Unfortunately, the commodity market for your bulk food ingredients often just is what it is, and it's completely out of your control.
Most people would agree that at the end of the day, there's only so much a purchasing manager do can do to lower your ingredient costs-- which includes bulk oils. You just have to go with the flow, they say, even though it could be slashing your profit margin, or possibly even sinking your business.
Well, we don't agree. We think you'll just have to get creative when it comes to how you're buying.
It's true, there's nothing that you can do about the prices mandated by the commodity market. But you can make lots of little other changes that can makem that all factor into your total price. These add up to big savings.
Here are the best 4 ways we know of to begin lowering your bulk oil ingredient costs. Even better? You don't have to wait for the commodity market to be high-- you can start saving money right now.
4 Ways To Reduce Your Bulk Oil Ingredient Prices, When the Commodity Market Is High
1. Switch To Bigger Packaging
Go big or go home, right?
Well, there's actually some truth to that. Buying in bigger pack sizes can save you pennies on every pound of oil that you buy. I know that doesn't sound like much, but it really adds up.
For example, if you switch from 35 Lb. Containers to 275 Gallon Totes, you're going to save about $0.03 - 0.06 per pound. Let's take a conservative middle ground, and assume that if you make the change, you'll save $0.04 per pound. It's time for some math folks, so grab your calculators!
$0.04 in savings x 2093 pounds in each tote = $83.72 savings per pallet
That means that for every pallet that you buy, you will save $83.72 by buying it in totes rather than in 35 Lb. Containers. Now, let's assume that you use an average of two pallets per week.
$83.72 savings x 2 pallets = $167.44 savings per week
Now you're saving a total of $167.44 each week just by switching to a different type of packaging. Over the course of the year, you'll really start to feel the difference.
$167.44 x 52 weeks = $8,706.88 savings per year
Yes, you heard that right. That's over an $8,700 savings, by making a simple switch. What does that mean to you? It means you've been paying $8,700 too much for... a lot of years now.
Before you make this switch, talk with your production team. It's only fair-- they are the ones who deal with the product on a day to day basis, and they need to be prepared for making the switch. You'll need a new system to get the oil out of the tote and on to your production line. It may take some getting used to.
Talk with both your production team and your supplier to come up with a plan for how to use the totes in you production line before, not after, they arrive at your doorstep.
If you're already using a lot of totes or drums it's time to look into a) the cost and savings of setting up tanker/flexitank deliveries or b) a returnable tote program.
2. Take Advantage of Volume Discounts
Most suppliers have bracketed pricing, which means the more you buy, the more you save.
You can use this to your advantage. First, talk with your supplier to find out exactly where their volume discounts are. Do they happen after you make a certain volume of purchases over the year (like, once you buy 100 pallets, anything you buy from there on our will be cheaper)? Or is their pricing bracketed based on how many pallets you buy at each order?
If it's the latter option, take a look at your buying cycles over the last year-- and see if you can re-arrange how to buy to meet their volume breaks.
For example, let's assume you normally order 2 pallets per week, with a delivery every Monday. Could you consolidate these orders into 8 pallets in a once per month delivery instead? As simple as that change is, many suppliers will offer a discount for that because it allows their warehouse to run more efficiently.
How much will consolidating your orders save you? It really depends on the price discounts that your supplier offers. With Centra Foods, you can save $0.03 - $0.06 /lb by hopping up to the next price break. Let's use the example above, and do the same math. Let's say that the oil you've been buying is $2.00 /lb, but now that you're consolidating your shipments, you're going to pay $1.95 /lb for ordering more at one time.
$0.05 /Lb Savings x 2093 lbs per tote = $104.65 savings per pallet, just for consolidating orders
That means that for every pallet you buy, you're now saving $104.65 extra. You're not buying more or less-- you're just changing when and how many are delivering at one time. So simple!! Let's assume you're still using 2 pallets each week in production.
$104.65 x 2 pallets = $209.30 savings per week, just for consolidating orders
Now for an annual grand total, drumroll please...
$209.30 x 52 weeks = $10,883.60 annual savings, just for consolidating orders
Trick of the trade: If you don't have enough storage in-house to consolidate, some suppliers will still offer you some (if not all) of the volume discount if you set up auto-deliveries of one tote each week. That's because you're placing all of your POs at once, and it still allows their warehouse to work efficiently and plan ahead.
3. Consolidate Your Deliveries
On a similar note, you can also get freight discounts for consolidating your deliveries. Let's assume that you're now going to ship 8 pallets every month, instead of 2 pallets each week.
Because you're now shipping what's considered a "volume shipment" (over 4,000 lbs), many freight carriers will offer a per pallet discount. This means that if you used to pay $300 per pallet, now you're going to pay $225 per pallet. Why? Because by allowing the truck to ship half of their load to one delivery location, you're helping them be more efficient too.
Remember, this is seperate from the price break points, above. If your suppliers price break happens at 5 pallets, but you can store and order up to 8 at a time, go for the 8! You'll see extra savings from the freight company that will make it worthwhile.
So again, let's do the math and see the actual savings that result from consolidating your orders, and shipping more pallets at one time.
$300 - $225 = $75 savings per pallet
You're still shipping a total of 8 pallets per month, or 2 pallets each week-- the same as above. That's a total of 104 pallets (52 weeks x 2 pallets) that's being shipped to you over the year.
$75 savings x 104 pallets ordered each year = $7,800 annual savings, just for consolidating shipments
Tip of the trade: This freight savings isn't always the case (depending on where you live) but most of the time, it is. Just get a shipping quote for a few different size shipments to find out how much you'll save.
4. Stay Informed About Each Raw Ingredient's Commodity Market
You're spending a lot of money on each different raw ingredient you use. If they are priced based off the commodity market (which most of them are, including almost all bulk oils) it's important that you stay up to date with what's going on.
Sometime in the future, you may want to lock into a supply contract. If the market is high right now, don't do it this second. Just start feeling it out. Ask your supplier questions like:
- Why is the market high right now?
- What happened to get it in this situation?
- What other kinds of things can affect the price of this ingredient?
- Is there a typical harvest time where prices often go up or down?
- What kinds of contracts lengths are common in good years vs. bad?
There can be great advantages to signing a supply contract if the market is right. For example, here's the top 4 benefits of signing a supply contract for olive oi.
Revisit the supply contract idea when you're ready and the market looks better-- just start gathering all your information now.
Your Annual Savings: The Grand Total
If you were this ingredient buyer, and you were able to put all of the new ideas into place that we discussed above, you'd see a lot of money staying in the company's pocket each year.
Exactly how much? Let's add it up.
#1) Switch your packaging = $8,706.88 savings per year
#2) Take advantage of volume discounts = $10,883.60 annual savings, just for consolidating orders
#3) Consolidate your deliveries = $7,800 annual savings, just for consolidating shipments
GRAND TOTAL SAVINGS = $27,390.48 annually
That's actually a lot of green back in your pocket, given that you only made minor changes to your buying cycles and packaging. All of these changes are quite simple, and they can be put into place with the help of your supplier.
Key Takeaways for Purchasing Managers
- You don't have control over the commodity market fluctuations in price, but there are other creative ways you can save money
- You can put these ideas into place, no matter what the market looks like today
- We have 3 top suggestions for simple changes that will save you a lot
- Get a bigger packaging size
- Take advantage of price break points
- Consolidate your shipments as much as possible for freight savings
- After that, start researching the commodity market so that you can make strategic plans for the future.
Topics: Prices & Saving Money
