Commodity Management Blog

Innovative Ideas and Thought Leadership for Volatile Commodity Marketplace

Michael SchwartzThere was a very interesting article in The Times about industrial manufactures raising prices due to the soaring cost of raw materials.

I’ve noted in the past about Food and Beverage companies being affected by rising and volatile commodity prices – and the news continues – McDonald’s CFO, Pete Bensen, said on a recent earnings conference call that it will raise prices this year in the face of rising commodities costs.

But I haven’t seen many articles about the effects of rising commodity costs on industrial manufacturers.  The Times article presents a call-out case study of Norton Motorcycles.  “A motorcycle is constructed 60% (by weight) from aluminium, 20% from steel, and the remainder from a combination of plastics, rubber, paint and other materials.”

The article also lists the cost increases for these materials in the last year:

  • Rubber (tires) 73%
  • Steel (frame) 29%
  • Aluminium (engine casting) 8%
  • Plastic (fuel tank) 7%

lan McCafferty, the CBI’s chief economist, said: “Manufacturers have come under intense pressure to pass on rising costs. They have increased prices markedly in this quarter and expect to raise them at an even faster pace over the next three months.”

The publication of the article couldn’t have been more timely; Triple Point recently published a solution brief, “Commodity Management for Automotive Manufacturers and Suppliers,” in order to help manufacturers operate in this environment.

The focus for supply chain groups over the last 15+ years has been on efficiency and speed. Manufacturing and supply chain techniques such as — Just in Time (JIT) inventory management, Total Quality Management (TQM), Six Sigma and Demand Driven Supply Network (DDSN) — were introduced to eliminate waste, reduce inventory and improve quality. These efforts have led to a striking reduction in buffer inventories to bare minimum levels. In addition, these leaner supply chains have become more global as organizations look for lower cost suppliers and new markets to sell product. On one hand, this has reduced costs and opened new markets but on the other hand it has significantly limited the ability of businesses to handle unforeseen shocks to the system such as sharp raw material price rises and volatility.

The Triple Point solution brief discusses how automotive manufacturers and suppliers (really applicable to all industrial manufacturers) are facing unprecedented fundamental changes in metals, chemicals, plastics and energy market environments.  In this “new-normal,” industrial manufacturers need to recognize how the same systems that have historically been deployed by energy and commodity trading companies can help them manage raw material risk and preserve profit margins.