The inflationary period we’re facing now was caused by a perfect storm of events – ongoing supply chain disruptions, the post-pandemic surge of demand, a labor shortage, transportation issues, and more. This has set off a ripple effect – suppliers must pay more for materials and pass those costs on to manufacturers. Manufacturers with numerous suppliers may get hit especially hard, and in turn, must pass some of those costs on as well – eventually reaching consumers.
The good news is that there are some ways for savvy manufacturers to reduce or mitigate supplier costs and help preserve profit margins.
Identify critical suppliers
Go through a list of all your suppliers, determine which ones have the most impact on your business, and calculate how a potential price increase from those suppliers would play out. The COVID crisis spurred many manufacturers to examine their supply chain and find back-up suppliers to help reduce risk (such as locating domestic suppliers instead of overseas to reduce transportation costs and disruptions). If a specific supplier is having an outsized effect on your company, it may be time to consider your other options.
Relate and negotiate
While you won’t have much leverage with one-off commodity suppliers, the suppliers you do the most business with may be willing to negotiate and offer you lower rates. If you have a good relationship with a supplier, be proactive, acknowledge the economic pressures they are facing, and work with them to come up with a solution. It’s possible that your supplier will reduce your costs and pass them onto other smaller or more difficult customers.
Don’t get locked in
During these turbulent times, you don’t want to sign any long-term contracts with suppliers that lock you in to today’s higher prices. Instead, propose a surcharge or another kind of fee that doesn’t muddy up your standard costs, and be sure to have a process in place that allows you to review and adjust those fees.
Valley understands manufacturing
At Valley, we understand the tremendous challenges manufacturing businesses have faced over the past few years and we’re here to offer you the guidance you need to overcome those challenges and grow your business. If you need help, check out our commercial lending services, or talk to one of our financial experts today!