The Problem of Rising Raw Materials Costs

Posted by Nikhil Kapoor on

Today, manufacturing organisations are immensely impacted by the volatile and unstable global markets. Problems like rising energy cost, unexpected fluctuation in raw material prices and unforeseen obstacles are destabilizing the supply chains. This price volatility and difficulty to procure raw material may not just be a temporary phenomenon. It depends on the manufacturer to either absorb the additional costs or find new ways to mitigate the expenses or to pass price increase to the customer, who is already reluctant to spend.

Rising RM costs – fact or fiction?

Average across categories and time frames indicate non-food agricultural material prices increased by more than 117% since 2000, viz. 6% per annum may not appear precarious. Though the prices of rubber and cotton spiked alarmingly in 2013. On the other hand, cost of electrical power is of direct relevance to every industry and every company and that across crude oil, natural gas, coal and uranium have surged 10% per annum or 2.5 times their 2000 prices.

Agricultural commodities like corn, wheat and meat now have extremely close correlation to crude oil and so is for steel and timber. This inter-relationship also means that volatility in one resource component can trigger fluctuations in other. Thus, raw material price escalations. irrespective of industry, sector or company circumstances is inevitable and daunting reality.

Planning for future scarcity

Among all mid to large sized companies, 90% rate raw material cost among top-3 concerns to their business and that required deeper assessment of the risk with 5 to 10 year horizons, and then beyond. In case of energy, though developed countries spend significantly for estimating undiscovered global oil & gas reserves, its political and social obstacles are substantial. Apart, not much or little practical substitution of biofuel and swing away from nuclear power, further adds to the higher power cost escalations.

The future constrains in supply of agricultural raw materials is easier to estimate. Apart from climate change, the population growth impacts the demand and availability of agricultural land. The research and investment into agriculture over the last decade has stalled and seen slower transfer of best practices to developing countries. These factors draw a clear line to significant and ongoing supply side risks.

The need is, thus to mitigate the short-term risks and envision a long-term sustainability. The short-term actions are easier to take, as they involve working capital protection, cost control and the bottom line that is an ongoing challenge for all companies.

Broader measures toward sustainability need to include framework for:

1. Financial modelling of raw material inputs

The procurement departments of the company need to become agile and proficient for use of derivative instruments, which will facilitate widest possible hedging opportunities. The components to be measured would be detailed cost tracking, projections under various scenarios and risk analytics.

2. In-depth supply chain interrogation

The area of focus should be to the nearness and sustainability value of the raw material source. Upstream investments should be considered to access the crucial raw material input. Imperative would be also to invest in waste minimization technologies and programmes. Such investments will generate compelling cost savings after modest payback periods.

3. Ensure measurability for sustainability

The financial reporting is shifting to embrace wider valuation techniques and reputation management by issues, namely carbon emissions, water and energy efficiency and chemical waste management.

4. Target immediate improvement

a. Company’s sustainability vision must be embraced as a Board directive

b. Business case of “green as the new normal” should be examined for sustainable products

c. Partnership and collaboration is the key

Based on current trends, in less than 20 years the world will need between 40% to 50% more energy, water and food. In this scenario, the ongoing pressures on availability and prices of raw material are inevitable. Business leader need to embrace the spirit along with vision to adapt stewardship measures towards greener economy.

(source: traccsolution.com)

About THE BLUE INGREDIENT COMPANY

We are a team of experts in Food Technology, Business Management and Workforce Planning, with the passion to achieve results for our clients. We connect global expertise of food ingredient manufacturers with the best practices of food manufacturers. We offer various consultancy services to our client namely the management, strategic, new product development, marketing research, sales and business development, human resource planning and many more. For enquiries, please write to info@theblueingredientcompany.com

1 comment


  • Very much Informative. I love your blogs and already a follower of it. I think that when it comes to raw material so its very necessary for new business to have raw materials that perfectly resembles their business and provides complete solution to connect with its consumers.

    shakarganjmetals on

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