Study shows radical response to volatile material prices

UK manufacturers are taking increasingly radical steps to cut costs in the face of rising material prices and falling availability, says new research.

A survey published today by manufacturers’ organisation EEF and RBS bank has found that almost 50 per cent of companies have redesigned their products and processes in response to current market conditions.

Around 40 per cent of firms have substituted some inputs with cheaper alternatives and a similar number have looked to renegotiate existing contracts with customers.

More than 60 per cent have sought different sourcing options and a comparable-sized group has increased its internal monitoring and modelling of prices.

EEF chief economist Ms Lee Hopley said: ‘This is a stark illustration of the impact of high material costs that manufacturers have been grappling with throughout the recovery.

‘However, while most attention is focused on the inflationary aspects of these costs, the flipside is another story of the extent to which companies are finding innovative solutions to deal with them.’

She added that there was not a simple equation for managing rising and volatile materials costs.

‘Manufacturers have so far deftly navigated the issue using the internal tools available and being agile in managing customer relations and procurement strategies.

‘This is an issue that companies are saying they will be keeping a close eye on in the months ahead.’

The IMF has estimated a 30 per cent year-on-year increase in commodity prices and almost half of manufacturers cited managing input prices as a growth challenge, compared with a third a year ago.

Around 15 per cent of companies reported problems with the availability of some materials — critical for those in the supply chain.

Peter Russell, head of manufacturing at RBS, said: ‘Volatile commodity prices have been a continuing headache for manufacturers for some time now. They have led to compressed margins and intense efforts to remain competitive, but the battle is not over.

‘Ever more creative solutions, including different methods of hedging and financing, will continue to be sought. The need for innovation and creativity across the sector remains as high as ever.’