How to Manage Supplier Costs and Keep Your Business Balanced

Manufacturing and distribution companies often have to dance with suppliers. As raw material and transportation costs continue to climb, many distributors are encountering price increases from their suppliers. However, waiting for prices to stabilize is not an option for businesses feeling the squeeze of these increases. The following strategies can help companies manage supplier costs before finding a new supplier.

Track Costs Throughout the Manufacturing Process

Recording how much each step of the manufacturing process costs is one way to understand where increases originate. Manufacturers should communicate with all involved in the process; the more information shared throughout the supply chain, the better.

Work with Suppliers and Review Purchasing Options

If a company sees rising prices, it should work with the supplier to make changes to protect operations from spikes in supplier pricing or refrain from passing the additional costs on to consumers. If the supplier is unwilling to lower prices, the distributor should look for other ways to increase profits and cut costs to offset higher supplier costs. Companies can also reduce costs by pre-purchasing or bulk purchasing raw materials. Buying in bulk often provides greater leverage with suppliers and may give the company some control over the relative price of materials.

Look for Internal Cost Savings

Using more energy-efficient equipment and production methods can lead to energy cost savings. Other resource-saving strategies include scheduling a regular night shift instead of employee overtime or subleasing the facility when it is not in use.

Strengthen Relationships with Existing Suppliers

Finally, loyalty can prove valuable in supplier relationships, where suppliers usually make the final call on price increases. Manufacturers and distributors can keep suppliers happy by paying invoices on time and providing ample lead time on orders. Building strong working relationships with suppliers can help foster compromises and reach fair prices, even during challenging times.

What Should Businesses Evaluate Before Choosing a New Supplier?

When all else fails, forging ahead with a new supplier may be the most fiscally responsible route. Choosing the wrong supplier, however, can cause more problems than it solves, so performing due diligence is key to finding a good match.

When evaluating a new supplier, companies should consider:

• Prices and payment terms: Ensure the supplier’s prices and payment terms allow your company to meet its revenue targets.
• Long-term reliability: Assess whether the supplier can remain a reliable source over the long term.
• Sourcing location: In some cases, companies may need to source raw materials from lower-priced economies.
• Transition planning: One consequence of choosing new suppliers is that the change may disrupt the supply chain. Coordinate with the new supplier early to address potential supply-chain disruptions and help ensure a smooth transition.

Choose an Effective Approach to Managing Supplier Costs

Rising supplier costs are a result of increasing raw material and shipping costs. To combat these cost increases, trim in-house costs, foster stronger supplier relationships, or (as a last resort) find a new supplier. CRI’s manufacturing and distribution team can help your manufacturing and distribution company assess these options and determine an appropriate course of action.