Six Tips for Dealing With Rising Material Prices
Manufacturers face enormous business challenges today. The top two are rising raw material costs and supply chain challenges, according to the fourth quarter 2021 Manufacturers’ Outlook Survey by the National Association of Manufacturers (NAM). Other significant challenges that may affect the availability of materials include rising transportation and logistics costs, unfavorable business climates, and trade uncertainties.
What You Can Do
Here are six tips for addressing increasing prices or decreasing availability of key manufacturing inputs:
1. Do Your Homework. Just because a supplier informs you that a price increase is necessary because of increasing costs, supply chain issues or logistical challenges, that doesn’t necessarily mean the price hike is fair. Do your own research to assess the impact of these developments on supplier costs and determine an acceptable range of price increases.
2. Purchase Materials in Advance. Recent experience has exposed the risks inherent in just-in-time manufacturing strategies. Stocking up on raw materials and key components can help you lock in current prices and avoid shortages. However, it’s important to have a solid grasp of your material needs and consider storage costs and the impact on your cash flow.
3. Negotiate Long-term Contracts. Consider entering into long-term contracts with suppliers that lock in prices and guarantee availability and a certain level of quality for a specified time period. Suppliers have limited production capacity. Long-term contracts that focus solely on price can be problematic if a supplier decides to sell to your competitors at higher prices (or lower quality), leaving you without materials or parts to purchase.
4. Include Escalation Clauses in Your Contracts With Customers. These clauses shift some of the risk to customers by providing for periodic price adjustments to reflect increasing or decreasing material costs. For simplicity, some clauses may be tied to cost-of-living or inflation rates.
5. Increase Your Own Prices. Consider passing through some of your cost increases to your own customers by raising your prices. Be sure to carefully consider the impact of this strategy on your customers and to back up the reasonableness of the increase with general economic and supplier pricing data.
6. Be Flexible. Look for creative ways to increase your company’s flexibility and agility. For example, seek alternate suppliers that offer more attractive pricing or can meet your needs in the event a regular supplier can’t deliver. Consider using suppliers that are closer to your facilities to reduce transportation costs or shifting production to locations that offer reduced costs or other advantages. Explore the possibility of switching to less expensive or more readily available parts or materials, provided doing so won’t adversely affect the quality of your products.
According to the NAM survey, the top three strategies manufacturers are using to address supply chain disruptions are 1) finding alternative or duplicative suppliers for some inputs, 2) increasing inventories of raw materials and other inputs, and 3) exploring more domestic U.S. sourcing or production.
Maintain Strong Relationships
Whichever strategies you employ, it’s critical to develop and maintain strong relationships with your suppliers and customers. Relationships based on transparency and solid communication will help you stay on top of developments that affect the availability and pricing of parts and materials and work toward solutions that benefit every partner on your supply chain.