Ask Steve
March 28, 2025
Question from Henry: What impact should we expect to price and lead time on stretch film because of tariffs?
Hi Henry,
Thanks for sending in your question. I am not going to address the tariff question directly, instead, I will help you understand what influences the two things you are concerned about: pricing and lead time. This will enable you to anticipate how a wide range of triggers, not just tariffs, might impact you and your company.
Let’s cover product pricing. Most companies begin with the cost of goods sold (direct material and labor). They add indirect costs (what it takes to operate the business, including interest, insurance, etc.). Then they add a reasonable profit to arrive at a selling price. In some cases, there may be a novelty factor that drives the price rather than cost. You might remember the pet rock, where there was no real material cost, because after all, it was just a rock! In cases like this, the selling price is based on what the buyer is willing to pay. Factors like buyer emotion, perceived value, and brand identity also play a part in establishing a selling price.
But the selling price is just the beginning of the story, because it will fluctuate based on supply and demand. Here is an important rule to remember about price: Selling price balances supply and demand. To illustrate that rule, picture a teeter-totter. If you place the same weight on both ends of the board, there is no movement because the fulcrum (where the board is attached to the ground) is placed in the middle. We will name one end of the board “supply” and the other “demand”. Let’s name the fulcrum “price”. Now, if supply equals demand and the price is positioned in the middle of the board, the two ends are in balance with no movement of the board. However, if we have more demand than supply, for us to keep the board in balance, we need to move the fulcrum closer to the demand end (in other words, increase price) until the board is level. But, if we have more supply than demand, to remain in balance, the fulcrum must be moved closer to the supply side (in other words, reduce price). So, in our illustration, pricing will shift wherever it needs to balance supply and demand and to keep the board level. Now, when you hear the term “upward pressure” or “downward pressure” associated with pricing, you can visualize the teeter-totter fulcrum moving closer to one end of the board to balance supply and demand. This principle applies no matter what the market or product may be.
One more important point to remember is that supply is measured in available inventory and/or how quickly it can be produced and delivered, expressed as “lead time”.
Now that we understand the relationship between supply, demand, and price, let’s look at some examples of conditions that can dramatically change price and lead time.
If there is a constraint on the supply of raw materials or production of an item, demand will exceed the available supply. This will cause an upward pressure on prices. It could be a natural disaster that takes a plant offline, or it could be a shortage of containers needed to ship products overseas, or a rail strike. This can lead to panic buying when lead times increase rapidly, and the fear of insufficient supply takes over. To ensure adequate supply, companies will increase order quantities, and in many cases, duplicate orders with multiple suppliers. This looks like an increase in overall market demand to the suppliers, but many of those orders are not “real”. Prices continue to increase to bring demand in line with supply. As a result of panic purchases, companies may end up with months’ worth of excess inventory on the floor. Meanwhile, manufacturers are still gearing up to meet this “new” demand by bringing more capacity online. As product deliveries are made, phantom orders are cancelled and the balance between supply and demand swings back to the supply side causing prices to collapse. Increased production capacity coupled with the excess in the supply chain maintains a downward pressure on price. Remember the balance we discussed.
Now, let’s explore how a change in price affects a balanced supply and demand. If cost or expense increases (be it raw material, shipping, or a levied tariff), the seller has a choice to make. They can absorb it or pass it along. If it is marginal and not widely publicized, an increase may not affect the balance between supply and demand. But, if it is significant and widely publicized, many companies will increase order quantities to offset the anticipated price increase. This creates a phantom demand and mirrors the scenario I just described.
I have watched these exaggerated supply and demand fluctuations happen time and time again over my “almost” five decades, working in several industries. Isaac Newton’s 3rd law of motion states that for every action, there is an equal and opposite reaction and is just as applicable to supply, demand, and price as it is to a body in motion.
We recognize that triggers, which can affect price and lead time, are inevitable. To ensure we can meet our customers’ needs, we eliminate the exposure to fluctuating lead times by contracting a percentage of our film manufacturer’s total capacity. Even through the supply chain shortage post-COVID, our lead times never changed, and we supported 100% of our customers’ stretch film needs. While we passed on nominal increases in cost, more directly related to transportation, it was a fraction of the “market price adjustments” for stretch film. Another strategic decision made many years ago was to have all our stretch film produced domestically, giving us far greater control over quality, supply, and cost.
Thanks for asking.
