Ouch. Ouch. Ouch. Wince. Groan.
Those are the sights and sounds of manufacturers battling raw material prices that sometimes appear completely out of control. Crude oil futures cruised past $75 per barrel in early July. That's bad news for every manufacturer, but even more so for energy-intensive companies and industries that also use petroleum products as feedstock.
Copper prices have doubled in the past year, nickel prices are on the rise, and resin prices may or may not have peaked. What's a manufacturer to do when his product's material costs soar and retreat, only to leap again in reaction to a multitude of factors -- hurricanes, missile tests and terrorist activities, speculation and, of course, supply and demand?
There's no doubt about it. Escalating and extremely volatile raw material prices are challenging manufacturers in their struggle to rein in costs and improve profitability. While it's a challenge companies would prefer not to face, they are implementing procurement strategies to mitigate those cost increases and level out the peaks and valleys. Alternative materials also are being scrutinized.
Big Budget Bite
It's no wonder that rising raw material prices have manufacturers in an uproar. Despite the attention labor costs receive when it comes to manufacturing, it's material costs that take a bigger bite out of most manufacturers' wallets, data show. According to the most recent IndustryWeek/Manufacturing Performance Institute Census of Manufacturers survey, material costs comprise a median 50% of U.S. plants' cost of goods sold.
With material costs such a big part of manufacturing's budget, "People have realized, 'We've got to be smarter about how we're buying these materials, and we've got to be smarter about getting control over this spend," says Pat Furey, a senior manager at Sunnyvale, Calif.-based Ariba, a spend-management solutions provider. "Over the past two years, we've seen a real heightened awareness in the procurement community trickling down to the entire organization around raw materials and what people are spending. This is getting board-level attention."
In an effort to reduce material costs, global sourcing has become widespread among manufacturers. The 2005 IndustryWeek Value Chain survey showed that slightly more than half of U.S. manufacturers are looking beyond their country's borders for direct materials. And many manufacturers, such as furniture maker HNI Corp., the Muscatine, Iowa-based parent company of divisions including HON Co. and Hearth and Home Technologies, have undertaken strategic sourcing initiatives specifically to reduce the size of an unwieldy, fragmented supply base and reduce their direct material costs.
"We're a little bit of labor, a little overhead and a lot of material [costs]," says Matt Sladek, procurement manager at HON Co., Cedartown, Ga., in describing why the manufacturer set its initial strategic sourcing sights on its direct material spend. Indeed, until the strategic sourcing initiative, Sladek says there was little sourcing coordination among HNI divisions, thus little leverage with suppliers in pursuing better prices for steel and such materials as particle board and packaging. A spend analysis initiative, which is a process of collecting and categorizing expenditure data to gain far greater visibility into how and where procurement dollars are spent, accompanied the strategic sourcing effort. "The two [initiatives] are intertwined," Sladek says. "The spend analysis is a crucial tool to a successful strategic sourcing initiative."
Indeed, Sladek says the greater visibility gained by the spend analysis revealed a few surprises, including the number of suppliers with which the firm had less than $100,000 of spend. And that matters, he says, because having more suppliers results in more relationships to maintain, as well as more transactions.
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