Price Hikes, Rising Raw Material Costs and Part Shortages

Last week, a colleague asked whether we had any specific examples of companies that, due to parts shortages from Japan, had begun sourcing domestically. Off the top of my head, I didn’t have any clear examples (though I’m aware of several companies that have begun sourcing from alternative suppliers, but not alternative US suppliers). Regardless, the impact of the Japanese earthquake and tsunami has had and will continue to have an impact on the US economy and will also help fuel US inflation (though the US has done a good job of that already with a lax monetary policy). So what kind of increases can we expect? Well for one, GM recently announced that it too (following Ford and Toyota’s recent announcements) will raise prices of vehicles sold in the US starting May 2. Though the increase may not appear significant ($123/vehicle) according to this Automotive News video clip, rising raw material costs forced the hike (the first 1:50 seconds of the clip tells the whole story).

Nissan, according to the story, will also limit paint color choices, particularly red, blue and gray colors due to pigment shortages, which comes on top of a product launch delay for the Murano CrossCabriolet. In addition, Mazda has also publicly announced several thousand part shortages at the recent Shanghai Auto Show and has said it will either identify alternative suppliers or change product specifications. But with automotive PPAPs standard in the industry, the likelihood of product specification changes happening quickly seems unlikely.

On top of automotive part shortages, we have the issue of rising raw material costs impacting the industry as Don Walker of Magna explains for Automotive News (the first 55 seconds have all of the details on that topic):

It’s unlikely that we have heard the end of supply shortages or raw material price hikes. Our friends over at The Distributor Board suggest three areas to explore from a risk mitigation perspective if your firm has experienced supply shortages:

Factor 1 Cost of carrying inventory, additional bank financing

Factor 2 Cost of additional warehousing, insurance

Factor 3 Cost of developing a second source for some products

They also suggest that for firms who repeatedly find themselves in tight supply situations, adding inventory may not provide the best answer. Instead, firms may wish to reconsider alternative sources in other countries and regions. And with Japanese automakers unlikely to go back to full production levels until later this summer due to power shortages, that might not be a bad idea.

–Lisa Reisman

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