Updated August 2022
Prices continue to rise throughout the supply chain. What’s your plan to manage operational costs?
It's no secret that soaring supply costs are having a major impact on the manufacturing of goods. The cost of producing everything from recreational vehicles, furniture and housing components to tools, parts and machinery has dramatically increased, impacting manufacturers and their customers nationwide.
Companies of all sizes are struggling with increased raw material prices and fluctuating supply shortages. This market volatility has left a myriad of challenges manufacturers have never encountered, making it difficult for companies to serve their customers — and turn a profit.
Why the sudden surge in supply costs?
As markets open up following the COVID-19 crisis, manufacturers are struggling to catch up with demand. Production shutdowns, revised work practices and social distancing are just a few reasons for the imbalance. Supplies of raw material have become increasingly more difficult (and expensive) to procure and ship, causing companies to either absorb the increase or pass it on to their consumers.
Rising freight costs
Since the onset of the pandemic, more consumers are purchasing retail items online, adding even more freight demands to an already taxed industry. Fewer drivers and less truck availability are adding to shipping delays, while higher fuel charges are also increasing costs.
When asked if congestion issues showed any signs of easing, Shaun Wang, LINC Systems Director of Sourcing and Procurement, told Modern Distribution Management:
“It’s basically the same, and I don’t see it easing or softening anytime soon,” said Wang. “I think it’s going to go through the good part of this year, at least through third quarter and might ease up in fourth quarter after the holiday season and all the big boxes bring in their containers.”
High demand is not the only issue driving long lead times and higher pricing. Bottlenecks and delays of cargo ships and containers at major U.S. ports are another side effect of a seemingly endless pandemic. In addition, COVID-19 has recently caused port closures in China – large cities have been shut down and nothing can go in or out to prevent the spread of the virus.
These issues combined are driving both the costs of goods and transportation higher, not to mention the costs associated with rail and warehouse storage. Container costs have skyrocketed and the cost to ship from Asia has gone up over 200%. What may have cost $3,000 per container may now cost upwards of $20,000 for shipment of those same parts. Here are some other examples of cost increases:
- Quadrupled container pricing, plus freight premiums
- Higher expenses associated with rail car and truck freight
- Increase of warehousing fees (up to $500 per day)
- Extended lead times (from 90 days to 6 months)
Rising cost of steel
Tariffs, increased demand and reduced domestic supply caused by the pandemic were the initial factors responsible for the dramatic increase in the price of steel. Today, rising steel costs are primarily attributed to supply shortage largely due to the impacts of the war in Ukraine, labor issues, as well as the lingering effects of COVID-19. Port closures in Asia are also to blame. Shutdowns in Shanghai and other Chinese cities are exacerbating global supply chain pressures, making it difficult for workers to load and unload cargo.
A tariff many manufacturers and distributors are currently dealing with is an anti-dumping duty. This is a duty that a domestic government imposes on foreign imports that it believes are priced below fair market value. Dumping refers to the export of products by a company at a price that is significantly lower than the price it typically charges in its home market. And while the intention of anti-dumping duties is to save domestic jobs, these tariffs can also lead to higher prices for distributors and, therefore, domestic consumers.
Are the rising costs temporary or here to stay? As inflation concerns ramp up, some manufacturers have begun stockpiling commodities to hold back until markets stabilize. The related price increases have been largely absorbed by producers and distributors along the supply chain throughout the pandemic, but that seems to be shifting. According to the U.S Labor Department, producer prices for goods are up 17.9 percent from June 2021 to June 2022. This means suppliers are continuing to pass the cost of inflation on to businesses and other consumers.
Dwindling Labor Pool
A new study from Deloitte and the Manufacturing Institute reports that worker shortages at U.S. manufacturers could cost $1 trillion in output by 2030. As the economy begins to open, manufacturers face two challenges. Not only do they have to contend with supply shortages and order backlogs, they can’t find qualified workers and drivers to fill roles. In fact, the manufacturers surveyed said that finding talent is 36% harder than it was in 2018, making it more difficult than ever to meet demand. Domestic drayage also continues to struggle with shortage of drivers.
New government mandates on manufacturing are also slowing production. Manufacturers can only have a certain number of people per square foot to limit the spread of COVID-19. This has led to longer manufacturer production times, thus creating longer lead times for distributors.
7 Time-Tested Cost-Cutting Strategies for Manufacturers
Rather than simply pass price increases on to your consumer, we suggest some ways you can mitigate expenses and cut costs in your operations.
1. Fastener and Tooling Selection
For applications requiring precision and performance, choosing the wrong fastener or tooling can be costly and dangerous. You run the risk of increased labor and repair costs, voided warranties, poor connection capabilities, leaks, load failure and shorter product life. Save money by consulting with fastening experts that can evaluate your operations and recommend the right fasteners and tooling options.
Related: Fastener Selection Guidelines
2. Equipment & Tool Maintenance and Repair
Broken tools and equipment slow down your production line and unplanned downtime can cost thousands. Improve production rates by routinely inspecting tooling and machinery for wear and tear before it leads to equipment failure. Check with your supplier to see if they offer preventative maintenance programs and onsite tool repair to keep your operations running full steam.
3. Improved Safety Programs
Did you know 4.1 million workers suffer a serious job-related injury or illness, costing businesses thousands every year in workers compensation costs, medical bills and lost productivity? Reduce the risk of occupational injury with safety training programs designed to address the most common safety-related issues on your worksite, such as pneumatic tool safety.
4. Automate Processes
If you are hand wrapping your pallet loads, you may be costing your company more than you think. Investing in automated routine tasks like packaging and palletizing can lead to material and labor cost savings. High-performance automated stretch wrappers can pre-stretch packaging film by 250% and offer better load containment, saving on materials and product damage.
5. Bring In a Consultant
If you’re struggling to find solutions to your operational challenges, it may be time to call in a consultant to help. Reach out to an industry expert that is familiar with your business to evaluate your current state of operations and offer recommendations on process improvements for better productivity, worker safety and efficiency.
6. Supplier Consolidation
Companies can increase their purchasing power through supplier consolidation. By selecting a few choice vendors, you can often expect better pricing, freight, shipping and handling fees as well as more personalized service. With fewer purchase orders to manage, you can also expect improved reporting on purchasing activity — helping you make better data-driven purchasing decisions. Be sure to choose a supplier that has the ability to source your supplies and the expertise to service them as well.
7. Inventory Management
Excess and obsolete inventory ties up capital that could be spent elsewhere in the business. On the other hand, missing inventory items like replacement parts can bring operations to a screeching halt. Vendor managed inventory programs help manufacturers maintain proper inventory levels, avoid stockouts and improve production rates.
LINC Systems is proud to carry a variety of fasteners, industrial supply and packaging products from top-rated brands. We also have the services you need to manage your operations more efficiently. If you would like to consolidate your supply needs and start saving time and money, contact us today by calling 800-513-9918 or visit LINCsystems.com.