Commodity Pricing Pressures: THE New Biggest Risk for Building Products Manufacturers

Commodity Pricing Pressures: THE New Biggest Risk for Building Products Manufacturers

This is the fifth blog in our series: The Top Challenges Facing Manufacturers in Construction-driven Markets & How to Meet Them Head On.

The research tells the story – commodity pricing has replaced regulation and compliance as the top concern for manufacturers of building products:

According to EY, pricing pressure is the biggest risk highlighted by building products companies in 2013, with the C-suite now accepting that they must find new ways to be profitable in response to shrinking developed markets. This contrasts with 2011, when companies were focused on the risks associated with regulation and compliance, and the most significant opportunity came from the execution of operational strategy.”1

Pricingleadership.com further notes that many manufacturers have implemented plans to make their operations more lean and efficient, with barely any near-term influence on margins. “Recognizing that price is the number one lever to improve margin, companies must look to evolve their pricing strategies in light of these new economic realities. Pricing pressure and increased competition are a nightmarish combination when companies attempt to achieve a sustainable, strategic, optimal pricing strategy.”2

Leanlaborstrategies.com adds that getting the pricing right is challenging. “Should they value their products based on the current market value of the raw materials or at the price they purchased those raw materials? It may seem tempting to delay re-valuing the inventory, but this sword is double-edged and cuts hard the other way when prices start falling. Secondly, exactly what part of the product cost is comprised of material?”3

The high raw material content in many building products makes manufacturers especially vulnerable to other cost changes. Because materials account for two-thirds of the value of the finished product, even small cost changes can have a large impact on profits and because basic construction materials are commodity products, manufacturers compete largely based on price. With excess capacity in the U.S., industry returns have been low in the past decade, a big reason why much capacity has passed into foreign ownership.

Clearly, with always tight margins, companies must strive to keep prices low in order to compete.

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 address the challenges presented by commodity pricing pressures, Dynamics AX includes robust functionality to help plan and run manufacturing operations as efficiently as possible, eliminating excess costs and maximizing productivity so companies can agile and able to respond with competitive prices. Capabilities include:

  • Executing multiple production strategies, including configure-to-order, assemble-to-order, make-to-stock, and make-to-order. Using both push and pull production control mechanisms.
  • Optimizing production and materials planning, forecasting and scheduling. Simultaneously schedule materials and capacity. Calculating available-to-promise (ATP) and capable-to-promise (CTP) deliveries.
  • Creating, scheduling, viewing, tracking, splitting, rolling back or categorizing production orders.
  • Understanding WIP and actual cost through production tracking and reporting. Tracking detailed resource and throughput costs, including work center costs. Reporting production variances to standard costs.
  • Managing routings:  Planning simple, sequential and complex networks; using simultaneous routes in the same network. Using rough-cut capacity and detailed scheduling capabilities. Organizing the shop floor into logical production units at individual sites.
  • Quickly scheduling/rescheduling jobs and simulating alternatives by dragging Gantt chart items. Resolving scheduling overloads by reassigning operations to alternate work centers. Optimizing scheduling across the organization with a unified resource model and scheduling engine.
  • Plus more …

For more information, download the full white paper, The Top Challenges Facing Manufacturers in Construction-driven Markets & How to Meet Them Head On. Or our building products fact sheet.

Read other blogs in this series:

Seasonal Demand 

Volatile Raw Material Prices

Regulatory & Environmental Issues

Next up: New Technology Adoption

Sources:

1. “Pricing Pressure and Cost Cutting: Top Risks for Business in 2013,” EY, http://www.ey.com/GL/en/Newsroom/News-releases/Pricing-pressure-and-cost-cutting--top-risks-for-business-in-2013, February 27, 2013.
2. “Competitive Pressures Strain Service Parts Manufacturers,” Sean Duclaux, http://www.pricingleadership.com/competitive-pressures-strain-service-parts-manufacturers/, April 12, 2012.
3. “Why Rising Commodity Prices Increase Pressure on Labor Costs,” http://leanlaborstrategies.com/2011/10/25/why-rising-commodity-prices-increase-pressure-on-labor-costs/, October 25, 2011.


Building Products Manufacturing, Business Advice, commodity prices, Discrete Manufacturing