It’s fair to say that this is the biggest question facing most businesses at the current time.
“When raw material costs are rising and customers are protecting their margins, how do we maintain our profitability?”
For those in the FMCG sector, like our clients, it’s a pressing question that needs a viable answer. Fortunately, there are answers and here’s how we suggest that you tackle it: more effective planning.
The impact of increasing raw material costs on profitability
Cost is a big factor when it comes to business and any increased cost affects the profitability of the business. The current volatile markets and limited availability of some raw materials are making this especially challenging. Considering that raw materials account for a significant portion of costs, this can have a huge financial impact. The volatility in the market also makes cash flow planning difficult as frequent, last-minute changes limit the ability to forecast prices.
Manufacturers are faced with three choices in this situation:
- Absorb the additional costs (unlikely viable in the long-term).
- Pass price increases along to customers (not usually possible).
- Mitigate the rising costs by reducing expenditure elsewhere (actually achievable).
More efficient planning is an effective method of reducing your overall raw material costs and providing a stable basis for effective cash flow planning.
Reducing expenditure through more effective planning
We emphasise ‘more effective’ planning as we’re acutely aware that planners are already effective in what they do. Production planning and scheduling software, such as Opcenter APS, seeks to help support them in driving further efficiencies.
Production planning software is a great way of reducing your spend on raw materials – even when the unit costs still keep rising. Because of the increased levels of accuracy of planning available, you would no longer need to order an additional X per cent to cover unforeseen demand increases. Being able to order less – with confidence – offers an immediate way to reduce spend. It also provides:
- 40-50% reduction in raw material inventory – less cash tied up in unnecessary inventory.
- Reduced levels of raw materials wasted because they’re not needed – no throwing away cash.
- Lower storage costs associated with decreased stock holding – longer-term cost savings.
If you’re concerned that the investment in the software will be cost-prohibitive – don’t be. It’ll provide a surprisingly quick RoI.
Need help mitigating the rising raw material costs with production planning software? Drop us a line! We can arrange a trial.
