WSJ.com – For Caterpillar, Commodity Boom Creates a Bind
A reminder that profit = price – cost, where the price is set by the market (not the old approach of price = cost + profit). Sure you might be able to increase your selling price, but that’s based on customer demand. Suppliers might have the same leverage over you to increase raw material cost, as is happening with Caterpillar. Only by reducing their own internal costs, and by helping suppliers do the same (as mentioned in the article), can you improve your profit. Don’t rely on price increases or squeezing your suppliers to cut costs the wrong way.