"Successful" "Lean" Company "Forced" to Raise Prices

Wenger Corp. Announces Price Increases – MarketWatch

Harkening back to my earlier post about GM schizophrenically cutting AND raising prices (due to poor sales and rising materials costs), we find another article about a company raising prices “because they have to.”

Facing unprecedented cost increases in raw materials, Wenger Corporation is notifying customers that prices on all its products will increase by four percent effective July 14.

“Our continuous improvement efforts, including lean manufacturing activities, have been highly successful in producing measurable results,” says Bill Beer, President and CEO of Wenger Corporation. “However, we can no longer absorb commodity price increases of this magnitude.” Since January, Wenger has experienced double-digit price increases for key materials including steel, aluminum, plastic and wood, along with higher freight and fuel costs.

Ugh. This is pretty simple. When costs go up, profits go down (not trying to be condescending). Most companies don’t like that… sure they’ve tried reducing other costs (through Lean, bravo), but profit margins are “unacceptable” to management. So what do you do? Raise prices, to maintain margins, of course. That’s a very linear and simplistic view of the world.

In most markets, if you raise prices, demand will go down. Falling sales will increase the company’s cost per unit, which will make profit look worse. So what do you do? Raise prices? How do you get out of that cycle?

To any company that is raising prices “because they have to” and it isn’t appreciably hurting sales, I have one question? Why didn’t you raise prices earlier? You obviously weren’t charging a fair market prices. OK, second question… isn’t that a sign of mismanagement, not charging a properly high price?

You should raise prices “because you can.” Because customers will pay it. Well, except that customers might only be “forced” to pay the higher price until they can get out of their contract or change their design so they can switch to a competitor.

Or am I missing something? If I’m not understanding this right, I guess my MBA ain’t worth much. But I’d bet Wenger Corp. is run by MBAs also…

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Mark Graban's passion is creating a better, safer, more cost effective healthcare system for patients and better workplaces for all. Mark is a consultant, author, and speaker in the "Lean healthcare" methodology. He is author of the Shingo Award-winning books Lean Hospitals and Healthcare Kaizen, as well as The Executive Guide to Healthcare Kaizen. His most recent project is an eBook titled Practicing Lean that benefits the Louise H. Batz Patient Safety Foundation, where Mark is a board member. Mark is also the VP of Improvement & Innovation Services for the technology company KaiNexus.

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10 Comments on ""Successful" "Lean" Company "Forced" to Raise Prices"

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  1. mike says:

    Too simplistic. In today’s market, producers must keep prices as low as possible for as long as possible just to stay in the game. Depending on where the individual producer is in the value chain, direct customers often force prices to continuously reduce. The last two years have indeed seen some serious rapid increases in the prices of copper, steel, plastics, and other essentials. Maybe Wenger really is embracing lean manufacturing, Mark. Maybe they haven’t seen enough gains from their efforts yet to offset the skyrocketing increases in their material costs. You don’t know enough to make a judgement. For you to dismiss Wenger’s situation as a sign of bad leadership is unfair. To carry your analogy further we would have to assume that oil companies have raised the price of gasoline to the ridiculous level it is today “because they can.” Customers will pay it. But, customers are paying the lowest they can–they aren’t buying a specific brand of gas because they believe it has a greater value. They are price shopping and limiting their consumption so as to be forced to buy as little as possible. I’m a lean teacher and practitioner and I know there are many forces at work in the market which do not fit into the often-quoted philosophy of “if they had only embraced lean they would not have had to a) lay off people, b) raise prices, c) move production overseas, d) insert your favorite “bad” management decision here.

  2. Andy Wagner says:

    Mark,
    I certainly understand the point here: one cannot expect price increases without added value to the customer to add to a company’s profit. However, there is such a thing as inflation. The value of currency changes for a variety of reasons. Prices change, and for that matter, incomes change. Four percent seems in line with the general trends today, inflation, cost of living etc. It’s understandable to me that a company would raise prices in line with these factors. What disappoints me is their need to rationalize this behavior in such silly ways.

  3. Mark Graban says:

    Ok I’ll admit it is unfair to call them “lean” in quotes as if I doubted them. I didn’t, though, accuse them of bad leadership directly. Just typical excuse making on price.

    Gas is a tough comparison because of the price elasticity. OPEC and gas stations certainly charge “what they can”. Without buyers, price would come down. People are certainly driving less. But individuals choosing the low price is just evidence of price being market driven. Some gas stations are willing to accept lower profit margin and some think they can charge more “because they can” for added value (additives) or brand value. Wenger is charging what they can (or what they think they can).

    I have no issue with companies raising prices but the excuse making is irritating. I have an article I will post soon about Toyota blaming materials cost for price increases too. Everyone is doing it (not just GM).

    Blaming “inflation” becomes self pertetuating. Raising prices due to inflation means there is more inflation. Where does it end? When people stop buying.

  4. Anonymous says:

    This is misplaced company bashing. 4%. That’s generally less than the price of inflation for anything driving by commodity prices, so you should be congratulating them for being able to get through this. Secondly, markets are not frictionless, so this is still supply and demand at work but it never happens in this theoretical fluid pricing marketing. And lastly, just because a company decides it prudent to educate their customers on what’s going on and providing explanation instead of just giving price increases without reason, that doesn’t mean they are making excuses. The did NOT say “because we have to.” Those are your words.

  5. Anonymous says:

    “Because they had to” and “forced to raise prices” are implied in these announcements.

  6. John says:

    Hmmm…I’m guessing my Grandpa would agree – your MBA (and mine) ain’t worth a damn. Back in his day, a business charged the minimum price necessary that allowed it to pay workers a fair wage and make a modest profit. Anything beyond that was “taking advantage” of customers.

    Of course in today’s time such cost-plus pricing is simplistic and unappealing to shareholders. Companies need to find clever ways to raise prices, even if it holds consumers hostage and accelerates global inflation.

    I admit the limits of my own articulation and so end with a quote from Peter Drucker:

    “A business that obtains enough profit to satisfy its objectives in the key areas is a business that has the means of survival. A business that falls short of the profitability demands made by its key objectives is a marginal and endangered business. Profit planning is necessary. But it is planning for a needed minimum profitability rather than for that meaningless shibboleth “profit maximization.”

  7. curiouscat says:

    I think it is mainly a matter of semantics. They could just say, we are raising prices because the market will allow it. Why will the market allow it? Because everyone in the industry must pay higher prices for supplies so our competitors can’t afford to undercut our increased prices.

    There is a value in understanding prices are cannot be seen as merely cost plus. But obviously it is a factor.

    Look at a very simple example – gas stations. This is probably one of the most obvious examples that cost increases in the marketplace will go directly to the prices charged (but also look at food…). I think this provides an example that in the real world cost of supplies can sensible directly increase price charged.

    So now you look at other examples and it is obvious that other factors are important too.

    Maybe eventually we will get to the point where companies can say in accordance with economic theory we attempt to maximize our profit and the marketplace now allows us to charge more so we will. For whatever reason (psychology, I think) companies never talk about maximizing profit when talking about pricing (outside of meetings with wall street analysts). In explaining a bad outcome, to customers, it makes sense companies try to make the reason a passive (not their fault implication) reason – not a choice of us to charge you more because we can.

  8. Anonymous says:

    Wenger isn’t in this alone. If it’s too steep of an increase, the market will correct them.

    Anybody who is in manufacturing has experienced increased materials and shipping costs. In 2002 the prices for copper, steel, molybdenum, coal, fuels, etc., were very low compared to now. Does anybody remember those golden days?

    Is is an excuse? No, it was an explanation that a lot of us have either already heard or are expecting.

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