How Manufacturers Can Tackle Raw Material Cost Fluctuations?

How Manufacturers Can Tackle Raw Material Cost Fluctuations?

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Fluctuations in raw material costs can significantly impact your bottom line. It also disrupts the whole production plan, shrinks your profit margins, and forces you to frequently negotiate with the suppliers. 

Raw material price indexing is one of the powerful strategies to deal with fluctuating raw material costs. If properly implemented, you can save millions of dollars and make profitable decisions related to production expenses and product pricing.

Learn what price indexing is and how to implement it in our blog post.

Tackling Raw Material Cost Fluctuations with Price Indexing

Also known as index-based pricing, it is a way to track how cost of certain raw material changes over time. It works like this:

  • Select key raw materials to be used in the production. 
  • Monitor and record the prices of these raw materials regularly from various sources like commodity exchanges or market reports. 
  • Calculate an index number to represent the overall change in the prices. 

Biggest Benefits of Using Index-Based Pricing

By tying the cost of raw materials to a price index, manufacturers like you can enjoy the following benefits:  

  1.  Know material costs: Raw material indexes track the average prices of many items, helping you understand how costs change over time. This allows for better pricing, planning, and buying decisions.
  2.  Negotiate like a pro: With accurate and up-to-date cost data, you get an upper hand when negotiating with the existing suppliers. You can close deals better and faster without wasting time on finding new suppliers at the last minute. 
  3.  See the future (sort of): Raw material price index helps you predict how prices might change in the future. With this prediction, you can lock in prices with suppliers using futures contracts and save from sudden loss.

4.   Find better deals:  Indexes show trends for different materials. If a key raw material gets expensive, you can find cheaper alternatives quickly based on your needs.

The Biggest Mistake Manufacturers Make While Managing Price Fluctuations

Spreadsheets are a go-to to record and track raw material price volatility. However, it is a recipe for disaster. Here is why

  • Manual challenges:  You will have to manually enter the price of each raw material price every time they change. Errors and delays are obvious this way. 
  • The lag factor: The raw material cost might be outdated by the time you update the spreadsheet. You need to track the changes in real time which is impossible with the spreadsheets.  
  • Limited insights: Spreadsheets offer basic calculations, but they lack the advanced analytics and reporting tools to truly understand the cost trends and identify opportunities for cost savings.

Moreover, there will be hundreds of factors to consider and thousands of variations of the sheets. Effectively managing and tracking the changes across all the sheets in real-time will be no less than a headache. It’s like discovering an opportunity, only just to miss it. 

How Cost It Right Software Helps?

Our costing software empowers you overcome the challenges of both raw material cost fluctuation and trouble of managing spreadsheets. It has a raw material indexation feature that automates everything you need to stay on top of raw material costs. Here is what you can expect.  

  1. Always up-to-date pricing: Automatically pulls data from major indexes like LME and ICIS to keep your material costs current.
  2. Effortless tracking: Matches your internal material data with external indexes for easy comparison.
  3. Dynamic pricing: Helps you adjust pricing strategies based on current market conditions.
  4. Real-time cost adjustments: Automatically update part costs as raw material prices fluctuate.
  5. Price change alerts: Notifies you of significant price changes that might impact your profits.
  6. Historical data tracking: Stores past pricing data for trend analysis and future predictions.
  7. Automatic cost model updates: Ensures your costing models always reflect current market prices.

With these features and functionalities, you can plan accurate product pricing as per current market realities. It also saves you from making last-minute negotiations with the suppliers and strikes the right balance between price and profitability. 

Conclusion

Raw material cost fluctuations are an inevitable reality in the manufacturing industry. However, by embracing transparency through index-based pricing, manufacturers can gain a significant advantage. They get the knowledge and tools to navigate price volatility, make informed decisions, and build resilience in the face of an ever-changing market landscape. 

Ultimately, raw material indexing serves as a compass, guiding manufacturers through the unpredictable seas of raw material costs and toward a future of sustainable profitability.

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