Customizing Raw Material Costs

May 11, 2000
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During the past decade, all manufacturing plants have had to take a hard look at their costs, from overhead to raw materials. Even manufacturing companies with large profit margins—companies that are generally more concerned about the performance of the raw materials rather than cost—have begun looking at alternatives to improve their bottom line. Suppliers that have been able to accommodate the needs of their customers have survived, while those that stubbornly refused to change have suffered the consequences of shrinking market share. The key to success for both the manufacturer and the supplier has been teamwork.

For a raw materials supplier to become flexible, it must have a solid understanding of each customer’s needs. Conversely, a manufacturer must understand the supplier’s capabilities to ensure that its needs are fully met. By working together, suppliers and customers can achieve solutions that meet everyone’s needs—without breaking the bank on either side.

The Supplier’s Perspective

Suppliers need to learn exactly what each customer’s required performance values are. It is not necessary to produce a product that far exceeds one, some or all of these values. The key element is to produce any given value with a high confidence level of repeatability. Once the comfort margin is set for a given value, tight control on the best results is just as important as on the worst results.

For example, if the iron level of a certain product is to be no higher than 1.0% with a median of 0.5% for a particular customer, there is no reason to always provide a product with less than 0.5%. If, in fact, that is the process results under normal conditions (without added value), the supplier may want to reevaluate its limits to reflect the value of the product, and possibly increase the price to generate more income.

Raw material specifications will depend on the supplier’s current process limitations. Therefore, all parameters of the process must be studied. If there are limitations that cannot be changed (i.e., it is economically unfeasible to change them), they will become the natural parameters for the raw material selection process.

Raw materials are natural resources; therefore, the number of alterations that a supplier can make to the physical and/or chemical characteristics of the material is limited. While most customers can be satisfied before these limitations are reached, the limitations must be understood.

Customer requests are always compared to the cost of change, including tooling, space, time, manpower and co-products. Approval of any capital investments must be made in accordance with the company’s return on investment (ROI) principles. Since each company balances its cash flow at different ROI levels, each supplier must calculate whether the investments they are about to make for any given customer are feasible. While most suppliers will do everything they can to meet their customer’s needs, some requests may have to be denied because the changes would be too costly to implement.

The Customer’s Perspective

All manufacturers try to gain the most from their processes with the least amount of change. Therefore, two kinds of materials are always under the probe: the most expensive and the highest volume (pounds per batch). The gains of a new material are always compared against the cost of the change in process, recoveries, volume, the environment and other areas. Additionally, the total cost of the raw materials will always be affected by any change in the percent volume of those raw materials. For example, if a particular material costs less but must also be used less, the effect of the lower cost material will not be as apparent as if the percent volume of each component in the formula were kept the same. In some cases, the additional materials needed to balance out the formula may negate any savings achieved from using a lower-cost product. It is important that the overall cost of the ceramic body be considered when substituting new raw materials into a formulation.

To be able to accurately determine the types of products that can be used in a given application, the supplier must see and understand the customer’s operation. The supplier and customer must agree on the set of limits to which the raw materials will be held. These parameters should always be challenged for the benefit of both parties as the relationship grows.

It is critical that both sides make a commitment to each other that the relationship is worth undertaking. This does not mean that the customer cannot deal with any other companies. But in this type of relationship, the customer should give the current supplier the first shot at accommodating any change in requirements before turning to another company.

The Cost Matrix

Once the needs of the customer and limitations of the supplier are understood and accepted, both parties can work together to develop solutions that are within the customer’s budget. A cost matrix is one tool that can help accomplish this task (see Figure 1).

Using a cost matrix, the supplier can show the customer how changes to the raw material will allow costs to be reduced without compromising product quality. Testing is done on the present, mid-range and lowest cost materials to determine the effects and limitations of products shown in the matrix. Axes of the matrix can be anything that will impact the cost of the material, including fineness, impurity levels, dryness, chemical composition, method of transportation, method of packaging and method of payment. Once one of the axes has been satisfied on the two-dimensional view (x and y axes), move to satisfy the other axis. The third dimension of the matrix (the z-axis) will be the last to be introduced.

In the case in Figure 1, the third dimension—the blending of the components (pyrophyllite [a] and pyrophyllite [b]) to further reduce the final cost of the raw material—comes after the agreement on the particle size (x-axis) and the alumina content (y-axis) of the new material. The blending is done while keeping the particle size and alumina content constant.

It is important that enough time be given for each change to settle into the system before the next change is accepted. The more time spent in testing, the less time will be spent in fighting the change in process later on.

A Teamwork Approach

To understand the limitations of any supplier, both the customer and supplier must study the supplier’s operations and consider all options, as well as the costs involved in making changes. For the supplier to understand the needs of the customer and produce a product that will meet those needs, the supplier must see and understand the operation in which its products will be used.

As the cost pressures for manufacturers increase, teamwork between customers and suppliers will remain critical to ensuring that the necessary raw materials remain affordable—and reliable—for decades to come.

For More Information

Contact Cihat Kutbay, Resco Products Inc., P.O. Box 7247, 3514 W. Wendover Ave., Greensboro, NC 27417; (336) 299-1441; fax (336) 854-5916; ckutbay@aol.com.

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