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Innovating Around Cost Pressure

Posted By Chris Chiappinelli, August 24, 2012 at 6:03 AM, in Category: The Innovation Enterprise

Every kid knows that resources are precious; elementary school teachers hammer home that principle in countless lessons and assignments. Every purchasing manager at a manufacturing company relearns this lesson many times over.

Raw materials are both the lifeblood and the bane of manufacturing processes, the essential ingredients that lead to a saleable good. Whether it’s steel or oil, rare metals or water, that formative material is the heart of the manufacturing process. And it can be pricey. Even under the auspices of financial hedging strategies, manufacturers can still be squeezed severely by the cost of raw materials.

Too often, it seems, executives and purchasing managers throw up their hands, resigned to the whims of the marketplace. But resourceful companies respond differently: They innovate around the problem. Put another way, they invest in future cost efficiencies. This is why research and development investment is so crucial to manufacturers’ success. The successful companies spend money tackling problems at the front door, instead of brushing them off the porch, only to find them at the bulkhead, teeth bared.

We’ve seen a few great examples of raw-material innovation over the past couple of years. One of the best is the way some leading manufacturers have responded to the rising cost of rare earth metals. These metals have exotic names, such as Praseodymium, Ytterbium, and Einsteinium, and mundane uses such as helping to run LED screens and hybrid-car batteries, lending color to cubic zirconia. They hide out in a neighborhood of the periodic table often neglected by budding high school chemists. And their collective name doesn’t tell the whole story— not all rare earth metals are particularly rare. The rub is that much of their supply is controlled by companies in China. That near-monopoly has inspired rare-earth producers to raise prices, and this has hit manufacturers, most prominently automakers, right on the bottom line.

But this isn’t a story about margin pressure. It’s a story about the innovative companies that find ways to relieve that pressure.

“If you think you can keep raising the prices for those [rare earth] materials and still keep your customers, you’re crazy,” said Jack Lifton, co-founder of Technology Metals Research, in a 2011 interview with Bloomberg. “The principal customer for rare-earth metals is a global automotive industry ... That industry will engineer this stuff out.”

And so they have. Toyota announced it would innovate around rare earths, creating a hybrid engine that eschews lanthanum, neodymium, and dysprosium. Honda created an innovative recycling program for rare earth material. And GM recently said it was close to a breakthrough that would allow it to avoid the element dysprosium. A June Reuters article on GM’s efforts stated, “The price of dysprosium oxide rose from an average of $229 a kilogram in 2010 to an average of $1,454 in 2011, according to Dundee Securities.”

Rare earths attract significant attention these days, but that doesn’t mean one of the peskiest of raw materials isn’t still infuriating manufacturers. Oil is a key ingredient in many of the products we buy, and price swings in the oil market can wreak havoc on manufacturers’ bottom lines. Innovative companies have made it their business to find a way around this raw-material squeeze. Take Pepsi, which in 2011 announced that it had developed a plastic bottle composed of plant waste, devoid of the oil it had theretofore relied on. Other beverage makers have followed suit.

Not all manufacturers will go it alone. Many companies have turned to academic institutions for helpful innovations—you might think of universities as adjunct R&D departments, in fact. Some aerospace companies, for example, have turned to the bright minds at Wichita State University for advances in composite materials that can stand in place of traditional metal-based structures. And a number of Virginia-based manufacturers have joined the CCAM program to access advanced research on coatings that they hope will enhance the durability of their ships and planes.

Investments directed at avoiding the high cost and volatility of raw materials are a classic case of sow now, harvest later. So, whether it’s through an internal R&D effort or a partnership, industrial companies need to channel the agrarian past. Just as a farmer incurs risk with every planting, so every dollar you divert to R&D creates a business risk. But that’s often preferable to the risk of letting the status quo guide your business.

Chris Chiappinelli is online research manager at Manufacturing Executive.


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Written by Chris Chiappinelli

Chris Chiappinelli is the online research manager for Manufacturing Leadership. He covers enterprise software, sustainability, economic trends, workforce issues, and emerging technologies.



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