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Raw material cost management key to business survival

Spiralling raw material costs are having a significant impact on the success of European businesses, a European survey* of CEOs and purchasing managers has revealed. Ninety-one percent stated that the price of raw materials was a key factor affecting current business performance, followed by economic prospects (63 percent) and competitive pressure (42 percent).

Population growth, natural disasters and shifts in the balance of political power are causing a systematic shortage of raw materials and supply ‘bottlenecks’. Businesses feel powerless to control the effects. Sixty-eight percent say that raw material price increases are having a negative impact on overall company results.

Respondents say the effect of rising costs has led to increases is their own prices; 61 percent have passed on costs to customers. But with not all being able to do this, the result is that operating margins are shrinking. And it’s only set to get worse, 83 percent expect prices will continue to increase in the next 18 months.

Richard McIntosh, UK Managing Director of INVERTO, says: "Companies must put in strong defences against increases in raw material prices if they want to survive the global competition. It is also vital to take out risk by harmonising purchase and sale prices."

This is particularly important for European businesses; a third of respondents thought that companies that are producing exclusively in Europe are at a geographical disadvantage in terms of raw material supply chains in the long term.

Companies are tackling supply bottlenecks by tapping alternative supply sources (47 percent), substituting materials being used (21 percent) and, in the short-term, increasing their inventories of stock (17 percent). Long-term price agreements are still seen as key to guarding against prices hikes but it’s increasingly difficult to get suppliers to commit to such agreements, and when they do, it is for much shorter periods of time.

Just one in ten businesses successfully manage to reject short-term price demands by suppliers.

McIntosh continues, "Companies are not using the full range of strategies available to them to defend against price increases and manage both costs and supply chain risk. Only 20 percent admit to accepting supplier price increase demands but we suspect this figure is higher in reality. Operational sourcing tactics are not an effective strategy and reflects a short-term approach. A longer term strategy with the right combination of sourcing tools would significantly empower companies and improve their negotiating position."

* INVERTO Raw Material survey was conducted via online questionnaire by the INVERTO Excellence Centre and involved the responses of 184 CEOs and purchasing managers in European companies.

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