How are you handling increases in the cost of raw materials?

It is natural for the price of raw materials for a company’s products to fluctuate within the marketplace. However, it is estimated that during the next quarter, the market price per pound of steel has increased 75 to 80 percent and is predicted to remain strong in 2009.

According to our strategic procurement manager, the price of steel is sharply increasing for three reasons.

• A weak dollar leads to a reduction in imports and increase in exports.


• The United States uses more steel than it produces, so there is a short supply.


• In addition, international trends are causing high demand for steel.

In addition, international trends are causing high demand for steel. Steel is being exported to Europe and other regions, such as South America. In Asia, exports are down because individuals there are using internal resources to rebuild cities affected by the earthquake. Secondly, the cost of raw material and scrap has increased. According to the American Metal Market, scrap is now selling for more than $890 per ton in Chicago, Ill. This is a huge increase compared to January, when it was sold for $410 per ton. Like steel, scrap is also being exported to other regions of the world, causing shortages and price increases. Finally, the cost to produce steel, in terms of both utilities and transportation, has increased.

When the price of raw materials rises in such a way, it is difficult for manufacturers to maintain the price of the final product. However, there are ways to mitigate these price increases, and we are taking proactive measures to do so.

Global procurement organization reduces the cost of many components

Working with the physical security division, engineering and product management departments, the global procurement organization was able to reduce the price of many of our products by five percent. Our strategic sourcing manager, global procurement, said this accomplishment was possible thanks to a benchmarking effort that included product value stream maps, redesign and value-added supply chain resourcing to reduce production costs.

“These types of projects are continually in progress for almost all of our product lines. The strategy has already saved millions of dollars and has helped us avoid millions of dollars in increased costs that are not as obvious as others. If it were not for our efforts, the cost pressures of steel would be much higher.”

Raw material price increases and competitiveness

While we were able to reduce the cost of many of our components, we were not as fortunate with other products. In some cases, the price of these products increased as much as 15 percent.
But we aren’t giving up. Our procurement organization continues to work with our suppliers and their supply chain to mitigate these increases. And in some cases, our efforts have been fruitful. “For the sheet metal (raw material) we use, we were able to mitigate the impact of the price increases through early negotiations and supplier relations. We locked in first quarter numbers in November and second quarter numbers in January, and we are still significantly under market value in terms of our cost.”

In addition, we were able to achieve significant savings by working with a North American supplier to cut some components to size before they are exported.

Even though we cannot predict what our competitors are paying for raw materials, we are confident that they are being impacted by these increases as well, and that we will remain competitive in the marketplace.

Take proactive measures to mitigate future price increases

To mitigate these types of price increases in the future, our procurement organization will continue to negotiate and form strategic partnerships with suppliers. “Under these market conditions, we have been very successful, due to our strategic negotiations, supplier partnerships and process evaluation. We will continue to undertake these activities in the future to ensure that we are getting the best price for raw materials in every situation.”