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The Cost of Doing Business.

Norman;

 We have all seen the prices of fuel jumping about daily. This is out there where we all see it and live with it as we go about town, and very much uppermost in our awareness. But did you know that you are paying, or soon will be paying much more for other items. How much did you last washer or dryer cost you? When you go for new ones, count on substantial increases. How much do parts cost you? And how much have they gone up recently? Count on seeing the prices go up even more. It is easy to say it is greed. But the actual fact is the cost of materials has skyrocketed way past what gasoline has done.

The manufacturers are just like you. They are in business to make a buck. But consider, how much of an investment have you made in your facility to support your operation? Now consider what kind of investment had to be made to build a major fabrication and assembly building, staffed with machinists, assembly people, and design staff to support it? Most of these are higher priced specialized trades requiring years of experience that also command high salaries. Along with high salaries come the attendant costs of Worker’s Comp, health insurance, paid non-productive time (Vacations, Holiday pay, and so forth), Payroll taxes, etc. I once worked with the Human Resources department at a manufacturer to determine the full cost of an employee. At that time (20 years ago!) a department manager made $35,000 a year. However, when all the other factors were considered, that manager’s total cost to the company was over $52,000 per year.

Now, manufacturers have recently seen other costs escalate as well. Costs which you may not see directly, but they do have a major impact on you and the future of your operation. The global demand for raw materials has put amazing intense pressure on the finite resources that are available. There is only so much copper, iron, nickel, chromium, and other materials that can be mined in any one year. And of course, fuel, and other oil based products have seen similar market demand.

Brass or any other alloy with copper in it has gone up four times what is was in December of 2005. In eighteen months, raw brass strip has gone from less than $1.35 pound to over $4.32 and is rising at about 10 cents per pound per week. In production there are always what are called “clips”, which is the material left when you stamp out a part. We now get twice as much per pound for our clips as we paid for brass 18 months ago. Die cast components have almost tripled. And that, with the cost of brass has caused the cost of locks such as used in service door locks and coin boxes to triple. We do not use a lot of stainless steel, but you know your machine makers do. That material has tripled in the same time frame. Plain old cold rolled steel had more than doubled. And so one with just about any other material you wish to name.

All of this means that machines that cost you $800 two years ago now go for about $1100 or more. And most of this is in the materials. The same goes for parts. Motors are mostly copper wiring. So quadruple that cost. A $100 motor will now run closer to $350 or more. Switches, wiring, plumbing supplies, all have seen increases. And this has caused a cascade effect into other materials. When copper plumbing components go up, it creates a demand for alternatives, such as PVC or PEX, and these are petroleum based products, subject to crude oil pricing and now have extra demand made on them. So guess what, they go way up too!

What does this have to do with you? It means that any monies you budget for capital improvements and maintenance must be increased to cover the added costs. Where does this money come from? From all the quarters that go into your machines.

And you already are stretched pretty thin. So all you can do is bump your vend prices along with the change in times. ( I will pause now for the usual screams to the effect that you CAN”T raise prices!!) But you must if you wish to survive. Do some basic math. If you now do 100 turns at $1.00, and change prices to $1.25, and do only 80 turns. You WIN! The gross revenue will be the same. The wear and tear on your machines, and the usage of utilities will be 20% less, so your bottom line actually increases. And if the turns do not drop, then you have added funds for the capital/maintenance accounts.

If you raise your prices and it allows you stay in business, while the fellow down the street does not raise his prices, and goes broke when he cannot afford to keep the machines in shape, any losses will come back. And maybe more! I know that this is traumatic step. One that is hard on you, hard on your customers. But look around you. What do you see when you go the grocery? What do you see when you gas your car up? What do you see when you set down to pay your water, gas, and electric bills? And even more importantly, what do you see when you shop for new machines or replacement parts.

Brace yourself. It isn’t even close to be over!! So get yourself prepared to cover your future needs now!

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