- March 2026
Why manufacturing margins are under structural pressure
In recent years, manufacturing companies have faced increased cost pressure due to a number of factors such as inflation, volatile raw material prices, increased frequency and impact from supply chain disruptions. As a result, direct material costs, which represent the largest cost component for many manufacturing companies, have increased at a non-sustainable rate and put pressure on profit margins. This cost pressure is no longer temporary or cyclical, but rather a structural change in the global economy. In this article, we will dive deeper into how manufacturing companies can break a negative profit margin trend by leveraging the sourcing function.
In addition to external pressure, complex internal processes and operations can amplify the effects of external pressure.
Fragmented procurement is eroding profitability
As many manufacturing companies operate across different plants and countries, fragmented and non-centralized procurement functions are common and the cause of many problems. Ways of working, processes and supplier relationship management become scattered and silo-based, which leads to a fragmented and non-managed supplier base and procurement teams that lack the correct processes and tools to work efficiently.
Strategic sourcing as a margin lever
Companies often operate in markets or industries characterized by fierce competition and low pricing power, resulting in limited options to pass cost increases on to customers. Together, these challenges force leadership teams to focus their attention inwards for solutions, with a structured strategic sourcing program emerging as one of the most effective levers to break the trend. A well-run sourcing program focuses on the entire value chain, addressing sourcing strategy, supplier accountability, product & specification management and organizational ways of working to deliver sustainable reductions and improving long-term competitiveness.
Four sourcing levers that drive impact
To understand how to maximize the impact of a sourcing project, let’s explore four key learnings from recent sourcing programs carried out by BearingPoint:
1. Turn every stone
Direct material typically accounts for 50-70% of total product cost in manufacturing, which means that every improvement can unlock significant margin upside. Strategic sourcing programs often uncover savings in places companies have overlooked. The “turn every stone” mindset reinforces that value can be found across multiple savings levers, not limited to price. A defined program can act as the motivator to take action on the long-overlooked areas and challenge legacy decisions to enable larger structural and long-term results.
For direct material could mean overseeing how a company works with footprint optimization, single, dual and multi-sourcing and supplier consolidation within direct material categories. Looking beyond sourcing strategies, levers such as value engineering, part standardization and demand management can deliver direct impact on profitability.
2. R&D collaboration
The R&D department plays a key role in strengthening the sourcing function by maintaining accurate, up-to-date technical drawings and specifications. This enables the sourcing function to engage a wider supplier base, obtain competitive quotations, and explore innovative solutions or alternative materials that can generate meaningful cost savings.
Close, structured collaboration between R&D and sourcing ensures that cost, manufacturability, and supply chain feasibility are considered throughout the lifecycle of a product. Standardized and current documentation also simplifies supplier switching, reducing risk and dependency on single suppliers while improving negotiation leverage, resilience, and the ability to adapt quickly to changing market or supplier conditions.
3. Supplier competition
The most effective way to drive cost reduction and supplier performance is to introduce healthy competition among suppliers. By regularly benchmarking existing suppliers against potential new entrants and running structured RFQs or e-auctions, companies can create a sense of urgency and motivate suppliers to offer their best terms. This approach not only helps to secure better pricing but also encourages suppliers to improve service levels, invest in innovation, and become more strategic partners, strengthening their part in the value chain. The process of introducing competition should be transparent and fair, ensuring long-term relationships are maintained while maximizing value.
4. Raw material clauses
Introduce a raw material clause in all raw material contracts to limit volatility. By implementing clauses that link pricing to published indices or allow for periodic price adjustments based on market movements, companies can protect themselves from sudden spikes in raw material costs. This approach leads to more predictable cost structures and enables better financial planning. Additionally, it fosters trust and transparency with suppliers, as both parties share the risk and benefit from stable, long-term contracts. The raw material clause is especially important in industries where input prices are highly volatile and can have a significant impact on profitability.
What companies can expect
A well-executed sourcing program targeting direct material can typically deliver savings in the range of 5-15% of annual spend, depending on the maturity of the procurement function and the complexity of the supply base. For companies with fragmented sourcing processes or legacy supplier relationships, savings can be at the higher end of the range.
From assessment to realized savings
BearingPoint can help manufacturing companies with a structured sourcing program. The program typically starts with an opportunity assessment where key categories and areas to be addressed are investigated and an expected outcome and implementation plan is put together. The next phase includes the actual program, typically spanning 3-12 months depending on size, where RfX-processes, negotiations and other sourcing activities are conducted to realize cost reductions.
If you are interested in learning more about this topic or discussing how this applies to your organization, please contact the article author - Axel Nilsson - or Daniel Pihl.
