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A Better Way to Manage Volatile Raw Material Costs

  • 23 August 2017
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Categories: Manufacturing

Warehouse full of building material.

Furniture manufacturers take heart: you don’t have to sit powerless to the ever-fluctuating costs of your raw materials. It’s been a longstanding challenge in furniture manufacturing — in a study from 2012, price fluctuation of raw materials ranked as the key concern among 51% of businesses. The volatility hasn’t improved much in the five years since then.

This leaves furniture manufacturers constantly seeking ways to expand and secure their margins. You can’t stop material prices from rising and falling, but you can adopt tools to help your business stay strong and steady despite the volatile costs of raw materials.

With the use of innovative software, precise methods for lean manufacturing, and scalable pricing methods, you can boost your control over material expenses. Here’s how you can fight back against the unpredictable nature of the materials you need most.

1. Predict Demand, and Buy When Prices are Low

The erratic nature of the commodities market makes budget planning especially tricky. Your business needs a plan of action that allows you to purchase more materials when costs are low, and save money when prices rise by relying on your inventory. Of course, the only way to succeed in this strategy is to have an accurate forecast of supply and demand.

This is one area where Epicor Enterprise Resource Planning (ERP) excels. The Epicor ERP system allows companies to forecast their requirements for set periods of time, and even generates suggested purchasing orders to fill potential gaps in upcoming inventory space. With this information, you can plan to purchase large quantities of raw materials, and the components linked to them, during the market’s most favorable times.

2. Be Lean with Your Raw Materials

While you get more advanced in predicting your supply and demand needs, you can simultaneously work to reduce those needs through waste management strategies. Look to Lean methodologies to measure your company’s potential waste in processes, supply cycles, and more — and cut waste wherever possible. In this way, you can adopt a more reserved use of raw materials, giving your operation more flexibility during times when prices are spiking.

Fortunately, you can turn to your Epicor ERP system to support you in your Lean goals. The Lean mindset is all about identifying areas for improvement in your production process — from wasted time or materials to flawed communication channels. Epicor offers embedded metrics for measuring component efficiencies and lean activity metrics, which helps businesses to pinpoint problems in their cycle and address them. The more Lean you are in your use of raw materials, the longer each material order will last you. Even better, as ERP software allows you to more closely monitor and adjust your processes, it will become easier and easier to see well in advance when you’ll need more material.

3. Adopt a Sliding Scale of Prices

If you haven’t already, it’s time for your business to consider shorter-term contracts with your clients, perhaps on a monthly or quarterly basis. The unpredictable nature of raw material costs has pushed many furniture manufacturers to reconsider their pricing systems. Even six years ago, about 70% of survey respondents in the manufacturing sector believed that annual fixed-price contracts were no longer applicable to the market. It’s been slow for manufacturers (and their customers) to accept the reality of this, but today, the fixed-price contract is simply too risky for furniture manufacturers.

By reducing the longevity of your contracts, you can adjust your pricing on a more frequent basis, based on the raw material prices available. This involves building sliding clauses into your contracts, which inform clients that prices may fluctuate according to changes in the commodity market. This way, the burden of the fluctuating material pricing doesn’t fall entirely on your, nor entirely on your customers — but is instead shared together.

4. Adapt to Cheaper Materials and Supply Sources

This point may sound like common sense, but don’t underestimate the power of shopping around for more cost-effective materials and supply chains. When you evaluate the market and your manufacturing process with careful consideration of costs, you may find alternative supply options, such as recycled, reprocessed materials.

The important element here is to find a balance between reducing expense and maintaining quality levels. If you find a supply chain that allows you to use less expensive materials and recycling initiatives without damaging the quality of your end product, this can significantly reduce your raw material expenditure. Keep your eyes and ears open for new opportunities for recycling and keeping costs down, as the market continues to evolve.

Create a Plan for Risk Mitigation

With the help of advanced ERP technology, furniture manufacturers can do a lot to keep themselves steady amid raw material price fluctuations. Even if you’re following Lean practices and predicting supply and demand as accurately as possible, there will be times when you can’t get ahead of the volatile costs of your materials, and your business will have to manage unexpected expenses. Preparation is the most essential element in these cases. Develop a risk-mitigation strategy, to act as a guideline your business can follow if problems with material pricing arise.

The most effective risk-mitigation solutions will focus on three areas. The first area is introducing financial hedges, to help overcome financial strain due to price increases. Putting money aside when prices are low is the best thing you can do to reduce the impact heightened expenses later. The second is considering operational hedges. These include changes you can make to your end-product pricing, design changes, or the management of inventory to reduce costs overall. The third is the use of innovative software — like ERP and other tech solutions — to manage the way your raw materials are purchased, by predicting product cycles and implementing schedules for bulk orders.

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