Controlling material costs

Raw material accounts for more than half of the selling price of a cubic yard of ready-mixed concrete. Heres how to increase margins by understanding what contributes to these costs.

ince 1982, ready-mixed concrete industry pretax profit has averaged only 2.7% of sales. According to the Ready Mixed Concrete Industry Data Report, published by the National Ready Mixed Concrete Association (NRMCA), Silver Springs, Md., and compiled by Profit Planning Group, Boulder, Colo., 1995 pretax profit was a mere $2.44 per yard. So how can producers increase margins? A place to start is by focusing on a companys largest cost component: Raw materials. In 1995, material costs accounted for 52% of the average price of a yard of ready-mixed concrete sold in the United States

Figure 1. Cost components of average selling price ($57.92)

per cubic yard of concrete

Figure 2. Materialcosts-vs.-averageselling-price ratio

per cubic yard of concrete

Source for charts and tables: 1995 Ready Mixed Concrete Industry Data Report, NRMCA

By company size (production yards)

Under 100,000 100,000 to 300,000 300,000 to 500,000 Over 500,000 49.2 52.5 53.2 54.6

By region
Eastern Great Lakes Southeastern South Central North Central Rocky Mountain Pacific 50.5 50.8 55.3 57.0 48.7 50.4 51.5

(Figure 1). And selling a larger volume of concrete doesnt reduce this percentage as you might expect. According to the NRMCA survey, a producers materials costs are affected more by geographic location than by yards of concrete produced annually (Figure 2). Limited supplies of high-quality aggregates in some areas and aggregate transportation costs account for this. According to NRMCA surveys, material costs are rising fastest of all producers expenses. Since 1993, material costs for a cubic yard of concrete have increased by about $4.25 (Figure 3). Fortunately, during the same time, the average sales price of ready-mixed concrete also rose in many markets. But with domestic cement mills at full production capacity and quality aggregate reserves shrinking, raw material costs are expected to keep rising.

Material component costing

According to the 1995 NRMCA industry survey, the cost of portland cement, fly ash, and other admixtures in a typical cubic yard of readymixed concrete was $18.25, about 60% of that yards average selling price (Figure 4). In a 1994 survey, costs for fly ash and admixtures were each reported separately from cement. Each ingredient was reported to constitute 3% of a typical yards material costs. According to the survey, fine and coarse aggregates constituted about 38% of a typical yards material costs. Aggregate delivery costs were included in this percentage. Concrete production plants located at aggregate production sites reported lower aggregate costs. But due to the combined operations remote locations, costs of transportation to jobsites offset lower aggregate costs. Unlike other manufacturing indus-

tries with high material cost components of the finished product, readymix producers have a high inventory turnover index. The index is a measure of asset productivity, representing the number of times in a year producers must replenish their inventories of raw material. In 1995, the typical producer replenished total inventory 24 times, or about every 15 days (Figure 5). From an accountants view, the relatively high inventory turnover index is a good sign. Short inventory holding periods suggest strong sales activity supported by an efficient production method. But because a typical concrete producers average collection period is 42 days, he will purchase his inventory about three times before customers pay for their first delivered load. Concrete producers need to be aware of these payment lags as they negotiate material prices and terms. Producers should pass along anticipated working capital interest charges or supplier credit costs to customers who pay late. Dont become a lender for your customer.

Figure 3. 1993-1995 component costs of average selling price

per cubic yard of concrete

Figure 4. 1995 material costs

as a percentage of material costs @ $30.59/yd.

companies weigh each delivered load and use computer programs to track materials received against suppliers invoices. I Conduct physical inventories monthly and reconcile them with computer-generated perpetual inventories. If physical inventory quantities are not within 3% to 5% of book numbers, take weekly physical inventories. I Regularly check aggregate gradations and mix yields. Random yield checks will help production managers to detect batching equipment

deficiencies. your commonly used mix designs annually with the help of a local testing laboratory or a cement or a dmixt ure sup plier s te chnical servic e de partmen t. These reviews can help ensure that youre making the best use of admixtures and supplementary cementing materials. I Review the mix designs on customer shipments daily. Computer batching systems can store more than 1,000 mix designs. Confirm that performance-specified mixes with the lowI Review

Figure 5. Asset productivity

Controlling material costs
Every operation can save on materials. Here are some tips: I Document all incoming raw material deliveries daily. Assign an employee at each plant to sign and collect all delivery tickets. Many Average collection period (days) Inventory turnover Typical Sales Sales Sales Sales concrete <$5 $5-$10 $10-$20 >$20 producer million million million million 42.2 24.2 32.8 17.5 42.6 22.4 47.5 26.3 50.4 25.2

est material costs are assigned to the correct project and customer. For instance, it is not cost-effective to send a 5000-psi mix to a non-spec footing job. I Compare current month-ending material purchase quantities to last years totals. Compare cement usage against mix design produced; e.g. if you sold more cubic yards of 4000psi mix than 3000-psi mix in the current year, cement costs should be proportionally higher. I Use a control chart to graph cylinder-break test reports and pay close attention to design vs. actual strengths. When actual strengths are higher than needed, based on standard deviation, youre giving away cement. Bill Allen is a management consultant for the ready-mixed concrete industry and owner of Allen & Associates, Memphis, Tenn.

1996 Industry Data Report available

he 1996 NRMCA/RMC 2000 Ready Mixed Concrete Industry Data Report is available from the National Ready Mixed Concrete Association, Silver Springs, Md. The report provides benchmarking information from more than 150 companies. Owners and financial officers can compare income statements, balance sheets, and other operating data to their marketing and financial activities in 1996. The data analysis in the report was compiled by the Profit Planning Group, Boulder, Colo., under contract to NRMCA. All individual company responses are kept strictly confidential by the Profit Planning Group. No one from NRMCA or its staff has access to any individual result. For information contact the NRMCA at 301-587-1400.

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