As the economy improves and business picks up, will your company be able to source raw materials in a timely, affordable manner?
By Bridget McCrea
As the U.S economy continues its pokey recovery, and as businesses start to think about rebuilding, manufacturers will be forced to sharpen their sourcing pencils and be more attentive to price, delivery times and availability. That means recovery could be a double-edged sword for precasters who have grown accustomed to a stagnant business environment. Economic activity in the manufacturing sector is expanding month by month, according to the Institute of Supply Management’s (ISM) Report on Business, which highlighted these trends:
• Prices are rising. The ISM Prices Index registered 85% in March, 3 percentage points higher than the 82% reported in February and the highest reading since July 2008 when the index registered 88.5%. This is the 20th consecutive month the Prices Index has registered above 50 percent. While 72% of respondents reported paying higher prices and 2 percent reported paying lower prices, 26 percent of supply executives reported paying the same prices as in February. The ISM reports that commodity price increases are of particular concern right now.
• Inventory levels are declining. Manufacturers’ inventories declined in March for the second consecutive month. The Inventories Index registered 47.4%, 1.4 percentage points less than the 48.8% recorded for February. An Inventories Index greater than 42.7%, over time, is generally consistent with expansion in the Bureau of Economic Analysis’ (BEA) figures on overall manufacturing inventories.
• Supplier performance is slowing. The delivery performance of suppliers to manufacturing organizations was slower in March as the Supplier Deliveries Index registered 63.1%, which is 3.7 percentage points higher than the 59.4% registered in February. This is the 22nd consecutive month the Supplier Deliveries Index has been above 50 percent. A reading above 50 percent indicates slower deliveries.
Combine these three factors and you wind up with a perfect storm for precasters whose businesses will be picking up right around the time prices are rising, inventories are declining and supplier performance is slowing. James Muka, a partner with business software developer Muka Development Group in Freehold, N.J., expects a high percentage of precasters to be unprepared for the new business environment.
Higher prices could be especially challenging for precasters. Holding many of those companies back, according to Muka, will be the lack of a systemized approach to procurement and sales. “When the pricing changes on raw materials, manufacturers can’t determine what their updated cost should be for the finished goods,” Muka explains. “They have no idea how much a product should be marked up, nor do they realize how just one price increase can affect the cost of their finished goods.”
Product availability will also create roadblocks for precasters who don’t plan ahead, and who don’t factor delays and other challenges into the equation when bidding on projects. According to Muka, having a good purchase order system in place that allows companies to input the order information and anticipated delivery time – and then tracks that order from concept to completion – will be more important than ever during the economic recovery.
“Manufacturers need to closely track their purchase orders and what items are floating out there,” says Muka. “A lot of companies are still handling this with manual systems, which is kind of shocking considering the amount of technology that’s available on the market.”
What’s a precaster to do?
As the economy improves, inventory shortages will challenge companies that have been working with a “cutbacks and belt-tightening” philosophy for the last few years. When the customer pipeline begins to fill back up, which buyers will get first priority? And how can you make sure your plant receives its raw materials within budget, and on time?
Sasha Berson, CEO at Northbrook, Ill.-based strategic business consultancy Berson Business Development, says precasters should brace themselves for more expensive raw materials over the next 12 to 18 months. The Producer Price Index, which measures the average change over time in the selling prices received by domestic producers of goods and services, has been steadily rising, says Berson, and that acceleration is likely to continue.
“The effects of the rising PPI will soon be felt through the entire world,” says Berson. “Manufacturers will be between a rock and a hard place as their suppliers will have no choice but to raise prices. At the same time, the precasters’ customers will fight back against any price increases.”
That pushback could find precasters passing on just 1 to 3% of the double-digit cost increases that are being imposed by their own suppliers, according to Berson. Governmental actions (or a lack of them) could also play a role in this perfect storm, Berson adds.
“If the federal government doesn’t reduce its appetite for borrowing, interest rates will climb causing higher borrowing costs for manufacturers that use financing to fund raw material acquisitions,” Berson explains. “A look at the latest 2012 budget numbers doesn’t reveal a cessation or decrease in government borrowing.”\
Berson expects manufacturers to use a three-pronged approach to deal with these challenges: cut more costs, invest in better technologies that make processes more efficient, and maximize the productivity of existing resources.
