Permit me to quickly shoot a blog on the subject of materials today. This is for entrepreneurs who are involved in some form of manufacturing, processing, conversion and similar approaches in their businesses. It has been a long time since I last wrote an article about manufacturing, but if you are curious you could read my blog entitled What an entrepreneur must know about manufacturing. Related articles that might interest you also include Top Issues an Entrepreneur Must Know about Productivity – Part 1, and Top Issues an Entrepreneur Must Know about Productivity – Part 2. These articles have something to do with materials and other productive resources, production, productivity, impact of productivity on profitability and a couple of other issues. Don’t you think these might be useful to you?
Now, by materials I mean physical things or substances whether in purely raw or natural form, modified or semi processed or fully processed that are used in the process of manufacture or production as inputs, to enable the business come up with a finished product. Some people refer to materials as feedstock or commodities. Direct materials form part of the final product but indirect ones do not form part of the final products or goods. Materials are an important part of what economists call the real sector, which refers to that part of the economy concerned with actual production of goods and services rather than buying and selling. If you want to learn more about the real sector, simply talk to a good economist. Don’t ask me the criteria to use to determine a good economist. Ok?
The problem that exists in some enterprises, small and big, is that some entrepreneurs including their managers hardly have any clue about containing raw materials costs. This makes their businesses bleed money so badly, and sometimes even cease operations or hardly make good return on investments (ROI). They could be yapping about high operating costs endlessly while their competitors in the same industry are controlling their costs and laughing (not just smiling) to the bank with their profits. You need to smell the coffee my dear entrepreneur. This is why today I thought we should talk about tips to reduce material costs in an effort to save some money for the business. Remember this, you are the one going to keep that money you save and I’m not coming to ask for it so you better take this seriously if you are an entrepreneur who uses materials in your business. Do you understand me?
What are the tips then?
- The art of buying is one major tip and focus area to enable your business reduce materials costs. Straightforward aspects such as bargaining, asking for discounts, good negotiation techniques, taking advantage of early payment discounts etc. come in handy unless you are simply not keen on them. I know some entrepreneurs will not even want to spend time negotiating claiming that they are too busy, while others feel ashamed and embarrassed to negotiate, thinking that people will assume they are poor or mean. Also, for some clueless entrepreneurs, they hardly know when the supplier is overpricing. Alternative sourcing can knock out suppliers who have the perennial habit of overpricing. Sometimes your business name, the car (motor) you drive around town or the designer suits you wear can make people overprice for you for no good reason. Don’t you agree with me? Advanced approaches such as purchasing process optimization, and hedging to address price fluctuations and safeguard against shortages could also be useful, if you can understand and implement them.
- Quality control at all stages of the production process, and elimination of waste, pilferages, defects and obsolescence. Production and conversion processes sometimes have poor controls and this translates into waste, pilferages, defects etc. Obsolescence is another culprit especially in poorly managed business where advance planning is not taken seriously. Entrepreneur, you can certainly find ways to address most of the above issues. Can’t you? You can optimize usage or consumption of materials and even recycle materials if possible or applicable? Can’t you? If you chose to be lazy and ignorant, that’s up to you! It’s your money and not my money anyway. The only problem I will have with you is that you are wasting the world’s resources, and additionally, you are not a wise entrepreneur hence spoiling this whole entrepreneurship thing. Ok? We aim to develop smart entrepreneurs through this blog.
- Use of substitute materials. Another option to reduce your raw materials costs is simply to look for, identify and make use of low cost substitutes. Now, this may sound easy but in reality it requires effort, and some entrepreneurs do not want to put in this effort. You need the brains in your business to work. You need the laboratories or thinking rooms to work. You need to brainstorm and think out of the box, even if you can’t see the box or are already out of that box. Think like a renaissance person if you can’t see the alternative materials you need. Many companies out there have found alternative and substitute materials and you are not going to be the only one left in the cold. The world is moving on. Some years back humans used to say that fuels are irreplaceable but today humans are driving cars that do not need oil. Huge oil reserves could become meaningless in the future.
- Volumes, volumes and volumes. This is one old economic theory that rotates around the principle of economies of scale. The idea is that the more volumes you do the less your average cost should be. Yes, dealing in volumes give you cost advantages if you manage it well. However, you need to know that at some point this volume agenda becomes useless and silly, because costs could again shoot up to the extent that you cannot manage. Again, when you act on volume on the supply side, you don’t need to ignore volume on the demand side; otherwise you will retreat in a disorganized manner like soldiers who have terribly lost a battle. Do you understand what I’m meaning here?
