Quick Tips for Handling Unpredictable Raw Materials Costs
One of the least predictable expenses of operation is the price of raw materials. Seasonal changes and even foreign politics can affect how much you spend on necessary supplies. You’ll need a backup plan for when raw materials suddenly change prices. Take the following steps to help keep costs low.
Prices change with some level of predictability. In fact, prices often undergo rises and falls that cycle through. The Commodity Price Index, CPI, remained steady for most of the 1990s. Between 2002 and 2007, it rose dramatically from 49 to 220. In 2009, the CPI halved before bouncing back to its 2007 level in 2011.
Of course, these changes may seem difficult to predict, but if prices are high, try to put off buying raw materials until they drop, as history has shown they will.
It’s rare that a consumer buys an expensive item without looking at costs from various vendors. Apply that same smart shopping technique to shopping for raw materials. Seek out the costs from multiple vendors to find the best prices. And don’t think any vendor you work with will be a permanent provider. Remember to regularly look for the best prices for the raw goods you use.
If possible, look for alternatives to the raw materials you currently use. Though the CPI for almost all goods has increased since the 1990s, you may be able to find materials with a more reliable price and supply.
With components of steel predicted to only last another 500 years at the current rate of usage, raw materials costs will only go up. Opt for renewable energy sources and raw materials that will have a better price over time than non-renewable sources.
Change Designs to Reduce Raw Materials
Reducing the raw materials used helped ski clothing maker Sport Obermeyer to cut costs and still meet fluctuating demand. If you have any influence in the designs you manufacture, consider choosing creations that don’t use high-cost raw materials, or use fewer materials. At Sport Obermeyer, the company reduced the number of fabrics they used without affecting the customers’ perception of the products or company.
Avoid Producers Who Pay Tariffs
In 2018, steel and aluminum tariffs added a tax on imported aluminum and steel into the United States. These tariffs were enacted to bolster domestic steel and aluminum manufacturing. But the taxes on imported raw materials could drop manufacturing of American-made automobiles that use imported steel. Projections estimate prices for American cars could rise between 0.5 and 0.8 percent. Worldwide, it could drop auto sales by up to 3.6 percent.
If you use imported products that are among those with heavy tariffs, seek alternative countries to import from that don’t pay this tax. You could even look for domestic providers. Even if the cost is slightly higher for the raw materials, you’ll save money since these producers don’t add the cost of the tariffs to their prices. Also, you won’t have to ship the materials as far, reducing transportation costs.
Design Customized Plans
For products with wildly fluctuating prices, design a specific plan for dealing with the changes. If you use steel in your facility, you may encourage designers to use less steel in the designs or seek an alternative.
You cannot use the same plan for all major commodities though. Some will rise in price while others drop. Don’t follow the same purchasing plan for all raw materials at the same time. Use price, supply and demand to decide when and how much of each raw material to purchase.
Make Sure You Don’t Price Too Low
When seeking raw material suppliers, you don’t always want to select the one who offers the lowest price. Like many things in the manufacturing industry, you get what you pay for. Dramatically lower costs could indicate subpar quality that could negatively affect the quality of your goods. They also reduce the effort the supplier will put into your order. It pays to be charged more for better raw materials and improved service.
Reduce Other Costs
If you find yourself stuck selling at a set price and raw materials costs go up, cut costs elsewhere. This strategy should be a last resort if other means of mitigating the material price rise don’t work. Look at cutting costs painlessly. Reduce overhead and inventory hold times. These factors can make it easier to lower your overall price when the raw materials cost you more to purchase.
Handle Raw Material Cost Changes
Don’t let the changes in raw material costs affect your manufacturing business. You can weather the tide of price fluctuations with some planning, tracking and changing. With these quick tips, you can keep your manufacturing facility running — even in an uncertain economy.
Megan Ray Nichols
STEM Writer & Blogger
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