COVID-19 has caused significant disruptions to daily life all over the world. These disruptions are not limited to easily visible experiences such as the inability to travel or gather. There are subtle disruptions that build up behind the scenes as well.
Raw Material Prices Are Surging
We are now starting to see the extensive shortages in the supply chain that are hitting businesses hard. The question is if these higher prices are a shock that will eventually subside, or if these prices are the new normal. At this point, it seems that the price shocks are temporary, but the risk of rising inflation is real.
The situation with lumber in the United States is an excellent example of the price shock. Over the last year, the price of lumber has risen 250%. The price increase may seem like it came out of nowhere, but it is simply the result of market forces at work. In 2019, there was a surplus of lumber and excessive inventories. Prices dropped in response, and lumber mills, seeing the lower prices, decreased production. Production further reduced due to low demand and business shutdowns during the height of COVID-19.
Now, in the Spring of 2021, there is a surge of demand as life is going back to normal and people want to spend money on new homes and improvements. It will take time, but supply will rise to meet the demand for lumber, and we will see a decline in the price though prices will likely stay higher than the previous 2019 prices. Prices are set on a national or global level, so the fact that there are piles of lumber doesn't mean there is no overall shortage in the market.
According to Bloomberg Business chronicles in “China’s Soaring Factory Costs Send Inflation Signal to the World”, the prices of most manufacturing inputs are rising to meet soaring demand and deal with shortfalls from COVID-19. The dynamics are the same as the lumber prices: lower production during COVID and a sudden rise in demand create a shortfall.
Currently, the situation is mainly confined to China as manufacturers are not passing much of the cost to consumers, but that situation could likely change. While supplies are not available, production capacity for most products (except semi-conductors that are frustrating dozens of industries) is available; they simply need to ramp up production.
4 Ways to Manage the Impact
Focus on what you and your organization can control. There are several ways to mitigate the current crunch.
Communicate with Suppliers
There might be a solution that is advantageous to both organization and supplier to keep prices and supply steady and build systems to protect against these shocks. Improving supply chain visibility can help control costs.
Reduce Your Inventory
Excess inventory is a severe cash flow drain on any industry. Good inventory control and reducing the amount of material kept on hand will lower these costs and leave you better able to absorb potential shocks. When prices go down, you won’t be stuck with a surplus of expensive materials.
Reducing scrap can save money during the production process. Any material not used in the product itself is scrap and costs your company. Reducing waste through robust process controls significantly lowers material needs.
For example, after investigating a flawed painting process in one of our clients' factories, our consultant reported the following:
They were wasting 70% of their paint due to it being sent into the air and down the drain. Therefore, $0.70 of every dollar spent on paint was wasted, meaning that the company lost $700,000 for every $1,000,000 spent on paint each year. An improvement to 30% waste (still unacceptability high) would save the company $400,000 a year and manufacture more consistently and more quickly.
Are your operations as efficient as they can be? Improving process flow, per-employee, and per-machine output can help cut costs to offset rising input costs. Writing control plans, validation checklists, and work instructions is a good place to start.
Don’t panic as you see the rising price of materials, but do take action. Action can save your company thousands and thousands of dollars now and for years to come. Though price shock is likely to subside, that does not mean you should be complacent. Regardless, the situation can change quickly, so make sure your company is ready for it.
Worried about costs and want to learn more about how to keep costs low for your operations? Read our eBook about how cutting costs can be done through quality improvement activities.