High Mix Low Volume Manufacturers Can Reduce Both Costs and Commodity Volatility

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I had the opportunity to pick up a new consulting engagement via some colleagues I know well from my Andersen days. The client, (who shall remain nameless) hails from the oil and gas industry. They buy an awful lot of metal a true mix of all the stuff one would see at your nearest full line metal service center along with millions of dollars worth of steel plate. But the products matter not. What this client has now confirmed in me is that we have, within the US manufacturing industry, an epidemic regarding an unnamed condition afflicting many US manufacturing organizations. The symptoms of that condition include: demand uncertainty due to the job-to-job nature of the business, high mix and low volumes, what I call a “spot market sourcing strategy (meaning the firm only goes out to bid when it has a sales order in hand), and an almost apologetic tone communicated to suppliers due to the volatility around size and mix of orders. On numerous occasions we have seen buying organizations describe their metal spend in this fashion only to think that reducing volatility (or costs for that matter) remains outside the scope of the manufacturing organization’s capability. But I’d like to let you in on a little secret. Psst – most manufacturing organizations that still remain in operation within the United States probably suffer from these very same conditions. In other words, a large proportion of metal buying organizations operate in a job-to-job or project-to-project basis. I’m wondering if it ever occurred to any of these organizations that they have no need to apologize for their business when communicating with suppliers regarding pricing?

I mean, with just a few exceptions (I can think of bottling and packaging, some automotive production, I’m sure there are a few others that still have a more traditional “line factory feel characterized by high volumes and low product mixes), but the rank and file manufacturing left in the United States looks more like our oil and gas client. I’m going to even go out on a limb and put a number on that I’d say 80% of the US manufacturing base operates in a high mix low volume environment. Even the very largest of OEM’s often have similar profiles.

Okay, so what’s the big a-ha moment? (I’m getting to that)

The reality is that any organization with several million dollars of metal spend (sometimes as little as $1m) can optimize their sourcing process to both mitigate commodity volatility as well as reduce costs even if they operate in high mix/low volume job-to-job sourcing environments. The logic of having over a dozen suppliers of carbon plate for a $6-9m annual spend makes little sense (I can’t think of one reason unless say the plant locations include Alaska and Hawaii and even then I think it can be done with fewer suppliers). The same analogy applies to disparate distributor spend you know the sheet, coil, bars, rods, tubes, extrusions and pipe in aluminum, stainless and steel (the regular line-card stuff if you will). Good old fashioned volume leverage, collaboration with suppliers regarding demand, the use of price indexes and other third party data to justify price adjustments all work in these types of environments.

Mitigate commodity volatility you ask? That’s the subject of a post later this morning.

–Lisa Reisman

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