Manufacturers make changes to cope with rising costs

23 August 2011

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23 August 2011 | Angeline Albert    

Manufacturers are devoting more time to developing procurement strategies, including seeking different sourcing options, renegotiating contracts and bulk purchasing.

In a report by EEF, the manufacturers’ organisation, nearly two thirds of the 100 manufacturers surveyed said they have sought other sourcing options to cope with rising commodity prices.

Published yesterday, the Manufacturing Focus report on managing materials prices, produced in partnership with RBS/NatWest, found that almost half of the organisations quizzed are keen to make efficiencies by redesigning products and processes to mitigate the impact of price rises from their suppliers.

The survey of managing directors, conducted in May and June, revealed some 40 per cent of companies have substituted input materials with cheaper options. This was particularly true of companies concerned about the limited availability of certain goods. 

Materials for which prices have risen strongly in the past 18 months are a diverse range, including titanium, rubber, copper, steel, yarn, resins, acrylics, rare earth metals, super-alloys containing nickel, aluminium and inorganic solvents. Many of these are raw materials that have an impact on the prices of basic components.

The International Monetary Fund has estimated there will be a 30 per cent year-on-year increase on a basket of commodity prices. In response to this, the report said: “Most actions taken by manufacturers to date have focused on internal manufacturing processes and procurement strategies.”

More than four in 10 organisations said they have looked to renegotiate existing contracts with customers as part of their procurement strategies. The document also said manufacturers are doing more to keep on top of market developments and have increased internal monitoring and modelling of prices. This option, while making a difference to understanding and planning for price changes, is also helping companies renegotiate contracts with their suppliers.

EEF chief economist Lee Hopley said: “While most attention is focused on the inflationary aspects of these costs, the flipside is another story of the extent to which companies are finding innovative solutions to deal with them. Manufacturers have so far deftly navigated the issue using the internal tools available and being agile in managing customer relations and procurement strategies. And this is an issue that companies are saying they will be keeping a close eye on in the months ahead.”    

Meanwhile, the Technology Strategy Board (TSB) has launched an initiative designed to prompt businesses to work with the supply chain to cut reliance on raw materials.

A report by the Hackett Group, published last week, said buyers are unprepared for rising inflation and commodity prices.

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