Louis Columbus Louis Columbus
Principal

Managing Pricing During Supply-Chain Uncertainty

November 1, 2022


As supply chains become more unpredictable, the more challenging it becomes to manage pricing. No one understands this more than metal formers and fabricators. Hot-rolled coil steel prices have soared by 30 percent or more in recent months. Before the latest price increases, the largest price variances had been minimal. However, many metal formers say they’ve experienced as much as six-fold increases in pricing variances. 

trainingAs a result, metal formers must negotiate raw-material price variability into their production contracts on every order, even as they see price increases of more than 200 percent for steel, 60 percent for aluminum and 20 percent for copper. Lead times also have climbed, with steel mills considering allocations for the rest of 2022 and into 2023.

Metal formers say that inventories are the "shock absorbers" they need to lessen the immediate impact of fast-rising and unpredictable prices. However, they can face severe pressure to manage inventory levels, costs and pricing in real time, which requires optimum visibility and control across raw materials, work in progress and finished goods inventory as they strive to manage their businesses. At the same time, metal formers must receive alerts on price variances and adjust pricing in real time across work in progress and finished goods, while updating their customers to align the business with rapidly changing prices.

How Metal Formers Can Stay Ahead of Pricing

Metal formers and fabricators say they face a much more competitive, fluid real-time environment in 2022 than any previous year. As a result, they’re more closely tracking customer orders, monitoring pipelines with weekly calls to customers to confirm orders, and fine-tuning demand forecasts. They also are balancing the timing of receipts and often deciding when to swap out high-priced materials for even higher-priced materials that have better availability.

While all metal formers face unique challenges in managing fast-rising raw-material costs and gaining enough visibility into future orders to plan production, those successfully doing so share a common strength: the decision to become transparent with customers on their costs and pricing. For example, a recent industry conference featured a panel of CFOs who advised manufacturers in the audience to create and adopt indexes that explain price increases and require their vendors to do the same.

“The more transparency you have the easier the conversation becomes around pricing, because customers can wrap their head around the cost drivers,” said Jason Palmi, president and CEO of Ramcel Precision Stamping & Manufacturing, Northbrook, IL. At Ramcel, customers receive a breakdown of final costs in every part of Ramcel’s pricing, including raw material conversion and any outside processes needed to fulfill each order.

“We're not in a position to take a bet on the movement of commodities and hope for the best,” Palmi explained. “We always have been very upfront, and we’ve taken a partnering approach with customers using a pass-through pricing model for years. That has helped us survive recent market crises and emerge stronger.”

Central to the success of Ramcel’s pass-through pricing model is the manufacturer’s focus on understanding what is going on downstream by having real-time visibility and control over its supply chains. This provides Ramcel with the real-time cost data needed to make the best trade-offs for customers and help them accomplish their goals.

Lessons Learned

Uncertainty over the future of raw-material and supply pricing contributes to the highest levels of risk that metal formers and fabricators have seen in decades, making accurate real-time cost, production and pricing data essential for managing operations. Discussions with executives at Ramcel and other manufacturers point to five key strategies for managing pricing.

1. Use inventory management to automatically update customer pricing based on the current cost of raw materials. For example, automating inventory management has helped one metal former significantly reduce the amount of staff time required to update highly individualized customer pricing, allowing the company to pivot rapidly and maintain margins. An integrated manufacturing reporting system that can refactor inventory valuations in real time based on pricing adjustments also is needed.

2. Capitalize on the insights and knowledge about inventory and production capacity to upsell customers. Metal formers long have used price breaks to motivate customers to place larger orders. Today, manufacturers can use insights and production capacity to offset higher material costs and increase their plant utilization by offering customers specific volume discounts.

3. Identify cost variances and scrap faster with real-time data. Metal formers can use real-time production and process monitoring to look beyond the cost of raw materials and gain insights into actual production costs. This in turn enables engineers to course-correct pricing and manage product expenses over the lifecycle of each part in production.

4. Keep truth-testing supplier forecasts and use the data to define contingency plans. Having manufacturing execution (MES) and enterprise resource planning (ERP) systems on the same database makes it possible to identify how the accuracy of supplier forecasts will impact production planning and schedules. Metal formers advise that it doesn’t take dozens of metrics to get this right. What’s needed is enough data to accurately create what-if scenarios that take full advantage of the high-demand, low-supply conditions facing many manufacturers. 

5. Integrate quoting and computer-aided design (CAD) in the same workflow. By starting with CAD drawings and detailed data of the parts customers need to produce, metal formers can streamline quoting and improve pricing accuracy. The ability to lock in orders sooner also can help alleviate the impact of fluctuating material pricing. Additionally, manufacturers can add more value by providing the expected delivery date of the order based on production scheduling availability. MF

Industry-Related Terms: CAD, Model, Point, Scrap
View Glossary of Metalforming Terms

 

See also: Dassault Systemes

Technologies: Management

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