Lean makes mathematical sense

By Hugh Williams

- Last updated on GMT

Related tags: Raw material costs, Cost

Lean makes mathematical sense
Here's a riddle for you: Your raw material costs are going up rapidly. Your customers are by nature very price sensitive. Increasing your prices with...

Here's a riddle for you: Your raw material costs are going up rapidly. Your customers are by nature very price sensitive. Increasing your prices with them is difficult at the best of times. Now, their sales are not growing as fast as they had hoped, and they do not want to raise prices. So who pays for the increase in material costs?

How easily an increase in costs filters through a supply chain varies enormously between industries. For some it gets passed on to the consumer very quickly. Not so in the food Industry. Here, manufacturers are caught between a rock and a hard place!

The latest retail figures suggest that costs are increasing two to three times faster than volumes. They are keen to keep their prices low due to stiff competition for a slice of a cake that is likely to get smaller over the coming months.

A food supplier client of mine recently told me that he desperately needed to increase his prices by 20% to cover the increase in raw material costs. This kind of hit cannot go through as a lump, unless there is a true crisis.

So how do you solve at least part of the riddle? Well, while you have probably had more than enough of the word 'lean', there is still plenty of fat in supply chains. Although this is costing businesses dear, some companies are almost oblivious to lean thinking.

Another of my clients has just confirmed that it has managed to reduce its inventory by 30% without adversely affecting customer service. Since the true cost of holding stock is about 35% (all inclusive) on top of its value, this is a real saving that can buffer against other rising costs.

If you too could reduce your costs in this way and on this scale, other increases would not hit you as hard. I know that lean alone will solve the whole riddle, but remember that lean is also about taking less risk and compensating with more flexibility. In the current climate, I think we could all do with more of that.

Hugh Williams​ is founder of supply chain planning specialist Hughenden

Related topics: Supply Chain, Services, IT

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