- Using the most appropriate machines and equipment, including preventive machinery maintenance. My dear entrepreneur, do you know that the machinery and equipment you use play a critical role in reducing your material costs? Do you know that your business can lose a lot of money because of poor or ill-maintained machinery and equipment? Do you know the principles of preventive maintenance, and do you really utilize this in your business? Well, only you have all the answers but you need to be serious because lack of seriousness can manifest in many ways in your business. So, you could save some money in material costs by properly managing your machines and equipment that use those materials in the process of production.
- Outsourcing part of your production. By the way, you don’t need to stick to something like glue or a postage stamp when you can’t manage it. Be smart! Business is not a matter of life or death and if you take it too seriously you may miss it altogether. You need to infuse some fun into it the way Sir Richard Charles Nicholas Branson of the Virgin brand does it. When your numbers indicate that someone else could produce for you at a cheaper cost, why don’t you swallow your pride and let that person produce for you? You need to use some common sense and stop bragging about employing so many people in your production facility located in some upscale city nobody cares to know. Ok? The bottom line of business or entrepreneurship is profitability; if you are not achieving that you are likely to lose that title of entrepreneur very soon! Period!
- Leverage suppliers by negotiating long-term partnership arrangements. You need to be able to sit down with your suppliers and negotiate some better long-term things that help sustain both their business and your business. You have got to think win-win otherwise business partners will run away from you. Don’t you agree with me? Issues such as faster delivery, better financing terms etc. are things you can negotiate about. Smart entrepreneurs can leverage suppliers in many ways towards achieving their medium and long-term business goals and objectives.
- Relocating your production facility. This is another approach to reduce material costs. This is quite a radical and major move and involves investing some money but if you consider the numbers sometimes it makes a lot of sense to proceed with it. You have got to analyse this in the long term. Many big multinational companies have done this so don’t think that it is a dumb idea. No matter the size of your business, you could consider relocating your production facility if it makes good economic sense. It may not necessarily mean you moving across oceans, continents, countries etc. Some smart moves can be done even within the same country, with huge cost savings. Isn’t this something worth considering?
- Just-in-time (JIT) procurement. This is one of the concepts that the Japanese use to outcompete the world. It principally hinges on lead time management and minimizes inventory holding and associated costs as materials are ordered when they are needed. It also works with advanced supply chain management and strategic supplier network optimization. However, you have to consider both the pros and cons of this approach depending on where you are located on mother earth. Following this principle in some parts of the world could be disastrous because of several factors beyond your control. Where logistical challenges exist for example, or where regulatory guys take forever to clear your materials, this approach may have set backs.
- Redesign of products and processes. Another vital tip to reduce material cost in your business is through redesign of products and processes. New product development for example could eliminate unnecessary product features and also eliminate non-value added materials. You could also consider reducing or eliminating completely product packaging. Additionally, refining your production process and eliminating too much waiting, movements, over-processing, over-production etc. could generate for you significant material cost savings that would make you laugh your way to the bank because your business is giving you good profits. Isn’t this also fantabulous?
- Deploy ERP systems. We are in a world of information and communication technology (ICT) advances. Many enterprises out there are taking advantage of this and you should not be the one to miss these advantages. Enterprise Resource Planning ERP) software has capabilities that optimize inventory, accelerate WIP (work-in-progress), enhance supply chain planning, enhance manufacturing execution etc. There are even more advanced approaches such as Six Sigma, Kaizen, Kanban etc. as part of lean manufacturing approaches being adopted by entities globally. Never run away from these because you are a small enterprise. Ok? Try to understand what they mean and how applicable and relevant they are to your business. At the end of the day, in a global setup your products are competing with countless similar products from other parts of the world, and no one really cares about your costs. The market always wants cheaper and better things. Isn’t this true?
So, let me now make a swift ending here. The above are some tips to help reduce material costs in your business. If material cost forms a significant portion of your business costs, you better seriously take note of the above options and determine which ones you can implement. If you chose to struggle amidst plenty of knowledge, that is up to you!
Enjoy the new week,
The Wise Entrepreneur