Input prices are putting pressure on margins - how are manufacturers responding?

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Today's Producer Price Index release showed that prices facing manufacturers have risen by 16.2% in the last year. A little down from steeper rises seen in previous months, but significant, nonetheless.

The strong rises in commodity prices in the last couple of years has caused significant challenges for manufacturers. Our recent survey for Manufacturing Focus found that 48% of manufacturers saw materials costs were a top-three challenge for their business.

Our Business Trends survey, which we released on Monday, shows just how high and volatile input prices are hitting firms. This quarter's survey saw a second consecutive worsening in the pressure firms are feeling on margins.

Pressure in margins builds% balance of change in margins in the last three months

As well as putting up their own prices – when they can – manufacturers are responding to input price rises in a number of ways such as seeking different sourcing options, substituting some inputs and raw materials, collaborating with suppliers, and stockholding materials.

For example, as we reported in Manufacturing Focus, one electronics manufacturer which uses rare earth materials had to respond to the prices of some inputs rising four to six times in the last couple of years. Given the product lifecycle, the company had limited ability to pass price rises on in the short-term so the company chose to stockhold some of its inputs, which has reduced vulnerability to price rises and ensured availability.

However, there is no one-size-fits-all response. For example, other companies we spoke to were unable to bulk buy in one case this was due to unpredictable order flows, and another highlighted risks associated with stockholding such as potential damage to warehoused goods.

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