Supply Excellence — Hidden Supply Costs and The Importance of Agility

Hidden Supply Costs and The Importance of Agility

September 6th, 2006 · by Tim Minahan · No Comments · costing, design and development, supply management

Thanks to rising energy costs and raw-material hogs like China, India, and Boeing, supply markets these days have more faces than Sybil.

Supply managers received good news this week as oil and gas prices continued to decline, with oil slipping below $68 per barrel for the first time since June. Industry experts also downgraded earlier concerns that a dispute with Iran or hurricane damage would increase prices or disrupt fuel supplies. And just yesterday, there were reports of a new oil source in the Gulf of Mexico that could boost U.S. reserves by 50%.

However, for many manufacturers, this good news has been overshadowed by supply constraints and price increases for critical raw materials. During the first half of 2006, prices have skyrocketed for commonly used metals:

Nickel prices are up 89% since the end of 2005, hitting a 19-year high.
Gold is up 40%, hitting a 26-year high.
Copper prices are up 71%.
Zinc prices are up 62%.
Aluminum prices are up 21%.

Not surprisingly, prices for petroleum-based products have also climbed. Rubber prices have risen 31% in 2006 to more than $2/kilogram. Plastics prices have climbed 4% - 8% during the first half of the year. Unfortunately, dips in oil prices won’t be reflected in lower material prices for several months.

To make matters worse, some suppliers are now resorting to a tactic long used in logistics and transportation markets: surcharges. A recent article in the Baltimore Sun cites a growing trend among foundries and die casters to apply a surcharge that is tied to the fluctuation in metals prices. Purchasing magazine reports that suppliers of stainless steel sheet, strip, and continuous mill-plate products and tubulars have upped surcharges 21% to 85-cents/lb. And the Manufacturers Alliance (MAPI) reported that 59% of its member companies (generally large multinational manufacturers) have added surcharges on products to try to offset higher commodity prices.

What can you do to counter rising prices and hidden supply costs? Here are a few approaches:

In response, many supply management groups have adopted hedging strategies. Even the major airlines are taking the recent decline in oil prices to once again employ hedging on jet fuel. However, the extreme volatility in commodity supply and prices have limited the effectiveness of hedging programs, according to MAPI.

Others supply management organizations have shifted buying from higher priced materials. For example, one manufacturer elected to alter its product make up to replace higher-priced nickel with (comparatively) lower-price metals, such as stainless steel. Big buyers of aluminum have adopted similar strategies, switching to polyethelene terephthalate (PET) or polyvinyl chloride (PVC) plastics or to steel. Still others have reported stockpiling inventories of certain materials and prices to protect against any further increases.

Today’s unpredictable supply markets reinforce the need for enterprises to continually balance cost savings, quality and performance, and risk in every supply chain planning and sourcing decision. They also reinforce the need for enterprises should also consider the implications changing supply market factors while designing new products. As evidenced above, the ability to switch to alternative materials or parts can be equally (if not more) important than the ability to swap out suppliers. In the face of an unstable and increasingly global world, agility and flexibility in supply can mean the difference between being in the black and being out of business.

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