Prices for raw materials are not looking good. Copper prices have doubled in the past year. Last month crude oil futures continued past $75 per barrel; yesterday they hit $77.15 intraday. Nickel prices are on the rise. And, well, resin may or may not have peaked.

Yet perhaps such doleful news carries a glint of promise.

Earlier this month, an IndustryWeek feature focused on how "escalating and extremely volatile raw material prices are challenging manufacturers in their struggle to rein in costs and improve profitability."

The publication's data found that companies are not only implementing procurement strategies to lessen costs, they are also taking advantage of alternative materials.

According to the most recent IndustryWeek/Manufacturing Performance Institute Census of Manufacturers survey, material costs comprise a median half of U.S. plants' cost of goods sold. With material costs taking up such a big part of manufacturing's budget, members of the procurement community are being smarter about the way they buy materials.

Particularly worth noting is how widespread global sourcing has become among manufacturers in an effort to reduce material costs. Slightly more than half of U.S. manufacturers are seeking direct materials from countries outside of the U.S., according to the 2005 IndustryWeek Value Chain survey.

Sixty-one percent of respondents in the most recent PricewaterhouseCoopers' Manufacturing Barometer noted they were either already sourcing from low-cost countries or seriously considering doing so. (China was the leading country cited for low-cost sourcing, with an overwhelming 82 percent of those using or considering low-cost sourcing likely to set up operations there.)

"Industrial manufacturers looking to control rising costs often need to rely on low-cost country sourcing in order to maximize international supply chain efficiency," said Jorge Milo, leader of PricewaterhouseCoopers' U.S. industrial manufacturing practice.

However, the same PricewaterhouseCoopers manufacturing study also found that users or those considering low-cost sourcing appear to have less price flexibility and expect a greater share of their total revenues to come from sales abroad.

In addition to international sourcing, many manufacturers have undertaken strategic sourcing initiatives specifically to reduce the size of "an unwieldy, fragmented supply base and reduce their direct material costs," IndustryWeek pointed out. With sourcing coordination lacking among divisions, there is lesser leverage with suppliers in pursuing better prices for direct materials.

Further, manufacturers are bringing procurement expertise into the product development process sooner, such as before the materials are specified. Getting procurement involved early during the design stage "helps manufacturers to consolidate material specs where it makes sense, which results in a rationalized supply base, aggregated spend and more buying power in the market." While many companies have been doing this for years, a notable number of engineers and those in the procurement community don't communicate well, if at all, in the development lifecycle.

Observed Pat Furey, a senior manager at spend-management solutions provider Ariba:

When I was in engineering, we didn't necessarily worry about how many different grades of a given material we were buying. We were just [specifying] what worked best and was the easiest to get done to get our product released to the market. We didn't worry about whether our procurement department was buying 20 different grades of the same basic material.

Manufacturers also are examining whether they can increase the amount of reprocessed or scrap material, thus cutting back on raw material costs, and use it without negatively affecting the end product.

Companies' own central procurement departments are trying to lock in raw material prices not only on their own behalf, but also on behalf of suppliers that make parts for them. Not only does it aggregate buying power, but it is also locking in the raw material portion of the supplier's price so you (the company's procurement dept.) don't have to worry about your supplier upping your prices as the prices the supplier pays go up.

In addition to implementing such procurement strategies to lessen costs, companies are getting smarter about designing products with the specific goal of introducing less-expensive materials, as well as efforts toward sustainable manufacturing driving product innovations that reduce dependency on expensive raw materials. For instance:

• Goodyear Tire & Rubber Co. has increased its ability to substitute synthetic rubber for 15 percent of its natural rubber used, taking advantage of the price differential between the two materials. While the increased substitution flexibility won't reduce Goodyear's total raw material costs, the tire company says it does slow down the rate of increase.

• DuPont hopes to begin production next year of high-performance thermoplastic resins and elastomer products made from bio-based material innovations. The products will be made not from petroleum but from corn sugar. (As an added benefit, the company's new bio-based materials require approximately 40 percent less energy to manufacture than the petrochemical-based counterpart, DuPont says.)

Despite costs, or perhaps due to costs — particularly energy costs — rising for U.S.-based manufacturers, "passing through those costs is providing companies with a chance to test their pricing power and to maintain gross margins," according to another recent IndustryWeek editorial.

The PricewaterhouseCoopers study says that overall, the manufacturing executives anticipate an average revenue increase for their companies of 8.1 percent during the next twelve months, up from the 7.8 percent average increase executives projected three months ago.

Of course, to many companies, cutting down raw material costs may simply mean cutting costs in other areas, such as in services, where price increases have been less extreme than in raw materials.

Sources

Rethinking Raw Materials
by Jill Jusko
IndustryWeek, August 1, 2006

Growth is on the Horizon for Industrial Manufacturers, PricewaterhouseCoopers Survey Finds
PricewaterhouseCoopers (via PrimeZone), July 27, 2006

Manufacturers Passing Through Costs, Increasing Gross Margins
by John S. McClenahen
IndustryWeek, July 31, 2006