Welcome to the second post in this new blog series that explores the top challenges facing manufacturers in construction-driven markets, and how to meet them head on. As a reminder, we're talking manufacturers of:
- Architectural and structural metals
- Cement and concrete
- HVAC equipment
- Lighting equipment
- Paint and coatings
- Plastic resin and synthetic fibers
- Switch, connector and other wiring devices
- Windows and doors
- Wood products
Challenge #2: Volatile Raw Materials Pricing
A recent report by A.T. Kearney speaks to the importance of raw material prices:
Raw material prices are experiencing unprecedented volatility … For companies with significant raw material exposure—particularly manufacturers and those in the process industries—mastering raw material volatility has become essential to short-term growth and long-term competitive advantage. *
Let's take a closer look:
Raw materials used by architectural and structural metal products manufacturers are primarily forms of steel and aluminum, and those prices vary widely from year to year. The United States imposes tariffs on imported steel occasionally to protect jobs in the domestic steel industry. Prices for iron, steel and aluminum can rise more than 20 percent within 12 months.
Resin and synthetics manufacturers can experience changes in raw material inventory values and may be unable to pass cost increases to customers. The major raw materials for resin manufacture come from oil and natural gas, and these costs can swing sharply with the price of crude oil. Production of products made from plastic resins can vary sharply from year to year, making demand difficult to predict.
Naturally, wood products manufacturers are sensitive to fluctuations in lumber prices. When lumber prices are low, margins are squeezed due to cost-cutting competition. When lumber prices rise, millwork manufacturers (including wood door, window and flooring makers), wood pallet and container makers and manufactured housing companies may experience tighter margins amid higher materials costs. Lumber prices in the United States can fluctuate by double digits annually. Increased raw material prices can't always be passed on to customers due to competition from alternative products (e.g., vinyl windows, steel doors).
Companies in the HVAC equipment and current carrying electrical wiring industries face fluctuations in prices of various raw materials. In the former, it is chiefly steel, copper and aluminum; the latter includes copper, aluminum, plastics and computer chips. Companies are also sensitive to price increases for components and subassemblies purchased from suppliers. Often manufacturers in these markets are caught in a whipsaw: passing higher costs on to customers can undermine a company's price competitiveness, but refraining from raising customer prices erodes profit margin. Many HVAC and electric wiring companies attempt to hedge against raw materials price increases by contracting in advance to buy some materials at fixed prices.
Prices can vary widely for metals, glass and petroleum-based materials used to make lighting equipment. Companies commonly obtain raw materials from outside the United States, increasing their exposure to variables such as rising transportation costs and other global factors beyond their control. The highly competitive nature of the market makes recovering higher material costs by passing them to customers very difficult.
How Microsoft Dynamics AX Can Help
Microsoft Dynamics AX is an enterprise resource management system for process, discrete and mixed mode manufacturers that includes business analysis, an enterprise portal, supply chain management, customer response management, human resource management and financial management modules; runs on a Microsoft platform; and uses technology already familiar to most of today's business employees.
To help manage volatile raw material prices, Dynamics AX includes robust planning options to help optimize production and materials planning, forecasting, and scheduling, including simultaneously scheduling materials and capacity, and can calculate available-to-promise (ATP) and capable-to-promise (CTP) deliveries. Additionally, approved vendor capabilities helps manage the vendor approval process per item with effective and expiration dates per item to ensure proper screening and compliance, and establish multi-level pricing for approved vendors.
Example: Managing Pricing Pressures
The example on the right shows Microsoft Dynamic AX's ability to support commodity pricing, in this case for gypsum, used in drywall. It shows how volatility with price fluctuations in gypsum prices can be used to simulate higher sales prices for drywall without changing the price of existing gypsum inventories.
For more information, download our white paper, The Top Challenges Facing Manufacturers in Construction-driven Markets & How to Meet Them Head On
Look for our next blog, Challenge #3, Regulatory & Environmental Issues
*"Raw Material Strategy—Volatility Is Here to Stay," AT Kearney, 2011.