Focus on the Fundamentals
By Joe Duszka, ISFA President
Typically when we think about sustainability, we think about products and solutions that contain recycled content or reduce environmental impact. While environmental sustainability is something we all need to be engaged in, we wouldn’t be here in the first place if we didn’t consider the sustainability of our businesses.
It has been a volatile year. We’re still dealing with COVID. We’ve faced ongoing supply chain issues, skyrocketing raw material prices, and persistent labor challenges. With the last quarter of 2022 upon us, we’ve seen our industry correct in some ways, but now we face a new disruption: inflation. As the Federal Reserve raises interest rates to combat inflation, we’re looking at a slowing economy.
While economists debate the timing of a recession and the severity, most agree that we can expect some cooling of the market. This downturn may be a chance to come up for air and assess where you are in your business. It’s an opportunity to refocus on fundamentals that we lost sight of during the frenetic pace of the past year. As fabricators, our two most significant expenses are material and labor. As the saying goes, “Sales covers a lot of sins!” So, it stands to follow that in a time when sales may be beginning to slow, it’s crucial to get a handle on these expenses.
When reviewing your material costs, consider the impact of raw material price increases and material yield. First, regarding price increases, ensure you have a system that captures not only raw material price increases but also the impact of surcharges and freight hikes. For example, some suppliers have not only increased material costs on their price list, but some have also added temporary surcharges and changed their freight policy. These additional surcharges and freight changes can equal 15% or more — on top of the material price increases. Failure to take these costs into account can be devasting to your material cost line and, therefore, the health of your business, so don’t overlook them.
In addition to pricing, material yield substantially impacts your costs. With shortages in some categories, we are forced to work with the materials that are readily available to us. As a result, your team’s process knowledge may be tested, which brings us to labor costs. In a challenging labor market, you may have found yourself with new hires in key positions in your shop. Without clearly defined processes, this can negatively impact material yield as newer employees may not have as much experience and tend to make more mistakes.
Labor cost is often the second largest line item on a profit and loss statement. For the past couple of years, with the labor market extremely tight, fabricators have had to raise their wages to attract and retain good talent, and sometimes we hired whoever was available to get the work out the door. Now’s the time to review your staffing. Do you have the right number of people for the volume of work you have today? Are you evaluating your team and identifying who your A, B and C players are? Sometimes we let our companies bloat as we try to keep up with demand, but then we’re sluggish to condense when demand ebbs. Pay close attention to your labor cost to ensure the health of your business in slower times.
Even with the headwinds of inflation, your company can continue to flourish if you focus on the fundamentals. For additional ideas and strategies, leverage your ISFA membership and engage in the many programs and resources that can elevate and sustain your business in good times and bad. To take a deeper dive into material costs and labor challenges and discover ways to mitigate them, I encourage you to check out ISFA’s Installing Profitability podcast.