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Manufacturers’ raw material costs increased for the 15th consecutive month in August 2021. That is one of the key findings of the latest Manufacturing ISM® Report On Business® from the Institute for Supply Management (ISM).
According to Timothy R. Fiore, CPSM, C.P.M., Chair of the ISM Manufacturing Business Survey Committee: “Aluminum, electrical and electronic components, energy, some plastics and plastic products, freight, and steels continue to remain at elevated prices due to product scarcity.”
Given this reality, how can manufacturers ensure they succeed going forward?
Re-Assess All Production Costs
While they are significant, raw material costs make up just a proportion of a manufacturer’s total production costs. The other two areas manufacturers can look to for savings are direct labor costs and manufacturing overhead.
Now, unless it is operating with an obvious surplus of workers, a manufacturer is unlikely to be able to significantly reduce its labor costs. The focus, therefore, should be on improving efficiency and productivity. By scrutinizing their working practices, manufacturers can often identify areas where efficiency savings can be made, while at the same time reducing rework.
When it comes to manufacturing overhead, firms should look at every aspect of their operations, from the packaging they use, to how much they are paying for utilities. Again, savings can often be realized by taking such a back to basics approach.
Evaluate Supplier Pricing
Typically, most manufacturers like to work with as few suppliers as possible. Doing so (usually) helps to reduce costs, improves efficiency and allows for deeper, more meaningful relationships.
But over time, a manufacturer’s long-standing suppliers might not represent the most cost-effective option.
To assess whether they are getting the best value for money, manufacturers should reach out to other potential suppliers in the first instance to gauge raw material costs.
Armed with this information, a manufacturer can then raise the issue of price with its existing suppliers. Approaching price negotiations in this way stands a manufacturer in the best stead for realizing raw material cost savings. Plus, if their existing suppliers cannot match the prices provided by competitors, the manufacturer can always switch.
Differentiate with Technology Solutions
When faced with rising raw material costs, the final area where manufacturers can realize savings is through leveraging technology solutions.
Manufacturing processes are often outdated and rely on antiquated systems. By replacing these with modern technology solutions, manufacturers can further streamline their processes and achieve cost savings in the process.
As an example, one SEAL Systems’ customer had its production planners arriving on-site at 3 a.m. to gather all the data/information they needed to carry out their jobs. By partnering with SEAL Systems and implementing automation to gather this data, the firm completely eliminated this requirement. Its engineers now enjoy normal working hours.
By re-engineering cost drivers, working closely with key suppliers and differentiating themselves with technology solutions, manufacturers can improve their production processes and reduce their costs.
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