Raw and Processed Materials / Resource Management

Risks and Rewards

September 1, 2011
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Sourcing raw materials can provide both challenges and opportunities.



Raw material sourcing is a lot like the game of Monopoly®-when all goes well, you pass "Go," collect $200 and move on. But when the process doesn't go well, it can feel like landing on the "Go to Jail" square. Depending on the situation at hand, "rolling the dice" is a great metaphor for what it takes to get the material you need, when and where you need it.

Raw material sourcing is a science in its own right. When we factor in today's emphasis on "just-in-time" manufacturing; inventory reduction goals to save costs; and the myriad economic, transportation, and environmental issues that could be in play at any given moment, it's easy to see just how challenging it is to have everything fall into place to ensure a smooth raw-material-to-finished-product process.

Risks and Challenges

There was a time when everything we needed to sustain our lives and livelihood was available within a few miles. In today's world of interconnected economies and global distribution, however, raw material sources can be next door or on the other side of the world. The ideal situation is to have the manufacturing site located next to the raw materials source and next to the customers, but how often does that really happen?

Whatever the application, raw materials today can be affected by everything from politics to the weather. Supply chains have lengthened in both distance and the time required to obtain the materials. These impacting factors can be driven by cost, availability or both. The longer the supply chain, the greater the chance that something may go wrong.

It's not difficult to find examples of this today. Titanium dioxide supplies, which are widely used as a pigment and for "hiding" in a variety of industries, have become increasingly tight over the last year or so. Depending on the type and grade needed, a limited number of suppliers is available to choose from. Even if alternatives are available, challenges such as language, currency, and lead times still exist. In addition, it's important to ensure that the product is what the supplier says it is. Do you have the resources (both time and money) to verify, qualify and test it?

With all of these risks and challenges in obtaining raw materials, what are the rewards and opportunities? Are they worth it? Who can help, and what can be done to make this process run smoother?

Rewards and Opportunities

The rewards involved with properly sourcing raw materials can be tangible (e.g., increased profit, happier customers) or intangible (e.g., a sense of accomplishment, the feeling of a job well done). Most businesses are focused on the tangible rewards of lowering their raw material costs to increase their profit.

Local sources, while less expensive to transport, may in fact be more expensive to purchase due to other factors, such as labor costs. By obtaining raw materials from overseas, where labor costs are lower, the product cost is lower (theoretically); a manufacturer could thus obtain larger profits. Finding new or different sources of raw materials with different properties than the local supplies may provide opportunities for innovative products that can help separate your business from the competition.

Opportunities can also come in the form of finding new uses or markets for your products based on a supplier's knowledge of their product and where they sell. For example, if your materials are only sourced locally, the supplier may be unaware of an alternative use or market for their product that could be thousands of miles away.

How can a manufacturer ensure they get the right material, at the right price, when they need it? Many can and do source their own materials, and have technical departments with the ability and resources to identify, qualify, and monitor their various raw materials and the products in which they are used. That said, no one person can know what materials are available from everywhere. Depending on the size of the manufacturer and their resources, they may not be willing or able to handle all of the sourcing themselves.

The Role of Distribution

The simple economic law of distribution is to buy in bulk and sell in less than bulk quantities. Distributors service those manufacturers that either don't have the need, space or desire to purchase large quantities of the material (or widget) in question.

Raw material distributors, on the other hand, can and do far more than just buy and resell. They source raw materials for customers in order to serve a need in the market. Distributors deal with all of the same challenges and risks that the manufacturers do and often shield the manufacturers from feeling the effects of a product shortage, whether it is due to transportation challenges or a production issue.

Distributors can also bring new materials and new uses for existing materials to the attention of a manufacturer to aid in the creation of new business or opportunities for their customers. They can also act as the "warehouse" for a customer that does not have space or does not wish to deal with the costs of having inventory onsite.

Distributors add value to the supply chain by enabling small manufacturers to purchase the same material as larger manufacturers; they also provide manufacturers with a wider range of raw material sources to choose from. Distributors can provide material for developmental pre-production testing prior to full manufacturing scale-up, as well as benchmarking of materials vs. other offerings.

All of these services have a cost that is added to the cost of the original materials. Cost and pricing are frequently a matter of discussion between distributors and manufacturers. What is the cost of sourcing the raw material, taking delivery of the raw material (along with all the necessary transportation hurdles), stocking the raw material and delivering it to the manufacturer? What is the value of having the material in stock and available when the manufacturer gets a last-minute rush order and needs the raw material yesterday? What is the value of having an uninterrupted supply of a key raw material when the suppliers' direct customers are on allocation? These are all questions that must be answered by the manufacturer when considering the added costs of using distribution.

Distributors can be an important ally and business partner in staying ahead of the competition and developing innovative, profitable products for the marketplace. Sourcing raw materials is a challenging process in today's world, but having a key partner in that process can help manufacturers continue their success and provide new opportunities for growth.

For additional information, contact R.E. Carroll, Inc. at 1570 North Olden Ave., Trenton, NJ 08638; call (800) 257-9365; fax (609) 695-0102; email ceramicsinfo@recarroll.com; or visit www.recarroll.com.

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