In 2022, nearly every shop is dealing with dramatic increases in raw material prices. Some types of materials are going up faster than others, but nothing is immune to the disruptions in supply chain stemming from various Covid-19 supply issues, as well as the war in Ukraine, and the simultaneous increases in demand as the global economy recovers from the pandemic and demand is at all-time highs. It’s a recipe for high prices which can have a lot of negative effects on suppliers in the metalworking industry who make precision goods out of raw materials. However, there are some simple steps that can be taken to mitigate the risk of increases.
Ensure all of your customer quotes include Terms & Conditions about your ability to pass through raw material price increases. Because all vendors are being affected by price hikes, the end customer will hopefully be understanding that this is entirely outside the control of its suppliers and be willing (possibly reluctantly) to pay for higher raw material prices. But you must include verbiage on all your quotes that your prices are only good for a fixed amount of time, or are quoted with material at a certain price in effect when the order is placed. Without this escape clause, you won’t have much to fall back on when you get quoted a higher price on your materials when you go to buy it. (If you find yourself dealing with price increases without any clauses to protect you, it’s always worth going back to your customers to see what they are willing to do to help you out.)
Do a careful review of prices quoted vs. prices in effect when the order is placed. If you quoted a job 6 weeks ago at a given price for raw materials, and you did include some T&Cs about material prices, the next step is to ensure you aren’t letting those possible price increases slip through your fingers. That means including a formal process for comparing what the price was that you quoted your customer, and what your vendor will actually charge you when you place your order. If you don’t include this formal review as part of your documented and standardized process, you’re sure to forget and lose the opportunity to change prices upon contract confirmation. An order entry/confirmation checklist is a good way to ensure you don’t forget this important step. (Tip – for many buyers, price changes are easier to swallow, if you keep your unit price the same, and quote a variable “material surcharge” or something similar. It allows them to maintain the unit price inside their ERP system that they are graded on, while giving a different GL code bucket in which to account for variability in material costs.)
Get several quotes from your vendors. Don’t assume that your favorite or closest vendor will always be your best option for buying raw materials. It’s a responsibility of you as the vendor to get at least 3 price quotes from your raw material suppliers. Ensure you document and save all those quotes in a way that is easy to retrieve and review, with quote numbers, lead times, expiration dates, etc. so you can cover your bases and ensure you have the information you need to decide where to buy that material if you win the order. Don’t be shy to have conversations with your vendors about their pricing in comparison to the other material quotes you’re receiving. If a “preferred” vendor is recently ending up with the highest quote where they weren’t previously, talk to them about the factors affecting them. See if there are options you can leverage to bring costs down (an example is blanket orders, talked about in item 5 below).
Discuss creative options with your customers. Especially if you support production quantities of products that are made on a recurring basis, your customer should be able to provide some kind of forecast, or you can predict future demand based on historical demand (I fully understand this is an inexact art!). Those forecasts may be enough to put some action plans in place to mitigate material cost increases. Clients are often open to discussing creative ways they can control costs. They may be willing to have you pre-buy (ask if you can invoice for the materials in advance so you’re not floating the cash for months) the raw materials in advance, or to even buy the material themselves and have it shipped to your facility. The key here is to be completely transparent about what you’re seeing and experiencing. Most clients (at least the good ones worth keeping) want to ensure their vendors are financially stable and can continue to support them in the long term, and of course they want to keep costs down, so they have an incentive to work with their vendors to come up with options to minimize cost increases. A creative idea I recently heard: a shop proposed to their customer was to renegotiate a temporary reduction in the customer’s payment terms. The customer had a standard Net 60 payment terms with the shop, but the shop needed a more readily available cash flow to purchase some larger quantity material buys. An LTA with the customer wasn’t able to come together fast enough to leverage current market pricing before it increased, but the buyer COULD temporarily agree to Net 30 terms. The quicker turn on paid invoices helped the shop with their cash flow limitations and they were able to maintain pricing with the customer, which otherwise would have resulted in a re-quote when the customer re-ordered with them. Because the shop and the customer both had a good relationship & were transparent in their needs & limitations, they found a solution that worked for both of them.
Consider blanket or Kan-Ban orders with your vendors. Even if your customer isn’t willing to pre-buy or provide raw materials, there are often arrangements you can make with your material supplier to help reduce cost increases. Based on the forecast or history of your client orders, it may be worthwhile to place long term blanket orders with your vendors. If your customer forecasts or blanket orders with your company protects you for a certain amount of inventory or WIP, then it’s a pretty safe bet to do the same with your material vendors. If the purchase is at your risk, then it’s worth weighing the risks of possible client cancellations or changes vs the cost savings of locking in prices before they increase in the future.
Hopefully some of these 5 tips will help you to recover possible increases in raw material prices, or protect you from future increases. If I could summarize the key element it would be communication. Communicate with your clients and vendors and within your own team. The more discussions you have, and share transparently, the more solutions will likely come to the surface. Your customers do have a vested interest in making sure that the long term health of their supply chain is intact. And if they don’t seem to feel that way, it’s worth considering if they are a customer you want to have in the long run. (See our recent blog post about this)
How Can ProShop Help? There are a number of ways that ProShop can help with the 5 points above. Here they are in order:
ProShop has a fully configurable quote T&C section with customizable lines that can be included in all new quotes and checked or unchecked to include or not. Or they can be copied from templates within the estimating module. So specific clauses about material escalations can be included for many use cases to make sure you’ve covered all the bases.
When contract review is being performed, you can have specific team members automatically notified when new customer POs are created, or Work Orders are created. Because there are no paper records needed, that review of price quoted vs. current material price can happen immediately. It’s also a matter of clicking one icon to get the entire purchase history of a material so you can easily see how the price has changed over time. And of course, you can add the requirement to your WO checklist to make sure it gets done in the first place!
Every purchased item can have multiple approved vendors and easy places to document their prices, as well as attach their quotes so they are always at hand, a week or a year later. As always, attached files are securely stored in our proprietary storage system for safety and easy retrieval from only approved users.
When it comes to providing transparency to your clients, the data is all right there and connected in a way that makes it easy to find and retrieve. We can’t make the phone call for you, but we’ll help you back up the conversations with data. If you can get them to provide customer-furnished-material, you can easily track the incoming receipt of that material and all the certifications it may come with, for automatic retrieval and collation when it’s time to ship the product back to them.
You can issue blanket material POs to your vendors, with the correct dates and quantities you want to receive. When each shipment comes in, it’s simple to track the certs, receive the shipment and generate a vendor bill for your AP process. And any future changes and adjustments are easy to make.