We've all read quarterly reports showing strong revenue growth and profit numbers on the part of major manufacturers. But those numbers belie the fact that manufacturers have been strongly squeezed on margins in recent years.

There are a number of reasons for this, not the least of which has been the cost of materials. According to the Bureau of Labor Statistics, crude petroleum has risen more than 100 percent in the past year, with diesel fuel rising 75 percent. The cost of copper and steel has risen in triple digits in the past four years, in some cases higher depending on the type required. For some manufacturers — such as welder maker Miller Electric — the cost of steel has risen more than 80 percent this year alone. You need iron and steel scrap? Many manufacturers do and the price has risen 93 percent in the past year and more than 200 percent in the past four years.

Can a manufacturer expect to pass along those kinds of increases to rental companies, distributors or end users? Not if they expect to deliver any machines. And, speaking of delivery, the cost of tires has gone up nearly 10 percent in the past year, a hike Ken Simonson, chief economist of Associated General Contractors says is steeper than he can ever remember. To sum it up, “Every cost related to manufacturing, distributing and delivering product has increased over the past 12 months,” says Harry Schneider, president, Lexington, Ky.-based Allied Financial Solutions.

While executives of manufacturing companies are quick to praise their channel partners as understanding their price pressures — after all, rental companies are faced with the same fuel price issues and the rising costs of materials are not exactly a hidden secret — they still face resistance when it comes to price increases because of the challenges rental companies themselves are facing with a construction slowdown and an increasingly competitive rate environment.

“Sure it's a conflict,” says one manufacturing executive who asked to remain anonymous. “Rental companies want more from us because we're the big brother. They say, ‘You can't raise prices now!’ Well, we have to pass on our costs, but nobody wants to hear it. There's a conflict between us, it's a match and a chess game right now. And if there's a rental company looking to buy some inventory, there are four of five manufacturers chasing the deal.”

“The most obvious point of contention between manufacturers and rental companies right now is with regard to inventory and the associated costs,” says Mike Ferguson, vice president of sales for Carson, Calif.-based Multiquip. “Traditionally, rental companies purchase inventory for fleet replacement and expansion as needed, and for retail sales. Many are now cutting back in these areas and the trend is putting more pressure on manufacturers to have readily available equipment close to the customer. This increases warehousing, shipping and transactional costs for the manufacturer and it's hard to raise prices to cover these additional expenses. We recently received a request from one major rental company to reduce prices if possible in view of the declining rental rates in this soft market. It is tough for everyone involved.”

Nor are the industry's financial sources exempt from the pressures. “Rental companies are placing strong demands on lenders to provide lower rates,” says Schneider. “Manufacturers have come to their financial arms in the past few months and asked them to carry longer delayed payments. Lenders, however, usually cannot provide such financing. It is extremely difficult for a lender to know that the equipment will be rented during that delayed period and be subject to [what financial institutions call] the unusual wear and tear of rental.”

Meanwhile, the increases in manufacturers' costs are unprecedented.

“In the last six months alone, steel has gone up 81 percent and copper 17 percent,” says Jeff Morneau, sales manager for Miller Electric Co., Appleton, Wis. “That has forced us into some small price increases and we're not alone in that. But nobody is getting rich here. We're not being greedy, we're not trying to improve our margins, we're just trying to cover costs. Rental companies are experts at logistics, they move fleet around, they understand the costs associated with that, they know there are surcharges when fuel costs fluctuate as wildly as they are now.”

Multiquip president Roger Euliss says his company is paying more than 70-percent higher prices for steel this year. Another increased cost for manufacturers, Euliss adds, are the cost of engines as a result of EPA and California Air Resource Board regulations.

“Fuel costs have hurt all aspects of the business,” adds Mike Howlett, Multiquip's vice president of operations. “Container costs on imported items have risen sharply — 15 to 20 percent — as ocean carriers pass along their increased operating expenses. Freight costs on domestic truck shipments are up even more as fuel surcharges, now approaching 70 to 75 cents per mile, are being added by all carriers. These fuel-related costs are very difficult, if not impossible, to recapture over the short term, especially when sales have become much slower.”

Tim Ford, vice president of Genie's aerial division, agrees about the rising costs. “These increases are real and we are working hard to mitigate them as much as possible,” says Ford. “It is becoming increasingly difficult to find ‘cost out’ opportunities that offset the steep increases we are experiencing. Genie has not announced equipment price increases as of yet, but we will be forced to do so in the near future if current conditions persist.”

“We have suffered significant cost increases across the board,” adds Peter Bigwood, president of Atlas Copco Construction Tools, West Springfield, Mass. “For example, cost of heavy steel plate imported into the U.S. has shot up since the beginning of the year by over 20 percent. With our manufacturing largely centered in Europe, we, like many of our competitors, have faced the additional burden of the 25-plus percent drop in value of the U.S. dollar against the Euro. These are real costs and no manufacturer can absorb these kinds of increases and remain viable without passing on price increases at some point.”

