05 October 2006

Rising commodity prices and global instability have put a strain on the UK manufacturing industry. Paul Snell finds out how buyers are coping

Many purchasers in the manufacturing industry feel stuck between a rock and a hard place.

Raw materials costs are rising faster than house prices, while at the same time procurement professionals find themselves under the cosh to cut costs.

"We are under extreme pressure to cut commodity costs," says Malcolm Madeley, purchasing manager at automotive manufacturer Sears Seating. "Most customers do not want to accept steel surcharges, although they know it is a fact of life at the moment."

Prices for many raw materials used in manufacturing have been on the rise for some time. In July, the CIPS/RBS purchasing managers index (PMI) for manufacturing recorded input prices at their highest for 19 months. And while August saw a slight dip in the rate of increase, the trend over the past 12 months has been upward.

Shaun Green, commercial director at the IMA Group, which assists manufacturers with buying, attributes the price explosion to increased demand from newly industrialised and developing economies.

Economists are now asking how sustainable the current situation is. Ian McCafferty, the CBI's chief economic adviser, says while cost pressures from inputs such as energy have recently eased a little, profit margins remain under strain.

"Overall the sector is doing better than it has for some time, but concern remains over how long this can go on," he adds.

Stephen Radley, chief economist at manufacturers organisation EEF, confirms that since the majority of companies cannot pass on costs to customers, margins are taking a hit.

So how can purchasers deal with unpredictable rises? Adrian Griffiths, director at procurement organisation Vendigital, advocates cutting costs by global research to identify new suppliers. But in Radley's view, the success of this method is by no means guaranteed. "They couldn't find a competitive price, because every supplier has raised their prices," he says.

Green agrees: "Wherever you turn, you are faced with increased prices."

And switching suppliers is certainly not always the answer. Griffiths suggests that buyers switch suppliers more often to reduce costs, but Green argues this short-term view could be damaging. "It is a dangerous game to play in terms of forward planning. Suppliers may not be so willing to work with you later. When supply is volatile, buyers stick with who they can trust."

Griffiths says forming relationships with suppliers is another way to cope with lean times. But he cautions that unless you have, for example, a team of engineers who can work with suppliers to develop new products, the time and effort invested in such relationships may not be worth the immediate reward.

But according to Green: "Making production more efficient may bring only marginal changes, but they can help."

But price isn't the only factor. In Radley's view many firms are already examining process changes: "Manufacturers are looking at their consumption levels of materials, and monitoring their processes, to try to make efficiency gains."

Madeley says a combination of strategies could help. "We need to work with the supplier to locate more cost-competitive sources," he says, but adds cautiously, "although we are finding the supplier is more inclined to work with their raw materials supplier to ensure continuity of supply."

SMoct2006