State of the industry: Challenging but hopeful
Alex Lawton, CEO, Lawton Standard
During the last year and a half, we’ve survived many challenges. There’s been a lot going on, from the global pandemic to economic ups and downs, from supply chain shortages to a changing workforce.
We’ve experienced many symptoms of taking a thriving economy, suddenly turning it off, and then attempting to turn it back on again. It’s a messy process that causes a lot of disruptions and dislocations. There are so many interrelated factors and constraints involved in the U.S. economy that it’s not a smooth process.
It’s a lot to unpack, but here’s a closer look at the macro forces that have been affecting Lawton Standard and how we’re guiding it through them to make us stronger than ever.
For the better part of a generation, inflation has either been low or non-existent. However, this year, it spiked to around five percent. Unfortunately, many people who manage our operations and our customers and suppliers have never lived through these conditions. Here are the additional challenges inflation brings.
Inflation has two effects: It increases our cost of materials and our workers’ cost of living. As consumer prices go up, our employees’ paychecks don’t go as far. So, we need to figure out if we can help them keep up with the cost of living or even put them ahead of it.
What makes that hard is that we don’t know if the current inflation spike is transitory or not. In other words, will it return to a nominal rate in a year or so? Or are we facing a prolonged period or even a generation of higher inflation like we experienced in the 1970s and 1980s?
If we push through significant wage increases without much thought and inflation turns out to be transitory, we wouldn’t be very popular if we tried to take back those wage increases. We’re planning to balance base increases with some one-time things (like special COLA bonuses) to help our people out.
We’re working hard to make sure we do what’s best for our employees while still doing a responsible job of managing and growing our business for all its stakeholders – especially customers.
We’re trying to be as agile as we can, watching the data, doing our own analysis of it, and trying to make the right decisions. At the same time, we’re communicating clearly and honestly with our employees (pay), our customers (pricing), and our suppliers (their pricing) about where we’re coming from and what we’re able to do for them.
By the middle of next year, we should have a much better idea of whether inflation is temporary or will last longer. My gut feeling is that it’s temporary. The markets, interest rates, commodities, and other indicators seem to agree with that assessment.
Cost of materials
Material input costs are all the things we purchase to produce our castings and other products. During this year, the prices of many commodities and other supplies rose rapidly due to sudden changes in supply and demand and disruptions. Lumber and used cars are two well-known examples of price increases. The price of lumber reached historic highs earlier this year, but now it’s moderating as supply catches up with demand. Likewise, used car prices increased 40 to 50 percent but are also starting to subside.
When our input costs go up, it increases our cost of goods sold. Some of this is protected by surcharges, but much is not. Add in the rising labor rates mentioned earlier, and it’s a challenging environment. Where possible, we need to increase the prices of our products to cover our increased costs. But we can only do that to a point. Our challenge is to achieve a happy medium: to protect our customers as best we can from those cost increases and still make an adequate profit.
We’re watching the numbers, doing analysis, and trying to make the right decisions for our stakeholders and the business.
When the dollar is strong, it’s harder to export products. When it’s weak, it’s easier to export. Many expected the dollar to weaken before the pandemic. What actually happened once the pandemic and its related recession hit was the opposite: the U.S. dollar stayed very strong. That’s partly attributable to a “flight to safety” (U.S. assets are attractive during times of crisis) and partly to the relative outperformance of the U.S. throughout the crisis.
Fortunately, the global economy is starting to normalize. China, in particular, managed things effectively. Europe and Japan have also done a decent job of managing the pandemic and the economic slowdown that accompanied it. As a result, they’re slowly getting stronger. That means our currency should not need to be as strong as it was. As a result, we should see a more favorable environment for our customers to grow their volume of business and thus ours.
One factor we’ve had working for us is the aid that the U.S. government provided to businesses and consumers during the pandemic. Our government learned a lot during the Great Recession of 2008-2009. When the pandemic hit, it had a much better sense of what financial interventions could be effective. It threw out lifelines to businesses and consumers to help us all get through these very challenging times. As a result, we were able to maintain a decent quality of life, at least economically, despite the major health issues of COVID-19.
Before the pandemic, most economists believed we were nearing the end of an economic cycle. In other words, after one of the most prolonged periods of extended growth in recorded history, the U.S. economy was headed for a slowdown. Not necessarily a recession, but a definite slowdown. Because of the pandemic that happened almost overnight.
What we see now is quite strange: It’s almost like the pandemic has reset the economy. It’s behaving as if it’s in the early stage of an economic cycle, which is usually marked by strong growth.
I predict we’ll see several years of solid growth in our industry. So it’s a good time to go on the offensive, to position our business for the future. It’s time to ask questions like: What do we want to be doing in the future? What’s a better mix of work? What’s the right mix of products (goods and services) we should be offering to our customers?
Supply chain challenges
We see many dislocations with supply chains. Manufacturers haven’t been able to get the components they need. They don’t have enough labor to produce at the same level as before.
Many other factors we’ve already talked about are interrelated with supply chain problems – like currency fluctuations and inflation. While some of this is secular, much has to do with the economy decelerating so suddenly last year and trying to bounce back this year. I think these challenges are going to be with us longer than most people expect.
But I want to emphasize: I’m not a pessimist. I’m very bullish about the future. It’s going to get better. We’re doing our best to proactively communicate our supply constraints and not to over promise and under deliver to our customers. The marketplace wants more from us right now than we’ve been able to provide. But we’re doing many things to address those issues and increase our effective capacity.
We’re doing that by investing in existing and new people and equipment and making strategic investments in additional facilities to fill in gaps in our product line. So I see a bright future ahead, but for all the reasons I’ve just outlined, it’s taking longer than I’d like for us to get there.
Over time, we’ll get to a less disruptive place. But right now, there’s much change coming at us from outside our four walls. Our philosophy is to take a flexible approach to planning. First, we do the analysis and factor everything we learn into well-thought-out plans. Then we execute on them. Finally, we revisit them regularly. We take stock of whether or not our assumptions were reasonable. We make adjustments as needed. Until things stabilize, this kind of agility is a must.
It hasn’t always been easy. During the last few years, our foundries have been learning to work with each other and leverage each others’ strengths. As we improve our systems and people, we’re getting better at executing our plans.
If you look at foundries similar in size to our individual facilities, many are struggling to cope with these macro-level changes. They’re not able to analyze what’s going on as well as we can. And they don’t have as much of the knowledge and resources that are needed to make improvements. Our respective foundries wouldn’t have weathered the last few years on their own as well as under the Lawton Standard banner.
Collectively, we’ve tackled these challenges from a more analytical and sophisticated point of view. We have a deeper bench of people, knowledge, and resources we can use to solve them.
Together, we’re stronger and more agile.
I believe these strengths will help us be more successful at meeting the needs of our stakeholders – our customers, employees, owners, suppliers, communities, and the industry – and in growing the business.
To use a baseball analogy, it’s like we’re moving from playing minor league ball to the major leagues. I don’t know about you, but I’m ready to step up to the plate.