December 11th, 2018
Beating the Competition in the Face of Rising Costs
In a previous blog, I mentioned three factors to watch in the year ahead: rising component costs, labor shortages and rising interest rates. The first two spell rising costs for window manufacturers, while the third influences consumers’ costs for buying fenestration products. So, will these three factors become the “perfect storm” that reduces demand for doors and windows?
Well the good news is that demand for doors and windows would be described by economists as fairly “inelastic”—meaning that only large changes in price would post negative effects. When a builder is constructing a new home, he is not going to skip the doors and windows because prices went up. Also, when an existing window fogs up or becomes inoperable, most homeowners are not going to skip over the purchase of a replacement by boarding up the opening!
When window manufacturers fret over rising component and labor costs, I remind them that it affects not only them, but their competition as well. So, does this mean that the playing field remains even? Not exactly.
When component costs rise, wastage and scrap rates become a bigger factor. When labor costs rise, then the labor hours required per unit become a bigger factor. What does this mean for companies that invest in automation? A clear advantage.
Automated machinery enables manufacturers to reduce the labor hours required to produce each door and window unit. Automation also helps reduce wastage and scrap rates associated with remakes and has an impact on warranty expense. Each time a person touches the work on a fabrication line, the likelihood of a mistake or contamination increases and along with it the likelihood of a warranty claim. So, if fewer people are involved in the manufacturing process as a result of automation, warranty expense has the potential to be reduced. Now warranty expense should be factored into the overall manufacturing cost per unit; so, once again, investing in automation reduces overall unit cost.
What about the third factor? How do we mitigate the effect that higher interest rates may have upon our sales? The answer here is “creative financing.” I am often surprised by the number of door and window companies that fail to offer financing in the process of attempting to close a deal. They assume that the consumer is not interested in financing, or simply does not need it. By failing to mention financing, many window companies or dealers may ultimately lose out. The customer may be shy when it comes to asking about financing, or assume that, since it was not mentioned, the window company doesn’t offer it. That introduced the possibility for a customer putting off the purchase for another day, only to be approached shortly there after by another door and window company that does offer to finance the purchase. They end up closing the deal!
A full discussion of what constitutes “creative financing” awaits pondering on a different day, but let’s just say for now that the first rule of creative financing is to simply offer it in the first place!