For producers, the key to staying competitive and profitable is to control variable costs. Variable costs are explicit costs that vary with production, i.e. labor, raw materials/inputs, utilities, etc. In a highly competitive the industry, it is vital to minimize the impact of increasing variable costs on the total cost of producing. If one cost increases that the company cannot control, then they must off-set this cost increase by a decrease in cost in some other area of production. Otherwise, they will have to pass on the costs to the customer. In the current economic climate that is not easy to do. This article has many examples of companies controlling their variable costs so they can avoid raising the retail price to customers.
Manufacturers Scrimp To Keep Customers From Paying More.
VF Corp. is sewing smaller buttons on some of its Lee and Wrangler jeans. General Mills has shifted to a slightly less expensive, though no less flavorful, rice for its Rice Chex cereal. And industrial product maker Quality Float Works is recycling oil for its factory machines.
Many manufacturers are taking small but meaningful steps to trim costs as they cope with surging materials prices without sharply raising prices for customers.
They have little choice. Household spending has picked up recently, but consumers aren’t splurging.
“They might be willing to accept a slight increase in price,” but they might buy less, says Madison Riley, managing director of Kurt Salmon, a retail consulting firm.
Food, energy and other commodity costs have soared the past year on rising global demand. Several manufacturers and retailers say they’ll pass along some increases to customers this year but will likely absorb much of them, squeezing profit margins.
Many say they’re scrimping without sacrificing quality:
•VF is switching to regular buttons on the flies of some jeans. Executives believed slightly bigger buttons “made a statement” and increased convenience, says Vice President Cindy Knoebel.
“We actually found that it didn’t make any difference to consumers.” The move saves about 5 cents on each pair and millions overall for the company, which is paying more for denim due to soaring cotton prices.
•General Mills used to ship rice-based flour for Rice Chex from farms and mills in Texas to its Cincinnati plant. But with agricultural and diesel prices rising, it switched to a different rice from Arkansas that’s less expensive and closer to Ohio. Costs fell about 4%, says Senior Vice President John Church. “You need to save 2, 3% in a lot of places.”
•Quality Float Works recycles oil that greases its factory machines to halve oil costs. The Schaumburg, Ill., maker of steel water-level sensors for tanks saw its oil costs nearly double from a year ago. “We can’t” raise prices, says President Sandra Westlund-Deenihan. “There’s a lot of people still out of work.”
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