A company concludes its fiscal year and sees good numbers. Let's say sales were up by 10 percent to 15 percent. Could have been better but, all things considered, they'll take it.

However, as they look at the numbers more closely, the company's executives see that their profit margins were close to flat—or worse. No major expenditures were incurred. Sure, there were price increases handed down from various suppliers. So why were the margins well below the sales figures?

How can you maintain profit margins? What do companies do to yield good sales numbers but flat, or even declining, margins?

“Everyone makes the same mistakes,” says Barry Lawrence, professor and program coordinator of the Industrial Distribution program at Texas A & M University.

Among those mistakes, he says, is not managing price—or price increases, to be precise. Hose accessories and assembly distributor Minnesota Flexible Corp. faced this situation in 2006.

At the end of last year, the executives of MFC met and began to set their budget goals for 2007.

It had been a strong year for MFC but the company's executives realized that while sales had improved, its profit margins did not follow suit.

“We saw that we had to start paying more attention to margins,” says MFC's vice president of operations Terry Kelly.

“[Margins are] the most important measurement of how we're doing as a business,” Kelly says, “and while we had a lot of good things happening, we saw that we had to get our eye back on the ball.”

At its year-end meetings, MFC reviewed company operations and implemented new internal cost controls, Kelly explains. But they also realized one crucial fact—they were not keeping as up to date on their vendors' price increases as they should.

“We asked ourselves if we were keeping track of the price increases we were getting from vendors, especially with metals and oil prices the past few years, where there are surcharges,” he says.

So at the top of MFC's list of goals for 2007 is “maintaining or improving margins,” with different approaches for each department. As a result, MFC's sales department has been using more accurate and disciplined reporting tools and methods this year.

“Getting back to blocking and tackling” is how one MFC executive put it, Kelly recalls.

“We're looking at these big picture things, but we needed to start doing some basic things that we used to do but maybe haven't been spending enough time doing,” Kelly notes.

It used to be fairly easy for Kelly and the MFC staff to keep up on the occasional price increases, he says. But he admits the company had been falling behind, in part because the increases have been coming along more often.

“It used to be that a couple of times a year you'd get a price list. Now you're getting constant information from vendors. So you need to keep track of that and make sure you pass it on to the customers,” he explains.

This year, Kelly says MFC has been more disciplined in using various reporting tools available through its system to track margins. More order margin reports are being utilized and MFC salespeople are being urged to examine their invoice registers more closely.

“If we get an acknowledgement from a vendor that shows they've increased prices without any prior notice, that immediately goes on a routing sheet so everyone in the building who needs to know about it does,” he explains. “We then determine if we need to ask customers for a price increase on future orders.”

Good communication between distributors and vendors, as well as between departments, is vital. Price increases, no matter how small, must be communicated promptly. Literally and figuratively, it can all add up.

“What we've found is that on a high-volume item even a negligible increase, after the third or fourth time, can make your margin drop significantly,” Kelly says. “It's like the frog in the boiling water. He doesn't know he's in trouble until it's too late. … And that's what we've been identifying. We were focusing on other things so the upper management team hadn't been paying enough attention to the most basic and most important number in the building.”

To avoid this, companies need to communicate to their sales force exactly what something will cost and its impact on profit, says Lawrence.

“They must get through to the sales force what something truly costs and why you have to go for a bigger margin because, in some cases, you might be giving it away,” Lawrence says. “It's all part of a total offering to the customer. You're selling a service. You're not selling an individual product.”

In Hialeah, Florida, vice president Eric Seiden and his staff at Interstate Screw were also seeing price increases.

Interstate Screw is a fastener distributor that carries a full line of screws, nuts, bolts, anchors, rods and specialty items. The company has no trouble keeping track of the price increases received from vendors. But determining how to pass them along to customers—without losing customers and still maintaining good margins—was the challenge, explains Seiden.

Prices have been rising rapidly in the industries Interstate handles. Freight and transportation, Seiden says, can be 20 percent to 30 percent of their costs.

However, stainless steel and nickel prices have soared and had a great impact on some of Interstate's items.

“All our stainless steel screws are made out of nickel,” Seiden says, “and nickel has gone up 500 percent in the last two years.”

Since just last year, stainless prices have risen 50 percent to 60 percent, and Seiden expects them to double this year. As one telling example, he refers to a quarter-inch nut made of nickel. Three months ago the price would have been $17 per thousand. In March, that price was $26, he says. And a comparable increase will come later this year, he estimates.

Seiden sums up the dilemma he and others face when he asks, “If the cost of the materials used to build your product doubles, what does that do to the price of the product?”

Comparing notes with other distributors doesn't make him feel any better.

At various fasteners shows, Seiden recalls, distributor colleagues were complaining that the price of steel might go up 8 percent, for example, but that they, in turn, could not dare raise prices more than 4 percent. What to do then?

