Defend yourself against rising raw material costs

Richard McIntosh, UK managing director of Inverto, an international management consultancy specialising in procurement, explains how catering manufacturers can beenfit from putting a proper cost management strategy in place to minimise turbulence in the supply chain.

"Spiralling raw material costs are having a significant impact on the success of businesses. We know this because our recent survey of CEOs and purchasing managers revealed that 91% cited it as a key factor affecting current business performance.

Those in the catering industry responsible for sourcing raw materials will probably be more than aware of the rising costs of stainless steel, for example, and the effect it is having on their overall company results.

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Population growth, natural disasters and shifts in the balance of political power are causing a systematic shortage of raw materials and supply ‘bottlenecks’, and businesses feel powerless to control the effects. The knock-on effect is that 61% of those we surveyed had passed on costs to customers. But given that not everybody is able to do this, the result is that operating margins are shrinking. And it is only set to get worse: 83% expect prices will continue to increase in the next 18 months.

So, it is now more critical than ever for companies to put in strong defences against increases in raw material prices if they want to survive the global competition. It is also vital to take out risk by harmonising purchase and sale prices.

We know from our survey that companies are not using the full range of strategies available to them to defend against price increases and manage both costs and supply chain risk. Only 20% admitted to accepting supplier price increase demands, but I suspect this figure is higher in reality. The shorter periods for which prices are now fixed are, in my opinion, further proof that buyers can achieve more in negotiations with their suppliers.

An option that has so far been neglected is collaboration: combining raw material requirements for procurement purposes. This can result in increased purchasing power that has a positive impact on availability and price. The vast majority of respondents (86%) would combine their raw material requirements with other companies and 26% would even be prepared to do so with a direct competitor.

There has been a marked increase in long-term efforts by companies to use substitute materials, albeit starting from a low level. The full potential of material substitution is far from exhausted, but this is often seen as an excessively lengthy and costly process.

Joint working across procurement and development teams at an early stage would mean development teams would benefit from procurement’s valuable contacts and supplier expertise.

Finally, many opportunities are wasted in the area of financial hedging too. There are still many prejudices that prevent this option being explored in any depth. Sourcing departments lack expertise and there is also room for improvement regarding in-house co-ordination. Who is responsible for hedging at a company? Procurement? The treasury or finance department? 17% of respondents say they do not have specialist knowledge, but we think the figure is higher.

Operational sourcing tactics are not an effective strategy and reflect a short-term approach. A longer-term strategy with the right combination of sourcing tools would significantly empower companies and improve their negotiating position."

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