Morneau points out that Miller, like many other manu-facturers, is constantly trying to control costs and find more efficient ways of doing things. “We're always looking at ways to improve our efficiency,” he says. “That is ongoing regardless of commodities prices. We spend a great deal of time and effort in each manufacturing unit here within the company, looking at ways to improve efficiency and cut costs and still maintain quality.” Euliss says “lean” initiatives have helped offset some of Multiquip's cost jumps, but not all.

The need for better communication between manufacturers and rental companies is obvious.

“Between manufacturers and their suppliers, you get into a just-in-time environment, and you don't do that unless you share things like forecasts with them,” says Dave Christifulli, president of Christifulli Consulting Group and a former senior executive at Wacker Corp. for more than three decades, and still a consultant to the Menomenee Falls, Wis.-based manufacturer. “It's not an exact commitment, it's an estimate. For example, at Wacker, we don't commit to our suppliers that we're going to build 1,000 units. We say ‘our forecast is for 1,000 units, generally we're about 90-percent accurate, and these are the months we're planning production.’ The channel can say to the manufacturer, ‘This is what our capex will be.’ Tell the truth. Don't say it's going to be $900 million when you know it's going to be $400 million. And then say: ‘For your products, this is what we feel we're going to be purchasing next year, this is the approximate quarter we're going to purchase in.’ That's how you start cutting costs, because the manufacturer can plan based on 90 percent of that. You don't have to have extra inventory lying around, you don't have to commit raw materials. That's one of the ways we can work together at keeping costs down.”

Atlas Copco's Bigwood agrees. “Typically, a manufacturer will make an offer for an annual preferred supplier agreement based on an implicit or often explicit expectation of certain volumes,” he says. “When those volumes fail to materialize, the manufacturer suffers a double whammy: poor absorption at the factory, coupled with low prices for the smaller number of units that are shipped to the rental company. It is hard to fault the rental company — they are only responding to market conditions, and working to ensure their own long-term viability by reducing spending in thin times — but the strain on the manufacturer is unavoidable in those cases, and there can be consequences, reduced hours in the factory and even layoffs.”

Exacerbating the situation is the current credit crisis. Although lenders with long-standing relationships with rental companies are less likely to be affected, “we are in an economic environment where banks are beginning to back away from the rental industry again, as they did in the late '80s and early '90s,” says Allied's Schneider. “These banks link ‘rental’ to the construction industry and choose not to lend.”

Most manufacturers agree that price increases are inevitable. Christifulli estimates most manufacturers have already raised prices or will raise them in the range of 4 to 10 percent in 2008 through 2009, in some cases higher.

“Couple all these supply chain upward pressures with an extremely soft domestic economy and slow sales to the rental industry, 2008 is not rolling out as a very good year at all,” says Multiquip's Euliss. “Channel partners and end consumers everywhere in our industry should anticipate price increases in 2009, if not before, as manufacturers can absorb only so much for so long.”

Christifulli's view is the absorption of these costs can be dealt with by manufacturers and rental companies partnering together in a more extensive and productive way. He advises both manufacturers and rental companies to look at business process re-engineering. “That means, basically, looking at all of a company's business processes, especially those that either touch or affect the customer, and eliminating those that truly don't bring value to the customer,” he says.

He also recommends partnering with key suppliers with the objective of reducing costs associated with inventory-carrying costs by paying on a “pay as consumed” basis.

There is no quick and easy solution to the current economic slowdown. Nor is there a quick and easy solution to the need on the part of all parties to pass along costs. But cost reduction is a major step and it cannot be achieved unilaterally by either rental companies or manufacturers. Finger-pointing expectations that the other do the cost cutting won't solve the problem either. Only a concerted effort by both sides will help all sides get through the crisis.

“The best way to cut costs is through back-office processes,” Christifulli says. “You have to tie your systems together through electronic data interchange. You can help them to consolidate freight, help with vendor-managed inventories, with training and assistance.”

An executive with a large rental company told Christifulli its transaction costs for every ordered part was more than $150. “That means if they order a $22 part, it costs them more than $170 because they are inefficient at how they order,” he says. “If they get tied electronically to their suppliers and work together on forecasting, they could save millions of dollars, given how many parts orders they make in a year. That would take care of years of price increases right there.”

The kind of partnership Christifulli is proposing is being applied by some manufacturers and rental companies already. But improved efficiencies and partnerships are likely to do more than help companies survive the current slowdown. They are necessary adjustments that will be part of the business landscape for years to come.