Unpredictability and rising raw material costs call for new approaches to supply chain management  

30 December 2021 | BLOGS

Uncontrollable and unpredictable forces like the Covid-19 pandemic, climate variations, civil unrest, and depletion of natural resources impact the cost and supply of raw materials. Leadership teams see supply chain management as the pivotal point that can help them streamline operations, reduce costs and take strategic market decisions. To fulfil these tall expectations, procurement and supply chain are embracing digital transformation.

Raw materials form the cornerstone for economic development

Historically, raw materials have always determined the global economy, from the earliest trade routes to today’s digital marketplaces. Raw materials are essential to the manufacturing process. Copper underlies the transmission of power, cotton and natural fibres make up the fashion industry, corn is the source of food for cattle, crude oil, and petrochemical products are omnipresent in everything from packaging to automobiles or even mobile phones.

In the past, the availability of raw materials in a particular country or geography would dictate the local market forces, but advances in transportation and opening up of bi-lateral trade have re-shaped the world economy. Enterprises now source from all over the world, pursuing the lowest cost, fastest time to market and latest innovation to survive. In this competitive world, the cost of raw materials is the main factor in determining pricing.

Sourcing and availability of raw materials determine aspects such as warehousing, production planning, materials planning and even customer warranties and replacements. The role of sourcing and supply chain management is make or break for manufacturing enterprises worldwide.

Rising costs of raw materials eat into margins and shrink profits

Amidst this competitive environment, the rising costs and unpredictability of raw materials have emerged as a key challenge for the manufacturing industry. Non-food agricultural materials have increased by 117% since 2000 on average across seven inputs, while manufacturing industries using rubber have seen an increase of 359% since 2000[1]. Since the economy opened after the Covid19 pandemic, the Raw Material Price Index is 18% higher than a year ago, and raw material prices are expected to average 10% higher in 2021 according to the World Bank’s Commodity Markets Outlook[2]. Manufacturers shield consumers from the rising prices by absorbing the volatility of raw material costs into their margins, but shrinking margins make it difficult for them to sustain their profitability.

Sourcing and supply chain strategies now contend with an unpredictable environment

It’s not just the cost of raw materials that is a cause of concern. Manufacturers are revisiting their sourcing and supply chain strategies to manage the rising unpredictability surrounding raw material supply. These unpredictable factors are out of the span of control of businesses.

The unchecked industrialisation and consumerism of the past decades has led to massive depletion of raw materials. An OCED report[3] states that the amount of materials extracted, harvested and consumed worldwide increased by 60% since 1980, reaching 62 billion metric tonnes (Gt) per year in 2008, an 8-fold increase since the early 1900s. By 2050, the world economy is expected to quadruple, and the global population will reach over 9.2 billion. Awareness among consumers and governments have acknowledged the need to establish a resource-efficient economy. Manufacturers are now including initiatives such as waste recovery and recycled products as raw materials to move towards a circular economy.

In addition to this, unpredictable world events such as climate and weather events, pandemics, civil unrest, and other incidents affect the supply of raw materials. The Covid-19 pandemic that had China, the factory of the world, at the heart of the world crises, saw supply chains freeze. Outbreaks such as bird flu, and diseases that affect cattle and crops are a common risk. Random incidents such as the ship Ever Given that wedged itself in the Suez Canal and blocked supply routes for over two weeks also brought home the unpredictable forces that affect raw material supply. Compliance and global sanctions are other unpredictable factors; manufacturers need to be vigilant and source ethically to avoid stiff penalties and loss of contracts or customers.

Inefficient raw material management has a ripple effect on all aspects of the business

The pandemic saw many of the risks around raw materials become a reality, causing manufacturers to realize the impact and form strategies to protect themselves against high-cost escalation risks. Inefficient raw material management has a contagion effect on other critical business processes.

Line of sight on raw materials is critical to materials planning, including aspects such as customer fulfillment, inventory and warehouse management, and logistics. Materials planning needs to account for production aspects such as make-to-stock or make-to-order, production time, and buffer for quality replacements. It also takes into consideration the inventory, including accurate forecasting of supply and demand, product shelf life, seasonal variations, perishability, and operational variability. The cost of quality is factored in, especially as savings on sourcing may lead to costs later. The material planning must fuel the production and supply cycle such that it is sufficient to fulfil orders, quality issues and has a buffer or safety stock. This buffer accommodates losses in shipping and manufacturing, last minute orders, or addresses quality replacements to keep customers happy. It also needs to consider the dependencies on purchasing such as lead times, import duties. At the end of the day, customers must be happy, and frequent out-of-stock situations, bad quality, and unreliable delivery commitments, and overpricing will drive away customers and negatively impact business.

Manufacturers rely on supply chain management strategy for operational efficiency, best pricing, and profitability

Manufacturers are exploring new supply chain strategies to deal with the uncertainties around raw materials and the volatility of costs. The strategies can be from both ends of the spectrum, for example, keeping a buffer stock on one hand to just in time management on the other. Alternately, they debate between diversifying their supplier base to localizing raw material sourcing or between warehousing to relying on distribution and logistics for delivery. They rely on technology to provide information to make these decisions.

Having complete visibility into the entire supply chain under a single platform, helps manufacturers to properly price their products, plan a competitive market strategy and keep customers happy. Tracking can help prevent against overstock or understock, ensure compliance for industries such as automotive that need to stock parts, prepare for quality rejections, and also offer strategic insights on warehouse and inventory management, time to market, and competitive pricing.

While end-to-end visibility across procurement, logistic movements, manufacturing, and real-time information were top priorities even before the pandemic, the lesson businesses and manufacturers learned was that they needed to implement a way to get this data. The need for an overall view  and tracking of the commodities across the supply chain reinforced the need for digitalization of supply chain.  With trends such as nearshoring, multi network diversification, and ecosystem partnerships, there is a greater need for better inventory management and harmonization of the product and solutions. Supply chain and inventory management platforms now use sophisticated technologies that combine the physical and virtual worlds, such as sensors and RFID for real-time tracking and monitoring, such as in cold chains or pharmaceuticals. Blockchain, artificial intelligence, and machine learning are also transforming the way that workflows are automated, and data is interpreted. With Industry 4.0 taking shape, manufacturers are looking to technology to help them manage the volatility of raw materials, optimize costs and deliver customer delight .

Eka’s experts summarize these challenges and post-pandemic strategies to optimize supply chain costs; watch the webinar to learn more.