Points of View: How Are You Handling Inflation?
Inflation recently hit a 30-year high, and small and midsize businesses are feeling the heat.
To cope with surging prices, wage increases, supply chain bottlenecks and other inflation-related challenges, many CEOs are rethinking how they compensate their employees, structure their investments and deal with unexpected costs. We spoke with two leaders from construction — an industry particularly hard-hit by inflation — and two electronics manufacturers to understand how they’re addressing these challenges.
Janice Miller is owner and managing member of MAC Equipment LLC, a construction equipment company based in Albany, New York. Founded in 2001, MAC Equipment provides rental, sales and service of aerial lift equipment to customers based in New York, Massachusetts, Vermont, Connecticut and New Jersey.
Steve DeWeese is vice president of construction for Elder Construction Inc., a commercial general contractor with offices in Windsor and Colorado Springs, Colorado. Founded in 1994, Elder partners with clients in the areas of office and warehouse; retail and restaurant; municipal and secured space; nonprofit and faith-based; healthcare; and education.
Dave Offerman is president and CEO of IEH Corporation, an electronics component manufacturer based in Brooklyn, New York. He is the fourth generation in his family to run IEH and previously served as the company’s vice president of sales and marketing.
Cassandra Gluyas is CEO of Thomas Instrumentation, Inc., an electronics manufacturer based in New Jersey. She specializes in the electrical design, software development and manufacturing of custom electronics for a wide range of industries.
How have your supply-chain relationships changed this year?
Janice Miller: With the supply chains drying up, it’s been difficult to get new equipment and parts for our aerial lifts. We’ve been trying to replace older pieces of equipment, but we’ve had to hold on to them because new ones aren’t available.
Steve DeWeese: For us, the impact on supply chains has been significant, both in terms of pricing and availability of materials. The unpredictability of supply chains has also impacted both the duration and completion of projects.
Dave Offerman: Fortunately, we have longstanding relationships with very good suppliers, both overseas and in the U.S. For the last 18 months, we’ve had constant communication between our purchasing folks, production folks and key suppliers. We haven’t seen any meaningful delays or interruptions in the supply of our inputs for raw materials.
Cassandra Gluyas: We are contending with a global shortage of components in the electronics manufacturing industry. Although I’ve been expanding our suppliers, it’s been hard to find some of the parts we need, even within that larger group. It’s been a challenging year.
Are you absorbing, increasing or passing through costs?
Miller: Right now, we are trying to absorb as much as we can. As we head into the slower season for construction, it’s difficult to raise your rates and keep your equipment out there when you have so many competitors. We’re trying to keep our rates consistent.
DeWeese: Generally, we are passing through. That’s the nature of being a general contractor and the way that our contracts are typically done. We charge a fee related to the overall project and tend to pass through the pricing of our subcontractors and their materials. Price de-escalations are going through our end users.
Offerman: We are passing through. We are using this as an opportunity to increase prices where we can, and where we feel like there won’t be too much pushback from customers. We are also considering the competitive landscape of each situation and application so we raise prices strategically.
Gluyas: We are both absorbing and passing through. We try to absorb small cost increases to avoid raising prices on the customer. But if it’s a larger cost that we can’t absorb, we pass it directly through.
Are you taking costs out of the business or making investments in the business?
Miller: We’re making investments in the business. We’re placing orders for new equipment, even though we’ll have to wait awhile for them to arrive.
DeWeese: Both. We are focused on becoming more efficient and taking costs out of the business where we can. But we’re also making investments — primarily in software and technology — to help increase efficiency while reducing project costs and time.
Offerman: We’re making investments in the short term in order to take out costs in the long term. We are upgrading a lot of our equipment that traditionally was very labor intensive and trying to automate some subassembly processes that are more hands on. Over the long term, these investments will drive down our labor costs. At the same time, we’re building another facility in a lower-cost region where rents and overhead are lower.
Gluyas: For the most part, we’re making investments in the business. We’re considering buying new capital equipment for manufacturing and trying to stock up on inventory. We’re trying to stay ahead of the shortage so we can keep moving forward.
Given today’s low interest rates, are you gravitating towards long-term leases or borrowing to purchase productive assets?
Miller: We’ve been borrowing. Leases aren’t a big option in our industry.
DeWeese: We don’t have a tremendous amount of capital equipment in our business. Our capital expenditures include trucks and some equipment used on projects, but most equipment is owned by our subtrade. We tend to do long-term leases on trucks and those sorts of things, as opposed to buying them outright.
Offerman: As of now, we’re not borrowing. Fortunately, we came into the pandemic in a pretty strong financial position. We still have a lot of cash on hand, enough to finance any of the investments and expansion activities that we are undertaking.
Gluyas: Typically, we don’t do a lot of borrowing and use cash on hand to purchase. But, this year, we are looking towards borrowing for future purchases.
How are you using facilities to manage high inflation?
Miller: We own our location. We’ve been looking for a new, larger location for a few years, but it’s been hard to find one — especially at a reasonable rate. If we do purchase a new location, I think we’d hang on to the one we have and lease it out.
DeWeese: We own the building in one of our locations and lease the building in the other location. In the future, we are looking to build and buy instead of extending the long-term lease on our property.
Offerman: As I mentioned earlier, we’re opening a second facility — in Allentown, Pennsylvania — that will mirror our primary facility here in Brooklyn. Rent and utilities costs will be lower, which will drive down our overhead costs overall.
Gluyas: We own our facilities, so we haven’t had the need to pursue borrowing.
Have wage increases impacted your business?
Miller: We’ve always paid our employees above-average for the industry, so our wages haven’t changed, aside from yearly increases. When we get someone who is a great fit, we make sure we keep them.
DeWeese: It’s a competitive market for talent, from laborers to leadership. We’ve had to increase wages to remain competitive in the marketplace and we’ll likely need to continue to do so.
Offerman: Wage increases have impacted us for a while; even before the current labor shortage, minimum wage increases were impacting us. But we’re able to pass along those costs without causing too much pain.
Gluyas: Wage increases haven’t really impacted us. Each year, we give annual bonuses based on how much the business made. This allows us to tailor amounts to how good or bad the year has been.
What investments have you made to help retain market share?
Miller: We recently developed a new website, which has brought us a great return on investment. We’ve also been trying new brands of manufacturing equipment that are more readily available than some of our older, go-to manufacturers.
DeWeese: We’ve invested in the training and development of leadership. But we’ve also invested in software to drive more efficiency in the ways we manage projects and provide a better client experience.
Offerman: We are increasing our investments in new product development to gain a foothold in markets that we haven’t traditionally been well established in, particularly overseas. We’re also devoting of greater share of expenses towards marketing — digital marketing in particular. Our sales model is very reliant on face-to-face interaction and salespeople traveling to different parts of the country and overseas to visit customers. Obviously, in the last year and a half, there hasn’t been much travel, so we are reallocating that budget to digital marketing to increase awareness of our company, products and capabilities.
Gluyas: We are spending a lot of time on our customer base and customer service to keep our long-term customers with us. We’ve also invested in stocking a lot of components and buying new manufacturing equipment so we can produce things when our competitors can’t. We’re just doing what we can to stay ahead of the curve.