warehouse products manufacturing inflation

Partnership is Key in Mitigating Inflationary Price Increases

The US ended 2021 with decades high inflation. The pandemic, and the actions taken to contain it, have led to a perfect storm that impacted every aspect of our lives – from personal to professional.

We, at Johnson Electric, much like most of our manufacturing counterparts, have battled production shutdowns, labor shortages, rising wages, commodity price increases and shortages, supply chain issues and surging energy costs. In our day-to-day operations, two components stand out as the main drivers of inflation in our business:

Raw Materials

Copper and steel are the core components in the products we make, and both have nearly doubled in the last year and a half. Copper rose 93% from $5,050 in April 2020 to $9,765 in November 2021. Steel is up 85% from $560 in April 2020 to $1,035 in October 2021.

Direct Labor

The Washington Post recently wrote that “manufacturing has weathered the biggest surge in workers quitting — a nearly 60 percent jump compared with pre-pandemic. No other industry has seen an increase like that”. For a long time, manufacturing has offered a path to the middle-class lifestyle in American society and yet people’s aspirations are shifting away from these jobs. According to a 2020 Nielsen study, about 54% of Gen Z indicated they wanted to start their own company.

The intersection of these two trends has made it increasingly difficult to recruit and retain factory workers. We have felt this acutely. To maintain operations, we significantly increased hourly wages, offered free medical coverage and other benefits/bonuses to retain and attract talent.

In the past, we were able to offset increasing costs through continuous improvement activities. However, the historically high inflation is outpacing these activities.

So how can we compensate for this inflation?

The truth is that, in the short term, we can’t. We are forced to share this inflationary burden with our customers in order to remain solvent. However, we are taking a different approach than in the past. Rather than instituting a general, across-the-board increase, we have deployed an individualized product approach – down to the part number level – taking into account the content of raw material and direct labor. We believe this is a better approach because it leads to meaningful discussions with our customers. Together, we can review the product to identify an alternate or work to modify the design to reduce material and/or labor requirements. This approach also helps us prioritize such activities, together with our customers, based on the largest potential savings.

In the long term, we are automating our manufacturing lines to reduce overall costs and lessen the impact of a fluctuating workforce. This will put us in a better position to protect prices in future inflationary scenarios.

We are actively working with many customers and prospects to optimize costs in new and innovative ways. And we encourage you to reach out to us with your challenges. We are ready to partner with you as we all weather this inflationary storm.

Sincerely,

Vincent Sallé
Vice President
Business Development Americas
Industry Products Group


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