As demand and inventory levels begin to recover, costs for raw materials and labor are also on the rise, encouraging many companies to adopt cost cutting measures down the supply chain and in their production processes.

With raw materials prices rising across a wide range of industries, more businesses are becoming concerned over their ability to stay within operating budgets. In addition, increasing labor expenses are driving up the cost of production, narrowing margins just as the economic recovery takes hold. To offset some of these rising costs, many companies across the supply chain are using strategies to lower expenditure in other parts of their business, without sacrificing the quality of their services.

In Battling the Rising Costs of Raw Materials and Production, published in June, supply chain collaboration firm TradeCard offers several ways to effectively reduce unnecessary expenses.

“You can’t lower the price of raw materials or labor. But with prices rising it’s more important than ever to get your own costs down,” TradeCard explains. “Overhead costs, processing costs, capital costs… look across your supply chain — into the extended network of parties and layers involved. There’s room for efficiency and savings. Now is the time to address it.”

The following are 10 strategies for cutting down on costs and improving supply chain and labor efficiency from the TradeCard report:

1. Perform a Paper Assessment — Examine your supply chain and find where paper is being used most, whether in purchasing orders, invoices, settlements or letters of financing. Wherever paper is involved, there are likely to be some errors and inefficiencies.
2. Change Your Transactions — Find a more efficient way to communicate with trading partners by harnessing flexible technology that enables connections and transactions without data re-keying or manual tasks. Eliminating unnecessary steps an important part of improving business.
3. Take Advantage of Your Financial Strengths — If you have an excellent credit rating, you could help your suppliers secure better interest rates, or if you’re financially stronger than the other partners in a transaction, you can help them with early payment invoices.
4. Go Direct — Eliminate layers within your supply chain by shipping directly to a store and finding ways to ship goods in less time.
5. Keep Close to the Source — Finish customization or other services abroad instead of finishing production domestically. Reducing domestically held inventory can provide major savings.
6. Find Partners — Try to reduce overseas resources and staff by working with a partner who supports your supply chain by connecting suppliers wherever they are located.
7. Diversify — Spread out your risk and exposure overseas. Try to find alternatives to expensive operating costs, such as signing on with partners in regions that are more cost-effective than others.
8. Look for Closer Sourcing — Switching to a sourcing hub closer to your main area of business can trim weeks off of shipping time, reduce costs and cut down on cycle times, leading to significant savings.
9. Explore New Options — Continually seeking new ways to connect with suppliers, service providers and financial organizations enables you to adjust your supply chain processes according to your needs.
10. Target Low Risk, Low Investment Models — Incorporating more cloud computing or software-as-service systems can help reduce implementation problems without risking a large part of your budget. Look for ways to partner with suppliers without placing undue burdens on your staff or existing technology.

While a business can’t control the price of raw materials, finding creative solutions to streamline distribution channels, build better relationships with suppliers and improve staff efficiency can help compensate for the elevated cost of production.

“Facing increasing volatility, companies must move away from rigid and fixed systems,” Karl-Heinz Sebastian, a senior partner at global consulting firm Simon-Kucher & Partners, explains in a recent report.

Earlier

Outlook: Raw Materials, Energy and Material Handling

Ingredients for Successful Supply Chain Strategy

Resources

Battling the Rising Cost of Raw Materials and Labor
by Kurt Cavano
TradeCard, June 15, 2010

How to Manage Volatile Raw Material Prices
by Karl-Heinz Sebastian, Andrea Maessen and Desmond Sullivan
Simon-Kucher & Partners, Aug. 10, 2010