Calculating Cost of Goods Sold If You're a Metal-Buying Manufacturer

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Whenever we hear about manufacturers potentially saving more money, it perks us up.

When we hear that they could be saving more money on their metal costs, it gets us going even more.

The Hackett Group recently released a report, titled the 2013 Manufacturing Cost Optimization Study (download the full report here), exploring “the aggressive reductions manufacturers are targeting in cost of goods sold, and how they are no longer relying heavily on offshoring to achieve their cost goals. Instead, they are focusing on improving internal productivity, reductions in materials costs, favorable energy prices, and supply chain improvements.”

Ahh, “reductions in materials costs” – music to our ears.

Manufacturing Cost & Investment Forecast

Hackett’s ultimate conclusions are thus: that US manufacturers’ cost of goods sold (COGS) will drop by 1% of net revenue annually in 2013 and 2014 “before stabilizing and beginning to increase after 2014 as major economies grow at or above long-term trend rates.”

After 2014, Hackett sees costs resuming again at traditional rates of inflation.

So what does the firm recommend regarding manufacturing cost optimization moving forward? A host of things, including:

  • Taking “advantage of stabilizing demand and narrowing cost differentials between regions to redefine the manufacturing, distribution, and transportation network to align network capacity, location, and structure to support future demand and strategic requirements (plant consolidation, contract mfg., new plants, etc.)”
  • Aligning “plans and execution across the supply chain and internal business functions to improve operational efficiency, customer service levels, and best use of Manufacturing and Distribution network resources”
  • Continuing to manage material costs by locking in “favorable commodity pricing through aggressive strategic sourcing; putting in place capabilities for sustained reduction though supplier partnering, category management, and advanced cost analysis and value engineering”

So if ferrous, non-ferrous or other industrial metals comprise a significant portion of your company’s spend, how exactly can you “lock in favorable commodity pricing”? How can you put capabilities in place to sustainably reduce costs through supplier partnering, or advanced cost analysis?

Strategically Sourcing Your Metal Using a Price Index

Let’s say you use a metal pricing index. Any metal pricing index. Ok, how about this metal pricing index.

Any way you cut it, there are strategic ways to use metal pricing data to reduce your company’s metal spend, or to improve supplier relationships. Here are a few to start:

  • Create greater visibility into metal part costs by giving yourself the ability to split out value-add in those costs. By breaking out the value-add, you’ll ultimately be able to lock in guarantees to keep more of your contract constant.
  • Know when your overseas suppliers’ cost increases are justified. By tracking transactional metal pricing in local markets, you’ll have a leg up on your competitors.
  • Be able to identify the most volatile metal markets and create strategies around those volatility. Using tools such as these are the best way to mitigate commodity price risk.

Stick with MetalMiner for more details and drill-down examples on these fronts – and many more – in the weeks and months to come…

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