The 2nd edition of the KRM Business Solutions Fall 2011 Newsletter summarizes the Top Concerns of local manufacturers in the Portland/SW Washington area. The top worries include growing sales in this economy and controlling volatile raw material costs. Of less concern are factory capacity and labor are plentiful. Cash flows are expected to cover normal operations but new capital will be required for equipment and other growth initiatives.
Contact KRM if you would like a copy of the survey summary or to receive our newsletter.
Read on for tips on buying raw materials and a framework to analyze partners or acquisition targets.
"Buying Right is Half Sold"
I first came across this expression years ago in the grain trade. It highlights the importance of getting your cost structure right to be profitable. It is especially critical in the thin margin grain trade but the axiom applies to most business and investment opportunities, from buying raw materials to expanding your business through acquisition.
Last month local manufacturers identified raw material costs as one of the top concerns to being profitable in 2012. Raw material costs worry these manufacturers for two reasons. First, unlike other large components of their cost structure (labor for example), they don't feel they have as much control over raw materials prices. Second, raw material costs are the largest cost component for most manufacturers, averaging 45% of the total cost structure in the survey group. As companies become more efficient through lean, continuous improvement and other operational enhance-ment programs this percentage will continue to grow. How do you know if you are "Buying your raw materials Right"? Unlike grain merchants, whose core competencies include taking risk positions, manufacturer's key strengths are not predicting changes in raw material prices. Taking a long position in raw materials could result in writing off obsolete inventory; large capital requirements if sales get delayed; or margin pressure if prices decline after you have committed to buy before sales are made. Buying Right for manufacturers requires:
- Inventory systems that track and report purchase commitments, physical balances and forecast usage
- Sales order and forecasting systems that allow accurate projections of raw material needs
- Supplier relationships that allow you to shift some price and volume risk up the supply chain
- Customer relationships that allow you to shift some price and volume risk down the supply chain
- Creative ways to increase your purchasing leverage like buying consortiums or extra bank lines for specific price break quantity purchases.
When negotiating to acquire a business, Buying Right is one of the main considerations keeping buyers up at night. A common mistake made by acquiring companies is to analyze the target business in terms of similarities rather than complements. The brief article in the link below, Prosperous Partnerships, will help you analyze potential acquisition targets within a framework that provides fresh insight to your analysis.
KRM works diligently to bring new ideas and learning to our manufacturing community. KRM and our partners understand the issues described above and can help you navigate through them. Our key strength is delivering high value improvements through financial intelligence. Frequently this is accomplished through interim CFO engagements or short term, focused projects. We would enjoy exploring ways we can improve your business and help make you more profitable.
Buying right is half sold.