If you’ve spent even a short amount of time looking at the cost of raw materials, you will have noticed a sharp increase in expenses compared to recent years. We know this has much to do with current market conditions and the pandemic’s effect on a global and economic scale. 

The Maintenance, Repair, and Operations (MRO) industry has been hit hard like many other industries. For many raw material mills, companies shut down production from the fear of a recession. But when the pandemic lockdowns hit, people filled their time by starting renovations and home repairs that required the materials no longer being produced. On top of that, issues such as transportation lag and labor within the manufacturing realm remain a challenge. 

Why has the cost of raw materials increased?

Currently, there is a tremendous global market demand for raw materials. China’s quick economic recovery has played a huge factor in this. While oil prices have risen by over 50% since 2020, there has also been a shortage in shipping containers that have delayed much of global transportation, limiting access to raw materials and affecting the cost of getting raw materials to manufacturing facilities. Simply put, there has just been this significant shift in demand, and as anyone with a basic knowledge of economics will know, it takes time for supply to catch up. 

How can we reduce the cost of raw materials?

Companies have always attempted to increase the profit margin by reducing the cost of raw materials without limiting the quality of the finished product. Here are some direct and indirect ways in which we can try to reduce the cost of overall raw materials.

Substitute Materials Where You Can

For many products, substituting for a lower-cost alternative is easy to do. If you decide to switch out to low-cost raw materials, make sure you research and consider all the factors involved. For example, cost-effective steel instead of aluminum can save the company money towards its COG. But not only that, steel continues to evolve as technology makes it stronger and more durable. So, your company is saving by substituting materials and possibly increasing the quality of your finished goods. However, it might do the opposite and negatively affect your bottom line - so do your research!

But haven’t steel prices increased drastically?

Yes, the cost of steel has increased by over 200% since 2020. Don’t get too scared, though. The cost of aluminum remains up to three times higher still. Now that the pandemic restrictions are beginning to relax in some parts of the world, the rate at which steel costs increased has started to slow down. According to a forecast by IHS Markit, the price of iron ore/steel will decrease noticeably near the end of 2021. “Either buy on spot or be sure your contract has an escalator clause because in coming months it would act as a de-escalator,” advises the forecast.

Consider eliminating functions of your products that are unnecessary

What about your final goods are motivating customers to buy them? Are you paying for over-the-top features that honestly aren’t even necessary? Cutting out what you don’t need will also decrease the overall need and cost of production. In fact, by focusing on your niche and what is driving your customers to demand your products, you may even increase your sales and therefore have a higher profit to expend on raw materials and other things. 

Use your negotiation skills to lower your costs

There is almost always an opportunity to negotiate costs with suppliers. Sometimes they’re offering you higher prices because they’re expecting you to negotiate it down. They’re happy when you don’t because they received more money than they would have accepted. When getting an estimate from a vendor, ask for a discount or find out if they’re willing to lower the cost for a longer-term contract or bulk order. There’s no harm in asking. 

When it comes to the cost of raw materials, we can expect prices to remain high for a while yet. So, finding creative ways to meet the needs of producing and manufacturing while staying within your budget and standards is necessary to continue growing and scaling your business. Finding new ways to outsource labor or materials could also benefit your company’s bottom line.

As an independent contractor, with an extensive number of sources and contacts, Jealco can assist in shortening the sourcing cycle. Reach out to have a conversation with a member of our team today.