The second profit driver we will examine is material costs. Material costs can make up a significant part of a product’s cost structure, often many times more than labor costs, so it’s a good profit driver to focus on to find opportunities.
Breaking material costs down into its basic components, we look for opportunities to either reduce unit costs, or reduce the volume of material needed. From the unit cost side you might look for alternate sources of key items or developing leverage by consolidating suppliers. Reducing volume opportunities might include reducing part complexity or managing material yield (reducing material lost through the process in one way or another). These can all provide opportunity for improvement but the real challenge is to try to improve the way material is managed throughout the order-to-payment process. That is more sustainable from an ongoing profit improvement perspective, but it’s also much harder.
Impacting this area is complicated by the conflicting objectives of materials management. Materials managers must try to minimize inventory levels while also ensuring that product is available when required, while also minimizing distribution costs, preventing equipment downtime due to part shortages, and procuring parts and materials at the least overall cost. The contradictory nature of many of these objectives means that materials management policy has to be built around trade-offs. For example, you can lower stock levels by increasing the replenishment frequency, but it increases freight and handling costs. You can consolidate suppliers or part ordering, but it might be at the expense of higher inventory levels. You can have more stocking locations but it can increase stock and labor requirements.
So while it’s a good area to find opportunity, because the flow of materials crosses many functional borders, you just need to be wary of the inherent conflicts (and resulting consequences) any changes might make.
