Adapting to Fluctuations in Raw Material Costs

One of the challenges companies face when creating new products is the need to source affordable raw materials. From the materials used to create the product itself to the materials used for packaging and shipping, this can create a significant cost for manufacturers. Fluctuating raw material prices can make it difficult for businesses to budget for this, and changing costs for raw materials can impact the costs of goods for the buyer. Adapting to fluctuations in raw material costs is vital to the production process.

The Impact of Fluctuating Raw Material Costs

Manufacturers follow stringent practices to create products that they can sell for profit. Price swings impact production costs, which leaves a manufacturer with two choices. They can either pass the increased expenses on to their own customers or take a hit on their profitability.

Price swings can also disrupt the production process. When the price of fuel goes up and the cost of transportation increases, manufacturers may try to consolidate shipments to save money. This series of events, in turn, can slow down the production process. It is just one example of how raw material costs directly impact the production process.

The price of direct materials is not the only factor that can impact production. Indirect raw materials and indirect shipping costs, such as the price of fuel to power the delivery trucks or the direct labor costs to pay the drivers who deliver the goods, can indirectly impact the production of goods and the overall manufacturing process. If suppliers face similar price fluctuations, the entire supply chain faces a negative impact.

Market Forces Causes Cost Fluctuations

Direct raw materials costs and indirect raw materials costs are some of the most apparent price fluctuations that can impact manufacturing, but what causes these market prices to shift? Here, we’ll take a closer look at some of the factors that affect the costs of raw materials and, thus, the costs of manufacturing.

Commodity Prices

Commodities are basic goods and raw materials used to manufacture products for consumers. Examples include:

• Plastic resin pellets
• Sand, soda, dolomite (used in glass production)
• Sugarcane, corn (used in bioplastic production)
• Crude oil
• Natural gas

For a manufacturer, there is little that can be done to control commodity prices, and they will adjust accordingly. It is important to have strong communications with partner manufacturers when these adjustments occur to minimize the risk of unexpected price changes.

Geopolitical Events

Geopolitical problems in recent years have driven up the costs of many types of raw materials. If a country manufactures and exports the majority of a raw material, such as rubber or oil, and they face an economic or medical crisis, then supply of that material may run low. If it cannot keep up with demand due to these political issues, the price will go up. Geopolitical events affect the entire supply chain, and raw materials are not immune to this impact.

Currency Exchange Rates

Variations in currency exchange rates directly affect the pricing of imported goods. When imported commodities, raw materials, or parts are involved, the manufacturing process is impacted. An appreciation in exchange rates leads to more expensive exports and cheaper imports, while depreciation causes the reverse effect.

Price Volatility

Price volatility describes changes in a commodity’s price. This metric is a day-to-day percentage difference in a commodity’s price. If there is a high degree of fluctuation, then the market is considered volatile, which drives up the cost of raw materials. Price volatility reflects changes in supply and demand, and high volatility means there is a particularly high imbalance between supply and demand.

Industry-Specific Considerations

Each industry has specific considerations that can impact the price of raw materials. Some industries are more reliant on products grown in nature and can face more of an impact if droughts or floods occur. Others are highly reliant on the price of oil, and changes in geopolitical factors can quickly affect raw material pricing. It is important to understand the various factors when making purchasing decisions.

Strategies for Managing Raw Material Cost Fluctuations

Raw material price fluctuations are inevitable. Because these prices are dependent on global governments, supply and demand, and even nature itself, companies can do little to control these fluctuations. Instead, it’s imperative to have strategies in place to help work around and manage them. Here are some practical steps your company can take to handle these fluctuations when they arise.

Diversify Your Supplier Base

The first thing you can do is diversify your supplier base. Diversity is a crucial way to reduce the impact of various supply chain risks, including price fluctuations. If fluctuations happen on a supplier level, you can choose a different supplier with a better price. When diversifying this area, be sure to consider your suppliers’ geographic locations. If possible, have several suppliers from different geographic areas to reduce the risk of natural disasters or geopolitical conflicts interrupting your raw materials supply chain.

Secure Long-Term Supply Agreements

For some raw materials, long-term agreements can be made through the manufacturer with suppliers to control pricing over a full contract. Suppliers will create these agreements with enough buffer to protect themselves from price increases, and the agreement makes it easier for a company to plan its budget to protect its profit margins.
When securing a long-term agreement with a supplier, be sure to account for the fact that prices may drop. Any cost savings you get now may go down if global prices drop. Find a balance between a long-term agreement that protects your budget and the flexibility you need to make changes when you find a lower cost somewhere else.

Optimize Packaging Design and Materials

To minimize the impact of fluctuating raw material costs on product packaging and production, consider optimizing packaging design and materials. Using sustainable materials, rather than just focusing on recyclable materials, can reduce the cost of the packaging for your finished product. Strive for a balance between affordable costs and the durability of packaging materials, ensuring that they adequately protect the products they contain. Optimize packaging to improve storage, extend product shelf life, and simplify shipping. Invest in wholesale packaging as you prepare to package and ship to your customers to save even more money.

Partner with Paramount Global to Conquer Cost Fluctuations

Cost fluctuations in the supply chain are inevitable. You need the right partner to help you understand these changing manufacturing costs. Paramount Global works closely with a network of partner suppliers to keep a pulse on raw material pricing, and we have proven strategies that can help your business thrive, even when markets change.

Our global product sourcing experts can help you find the best packaging for your products. We also offer inventory and supplier management services to help make sure your products are available when you need them. At Paramount Global, we have partnered with businesses like yours to provide complete packaging and supply chain solutions since 1976. Contact us today to learn how we can be a partner to you.