Confronting cost pressures, inventory management (Part 1)

The following conversation was edited for brevity and clarity from one of two concurrent Jan. 25 discussions at the 2023 Pit & Quarry Roundtable & Conference. Part two of this conversation can be found here.

PIT & QUARRY: For the producers here, how did you manage inflation in 2022 and what were some of the major adjustments your business made? For suppliers, please share how inflation impacted sales in the last year and what’s ahead.

JAMES MECKSTROTH (BARRETT PAVING MATERIALS): We’re in the southwest Ohio and eastern Indiana area. We have been investing capital into our plants in the last five to six years to make them more efficient. This has helped us through.

Still, despite being able to build inventory, labor and logistics have presented problems with getting material to our customers. There’s a lack of drivers. We don’t own any trucks, but there are a lot of trucks sitting in the market because we have a lack of drivers in the market. It’s pushed trucking rates up 20, 25 percent as we try to move materials to the customers. Customers will pay it because they need the materials.

JAMEN MCDERMOTT (SENSATA TECHNOLOGIES/PREVIEW RADAR): Obviously, inflation is driving costs up. With costs up, it’s driving prices up. It’s really delicate to not price yourself out of the market. A lot of competitive analyses are being done to try to know what you’re up against. You want to make sure you’re staying at least within a line and not crossing it, so you continue to be competitive.

Also, we’re seeing a lot more regulations in industries. Most of the regulations I deal with are on road, but those are starting to branch out into off road.

GEORGE REDDIN (FMI CAPITAL ADVISORS): We’re seeing a very visible improvement in our clients’ understanding of their costs and pricing and focusing not just on top line or bottom line. It’s return on that capital that [they] have to employ.

[They] have to have more inventory. There’s cost to carrying inventory. Now, I think the financial acumen of the industry is coming up because inflation caused everybody to learn more about what their true costs are and how that’s going to go into pricing.

With inventory, I think we’re going to shift more toward a focus on return on net assets or capital. It’s good for the industry. We’re getting smarter through technology, and some market forces have helped us.

STEPHENIE DAVIS (DAVIS INDUSTRIAL): To answer your question about inflation: From a service standpoint, we definitely felt it with service work in general. But from the distribution side, we take what [manufacturers] have and sell it for a competitive cost in the market. When prices go up, everybody follows suit.

I think what we didn’t anticipate happened on the service side of our business: Usually the fourth quarter is our busiest service time of the year – even part sales. But it wasn’t [in 2022]. I don’t know if that’s because producers didn’t expect the amount of inflation that we would have all year and they ran out of budget money early. Usually for us, customers in Q4 are like: ‘I need to spend this money before the end of the year.’ We’re happy to help, but we didn’t have that in 2022.

RONALDO DOS SANTOS (ANDERSON COLUMBIA CO.): We’ve reinforced our cost preparation for things like diesel and power consumption. We had a routine discussion with the group about reducing idle time and ways to be more efficient and productive. We even reviewed some practices and procedures that we have internally, and we implemented best practices in procuring strategic spare parts among different sites and even reaching out to other producers to be able to identify those parts.

We increased our inventory, and we had discussions with partners and dealers to see if we can predict when we’re going to have a failure based on a past historical. We want to keep the critical parts available in one location. We try to not only plan maintenance better, but also quantify how much spare parts cost.

DAMIAN MURPHY (PECKHAM INDUSTRIES): We’re deploying technology or software to really do a thorough analysis on our customer base and really be surgical about our customers and where we’re making money – as well as where we’re not making money. We’re very deliberate with that. It’s all about data, and we use technology to do it.

JONATHAN KOLBE (ALLEGHENY MINERAL CORP.): We are seeing a much higher influence on parts and service when we’re looking at major equipment purchases – sort of surpassing the actual purchase price. It may be brand name because, you know, these other producers already know you’re down [or] not putting any product out. With restrictions on availability of parts, that has been a huge emphasis. If a distributor cannot get rebuilt parts, we’re going to pass and move on to another equipment house. That’s been a little bit of a shift for us to get away from a quoted purchase price versus [dealing with] the next 20 years of parts and service availability.

VINCENT ROCCO (AMCAST): It’s critical to understand your costs as a company, either as a producer or a manufacturing services company. Investing in human capital and beefing up our financial department over the past three years has been key for us – critical, really – to understand market trends and adjust to increasing raw materials pricing.

NICK PEARMAN (ROGERS GROUP): To add on to what Jonathan said: We’ve put a lot of weight into the support side of the equipment we’re purchasing. Parts and availability are huge. Last year, relationships were really bonded – and some were to the detriment of parts availability.

If you can find a vendor who is willing to communicate if there are going to be shortcomings for parts availability, that’s better because you can work with them and say: ‘What are we going to do about this problem? How do we address it?’

The relationships you have with the vendors are very critical in these times, because having visibility of issues allows you to adjust and formulate a plan about how you’re going to make it through. Those issues have caused us to look at other vendors and forge new relationships.

Pricing is still a big deal, but lead time is really what caused us to go out and ask: ‘What about this vendor that we haven’t used before? We’ve developed some really great relationships with other vendors we might not have considered before because of these issues.

JEFF SIKORA (HAZEMAG): As difficult as this period has been as far as inflation, costs and product availability, it’s also offered suppliers an amazing opportunity to strengthen partnerships by emphasizing some of the things Nick said – reliability, honesty, being totally up front and candid about what we’re facing and dealing with – so they can understand the total picture of what they’re faced with. It really created a great opportunity for us to strengthen partnerships.