Supply Chain Management

Can We Really Offset High Materials Costs?

The primary elements that make up a finished product are direct raw materials. They can be any mined materials, like minerals, metals, crude oil, coal, etc. There are also indirect raw materials – anything that supplements the making of finished products from direct materials. The challenges represented by accessing these materials promptly and at a manageable price would have been unimaginable just a few years ago.

Tariff wars, the pandemic, continued political strife, fires, floods, climate, and a war in Ukraine have virtually shut down avenues to access raw materials and bulk electronic components. If they are available at all, it’s at a price tag that few can afford.

Back inventory is a thing of the past, and experts expect supply chain shortages to linger until at least mid-2023.

Is a Different Outcome Possible?

Can we do anything to cut costs and increase materials access? It turns out there’s a combination of potential actions, including:

  • Adopting new technologies
  • Implementing communication strategies
  • Revamping pricing structures
  • Search out less-expensive suppliers
  • Reduce logistics costs
  • Reduce production costs
  • Consider the possibility of using different materials and components
  • Eliminate unneeded product features
  • Only buy the materials needed
  • Look at the expense of packaging

However, one of the most valuable considerations is how you work with your key suppliers. If you have a relatively good and open relationship with suppliers, it may be time to take it up a notch. Consider, for example, the potential value of key suppliers contributing ideas and engineering resources, particularly when developing a new product. This ensures a higher level of commitment on both sides.

Companies are going even further with their suppliers, with some partnering closely to guarantee materials supplies. One such is Tesla, which partnered with BHP to ensure a long-term supply of the nickel required for batteries. A consortium may have more power than individual companies if your company is too small to adopt this strategy.

In any case, raw material supply volatility won’t go away. At the very least, companies should assess key risks surrounding their critical raw materials and implement measures to ease scarcity risks. It boils down to this. If suddenly (as we’ve seen), there’s a war, you won’t be able to order substitute materials fast enough.

Another critical component in managing material costs is automation, which can speed up processes and reduce errors and waste. An “always on” strategic approach will go far to find potential disruption early. Nothing replaces real-time data to reset and reevaluate a strategic approach.

Breakthrough technologies will be critical, not just on a technology component level, but also, for example, our power supply. Expanding our electric power infrastructure requires more iron, copper, aluminum, zinc, steel, ferroalloy metals, and other construction materials and platinum group elements to produce hydrogen. Rare earth element demand will increase as companies use them for wind turbines and e-mobility generators. Forecasts surrounding critical raw materials often fail to address a realistic look at consumption.

It is unlikely that we’ll run out of raw mineral materials in the future; however, access will likely remain a challenge. Big data and AI will help find and deal with supply disruptions and market volatility faster than ever. In any case, it behooves us to stay on top of disruption and access as much as is humanly and robotically possible. To recap, don’t go it alone, take an “always on” strategic approach, change what doesn’t work, and never stop evaluating your options.