The companies that take a proactive approach to implementing these measures today will face a brighter future than those that bury their heads in the sand and ignore the churning maelstrom, says Berson. “Manufacturers will be forced to become more ‘optimized,’ while those that don’t actively seek out ways to increase sales, and reduce or maintain costs, will face elimination,” he says.
The sourcing dilemma
One way to ensure your firm doesn’t face elimination when business picks up and raw goods become more expensive and scarcer is by beefing up your sourcing process. A robust technology system can play a key role in the process, according to Brenda Reiland, president at Data Collection Specialists Inc. in Conroe, Texas, who has seen one too many precasters trying to rely on manual systems to handle the important task of sourcing.
A better alternative to the pencils, papers and fax machines, says Reiland, is a purchase order system that ties orders to raw material availability and pricing. “You want to be able to calculate the amount of raw materials needed for a particular project,” says Reiland, “and kick purchase orders out to suppliers based on that demand.”
Reiland says this type of purchase order system is valuable in all economic climates, and not just when business is brisk. “Having too many raw materials on hand is almost as bad as not having enough,” she says. “Without the proper systems in place, you can’t look at your raw materials and know if there’s enough to keep your workers busy or if they’re just standing around waiting for trucks to arrive.”
Walking the tightrope
As the sourcing environment tightens up even further in 2011, precasters will be forced to look a little harder at how they’re procuring raw materials, where they’re coming from, how quickly those supplies are arriving and how much they cost. Reiland says now is the time to start looking closely at orders, prioritizing them according to demand dates, and fulfilling them as quickly and affordably as possible.
It’s a far cry from the business environment of the last two to three years, when manufacturing lagged and fulfilling orders was hardly a challenge. “Now is the time to run as lean and mean as possible,” says Reiland. “If you’re sitting on raw materials that aren’t allocated to a job, you’re sitting on money that could be allocated elsewhere.”
On the other hand, Reiland says precasters must keep enough materials available to keep employees working, “because having people standing around is money down the drain. It’s quite a balancing act.”
Sidebar
As precasters brace themselves for a more challenging procurement environment, they also have to pay attention to their own delivery times. Here, James Muka of Muka Development Group, Freehold, N.J., outlines seven steps to ensure on-time delivery, every time:
1. Implement a fully integrated system that includes quoting, sales order processing, bill of materials tracking, production scheduling, purchase order processing and inventory management.
2. Eliminate all double and triple entries into various systems. “Upkeep of various spreadsheets and disconnected programs immediately adds a true time lag and impacts the speeds at which accurate decisions regarding production scheduling and purchasing can be made,” says Muka. For example, let’s say a quote is created in a spreadsheet and the quote is accepted by your customer – you got the job. Now it takes another four days before the order is officially entered into the sales order processing system. You have already lost four days in the decision-making process. “If the quote can immediately be changed into an open order, it can be instantly factored into your decision-making process,” says Muka.
3. Enter the entire job into the sales order processing system and have a procedure in place to release only the portion of the job that needs to be produced. Enter the customer’s anticipated “need” dates for the finished product. “Too often, precasters enter only the portion of the job that immediately needs to be produced into their sales order processing system,” says Muka. “This will create a delay when the remaining items in the order need to be produced.”
4. The system should give the user the ability to establish the number of days it takes to make a particular product. For example, if product manufacturing starts on Monday, then the item will be completed and ready to be shipped by Thursday. The system should give the user the ability to establish the purchase lead time for items, and should give the user the capability to establish a true bill of materials for the finished good.
5. Use the customer’s anticipated dates to drive production scheduling and purchasing. That enables the system to calculate the required production start date and determine the future purchasing requirements.
6. Establish production capacities that will determine whether the customer’s anticipated dates can be met. If the customer’s anticipated dates cannot be met, then the production scheduler will have the visibility to accurately predict the completion date.
7. Through proper scheduling techniques, customer satisfaction can increase while inventory turnover increases, increasing profitability. “While just-in-time production may seem like a pipe dream to some precasters, the pursuit is a valuable endeavor,” says Muka. “The closer a precaster can come to just-in-time production, the more successful the operation will be.”
Bridget McCrea is a freelance writer who covers manufacturing, industry and technology. She is a winner of the Florida Magazine Association’s Gold Award for best trade/technical feature statewide.
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