“You have to get creative. You're not going to get the vendor to lower the price,” he says. “So you have to plan short term, but you need to look long term, too.”

One method Seiden suggests is looking at your cash management. Chances are you won't find any overnight cures. But a little here and there can add up. For example, Interstate began sending out most of its checks on the 30th day of each month.

“We used to pay our bills when they arrived,” he says. “But now we send checks out on the 30th day. That sounds like very little, but if you increase your cash flow another 10 or 12 days, [it can add up].”

Any “prompt-pay” discounts Interstate gets are still paid immediately, Seiden explains. Those should not be overlooked, he advises, no matter how little it may seem at first. A two percent break in price, for example, if paid promptly, can add up over a year.

“All these things are little, one or two percent savings here and there. But that's the easiest way to get margins,” Seiden explains.

A distributor can't do much about absorbing costs that result from a price increase. In fact, they shouldn't even try, says Lawrence. One way to do this—while still maintaining good profit margins—is to “make sure your system is agile enough that the minute that price increase hits, you've captured it,” Lawrence says, endorsing what MFC is doing this year.

Lawrence also emphasizes the importance of communicating the price situation to customers—of “pre-selling” any impending increases as well as explaining their causes.

“You have to have your sales force out there pre-selling the price increase, getting the message out to the customers, and preparing the customers for the fact that these increases are happening and that they are not [your] fault,” Lawrence says.

Steve Short, president of Updike Supply, agrees and adds another important factor in maintaining strong margins.

“It's important for a distributor to convey the value that they bring to customers,” Short explains, “and make sure they're getting paid for that value they bring.”

Knowing precisely what value a distributor brings to each customer's profit margins can be crucial, Lawrence agrees.

“You have to do an assessment of what adds value to your customers,” Lawrence says. “What adds value to them and what is the financial value to them of your activity?”

Seems simple enough, but Lawrence knows of several businesses that don't follow this rule consistently.

“If you don't understand what adds value to the customer,” he says, “you'll throw resources at everything, rather than at the critical things.”

Short, who is also president of the Industrial Supply Assn., suggests looking at margins both from the sales side and the operations side. It is the latter where he thinks technology can make the difference.

“On the operations side, the use of technology [can] leverage your human resources,” he says. “It's going to be more difficult to find qualified employees, and our industry is no different. We have to leverage the efficiencies of the people we have. So the use of technology and maintaining efficiencies is a key to profitability.”

Seiden agrees, adding that an upgrade in computers and related technologies does not have to mean huge expenditures. In the case of Interstate Screw, a small investment paid dividends, he recalls.

Interstate's recently upgraded computer system enables them to keep five years of data on a customer. It used to be only two years, Seiden says.

“And all that cost us was a bigger hard drive,” he explains. “So now, instead of referring to the past two years, I can say that over the past five years, you've used 10,000 of this item in a month. That's a lot more reassuring to someone.”

With some reluctance, both MFC and Interstate Screw have been importing more products than ever. At Interstate, Seiden admits it has reached a point where the company has greatly increased its imports in order to keep their margins and remain competitive.

“We used to buy domestically whatever we could reasonably buy. We always believe in supporting our own economy,” Seiden says. “We can make that work for small differences [in price].”

Interstate has always purchased some materials from China and Taiwan, Seiden explains, but is now buying many more sizes as well.

“I can't pay you $10, when I can buy it elsewhere for $8,” he sums up.

In the last two years, MFC has picked up five foreign suppliers from which it imports directly, Kelly says. The company has always tried to go with longtime domestic suppliers, Kelly says, but when MFC sees a price that can mean the difference between beating the competition or not they will look to import.

“It's an option you can't ignore anymore,” Kelly explains. “You might have ignored it 10 years ago, or hope you wouldn't have to do it, but at this point, you really do.”

MFC imports primarily from China and India. But Kelly cautions that imports are not a cure-all.

“It's no panacea. You realize there are different levels of quality, or standards,” he says.

Some hoses they've imported haven't been consistently up to MFC's standards and were rejected. Some of the necessary threads and fittings also fell short of what they required, he adds, and weren't used.

“There are other issues besides cost,” Kelly says. “Even if the quality meets a specification, it may end up being not exactly what you want.”

Some distributors have acquired companies with the long-term hope of improving margins. MFC did just that in January 2006, when it acquired Midwest Hydroline, an Illinois-based company.

MFC spent a good amount of time integrating the company into its way of doing business, Kelly says, and expects to reap some benefits in 2007. But it's the “blocking and tackling” that will get MFC's margins where the company needs them to be.

“It's important that everyone in the organization knows that profit is important, and that they should bring up anything they can do or see going on that effects our profitability,” Kelly says. “We're now talking about profit every day in one way or another.”