Raw material is often the single greatest expense for any manufacturing operation. It could range anywhere from 35 – 75% of total cost of goods sold depending on industry and the nature of the supply chain. Unfortunately, many manufacturing companies simply accept this as a “cost of doing business” and are reluctant to explore some of the many opportunities to reduce raw material costs. Some of these opportunities could be captured relatively easily and some require the execution of a longer-term Continuous Improvement strategy.
There are fundamentally three segments of your supply chain where there are opportunities to reduce raw material costs. Those segments are in sourcing, manufacturing, and post-manufacturing. The following are 20 reasons you’re paying too much for raw material:
- Accepting higher prices instead of taking advantage or supplier market competition. Why not conduct a periodic sourcing analysis to determine the pricing and reliability of competing suppliers? This would give you the information you need to either negotiate prices or source new suppliers.
- Paying higher prices by ordering smaller quantities from too many suppliers forgoing bulk discounts. The alternative would be to use a smaller number of suppliers to provide more of your materials, resulting in greater purchase volumes and lower prices.
- Accepting higher prices due to not leveraging payment terms that would be favored by suppliers. Instead, offer to pay suppliers sooner in exchange for lower prices.
- Accepting higher prices instead of utilizing points of leverage in supplier contracts to negotiate lower prices. The idea would be to assess your relationship with the supplier (including their past performance) to see if there is room for re-negotiating prices.
- Accepting higher prices due to unwillingness to collaborate with your competitors to get bulk discounts.
- Utilizing materials that are more expensive than what is needed for the product’s function.
- Accepting higher prices due to unwillingness to commit to long-term purchasing contracts.
- Purchasing materials at full rate instead of leveraging bargains. Conversely, monitor your supplier’s business cycles to identify when they would have excess inventory that they would be interested in selling at bargain prices. However, you will, in turn, need to maintain raw inventories and incur any shrinkage, obsolescence, and handling costs. This method is not typically recommended by could be effective in some cases.
- Purchasing based on your manufacturing schedule instead of supplier’s production schedule. Suppliers are willing to offer discounts if you purchase on their schedule so they don’t need to maintain finished goods inventories. Again, you will, in turn, need to maintain raw inventories and incur any shrinkage, obsolescence, and handling costs. This method is not typically recommended by could be effective in some cases.
- High variation in filling or packing processes resulting in high fill targets and over-fill / over-pack. Instead, apply Six Sigma approaches of reducing variation so that overall target weights and over-fill can be reduced.
- Scheduling using a “push” production model resulting in excess and obsolete inventories. The alternative would be to establish a “pull” production model using kanbans and safety stocks, resulting in controlled inventory levels and less excessive / obsolete materials
- Scrap and material yield loss created by “leaks” in the system. The approach would be to identify and quantify the impact of leaks. Then implement process changes to close leaks and convert more wasted material into sale-able finished goods.
- Too many low-consumption raw materials caused by high SKU complexity. Conversely, SKU’s could be rationalized so that smaller orders of raw materials could be reduced.
- Over-application of material that customers do not find valuable due to over-designing products. Instead, work with customers to better understand the product’s function and remove materials or functions that are not useful to the customer.
- Over-application of material that customers do not find valuable due to inefficient design. Again, work with customers to better understand the product’s function and explore design options that sufficiently address the need using less material.
- Material lost in the supply chain process being scrapped or sent to the landfill instead of being recycled or reclaimed
- High production costs for suppliers, which can be reduced by providing process improvement or project management services. An approach would be to provide Continuous Improvement services to help reduce the supplier’s operating costs in exchanged for reduced prices. This could be lucrative for suppliers since it helps them increase profit margins with other customers.
- High supply chain costs for suppliers, which can be reduced by providing warehousing and distribution services. This allows your suppliers easier access to your local markets by utilizing your warehouse and distribution services. Then, you can negotiate lower prices and services fees per activity.
- Accepting higher prices due to not leveraging buyers to take advantage of bulk discounts. Instead, work with your buyers to have them procure your raw materials. They can often get bulk discounts from your suppliers that you may not have access to. You can also offer your buyers lower prices since this will often result in significantly lower raw material costs on your end.
- Too much shrinkage, or goods being lost, damaged, or stolen in the supply chain process.
The key to driving substantial improvement in raw materials is to use big data to quantify the opportunity for improvement in each of these areas and develop your plan of attack. The areas that have a combination of high impact, quick results, and low cost of implementation would receive higher priority. The items that do not provide a high short-term impact but contribute to an overall more efficient supply chain would require a more strategic approach to implementation. Most of these items have a place in your Continuous Improvement Strategy and if executed effectively, would set your supply chain up for significant cost reductions in raw material.
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