified to run almost any kind of route regardless of the industry. Job search organization, Indeed.com, reports driver salaries have increased 38.5% in the past year.
Some Action Items on Freight and Delivery Costs
Because distributors serve as one of the critical hubs in the supply chain, we must always work to manage our costs, and this is particularly true during inflationary times. Here are a few things to think about in your business:
- Evaluate orders based on freight terms provided by suppliers. Free freight is worth more now than ever.
- Renew your efforts at capturing incoming freight costs. If the customer orders a non-stock item, consider charging for the incoming freight.
- Analyze the costs associated with deliveries. Can you pick consolidated shipping days rather than shipping every day?
- Some of your customers should be paying for deliveries.
- Be more aggressive with dropship orders.
People are Distributors’ Biggest Investment/Asset
Everybody uses that statement as a figure of speech, but for distributors it is true in the most literal sense. According to numbers produced in distributor association benchmarking reports, the costs of people represent something like 57% of the gross margin dollars for the typical electrical distributor, 67% for high-tech automation distributors and somewhere in between for others. This is a healthy outlay, and it’s headed in an upward direction.
In our research with distributors, we focused on the compensation levels of entry level inside sales/customer service and warehouse and technical specialists coming into the distributor organizations. Comparing late 2021-22 hires against 2019-20 hires, the results point to compensation increases in the 20-27% range.
Many factors are pushing this number forward and none come from traditional competitors. For instance, Amazon is building regional distribution centers with starting salaries advertised at $22/hour and upward. Target just added fuel to the inflationary fires by announcing they would be paying $24/hour in their facilities. Every time a new person is hired at a higher salary, everyone in the department ends up with a raise. Salary inflation is here.
What Can Distributors Do to Minimize the Effects of Inflation?
Saying it again, people are the lifeblood of our business, but it’s our job to ensure the lifeblood is used properly. Here are some points every distributor should think about:
- Are there sections of your warehouse that would benefit from reorganization?
- Would technologies like wave picking make you more efficient?
- Could some activities be automated in the customer service group?
- What would be the impact of pushing some customers to e-commerce?
A Few Final Thoughts
I hope you begin to factor some of this into your business plan. For instance, I suggest any distributor experiencing real growth needs to see sales growth of at least 10% just to stay even with the market. Real growth comes on top of that first 10%. On the other side of the ledger, assume people costs will grow at least 12%. Failure to factor these into your plan may bring some unpleasant surprises later this year.
Take advantage of the still low interest rates. Latest news from the Fed indicates they plan to raise interest rates. Some suggest political pressures will keep the increase low, but the trend is in that direction. Long-term financing on something big today will turn out to be a bargain later.
One last thought, distributors grew and prospered back in the 70s when inflation was double-digit strong. They just did things differently.
