Navigating Cost Pressures: Strategic Insights for Manufacturers

As 2025 progresses, manufacturers are seeing small signs that cost pressures are easing. But inflation, tariffs, and geopolitical instability remain critical challenges, requiring a shift from reactive measures to proactive strategic planning.

The Cost Landscape

In 2024, manufacturers dealt with dual inflationary pressures:

Cost-push inflation: Rising input costs like energy and raw materials, driven by geopolitical tensions.

Demand-pull inflation: Sustained consumer demand that intensifies competition for resources.

While demand-pull inflation may cool as consumer spending goes down, cost-push pressures are expected to persist. Energy price volatility, supply chain restructuring to mitigate tariffs and the potential for new trade barriers will continue to strain margins.

To best navigate this environment, manufacturers should take into account three critical steps for planning:

1. Fortify supply chains - Manufacturers must reassess and diversify their supply chains to reduce risk and improve resilience.

Identify vulnerabilities

Use scenario planning to map supply chain risks, focusing on single-source dependencies. For instance, a transmission manufacturer that currently has a China-based printed circuit board manufacturer would need to reassess its strategy due to a high exposure to tariff risks.

Since the component is critical to functionality, the manufacturer would need to take on a significant portion of the bill of material, as it would be difficult to pass that cost to an automotive OEM.

Diversify sourcing

Explore regional or alternative suppliers to mitigate disruptions from geopolitical events. In the example above, the manufacturer would look for alternative suppliers outside of China. To account for the fact that more and more of the world is being affected by tariffs, the objective would be to grow to at least three different suppliers. In this instance, the process implies that the identified suppliers have manufacturing sites in the newly identified location.

Enhance agility

Companies should invest in technologies that provide real-time supply chain visibility, enabling them to quickly adapt to disruptions, such as tariff changes affecting key suppliers. If tariffs remain in place long-term, manufacturers may need to make significant capital investments to relocate production and mitigate rising costs.

With tariffs once again set to be enacted on March 4, many manufacturers are already testing scenarios to fortify their supply chain, seeing savings for short-term monitoring and diversifying between 5 and 15%.

2. Understand and control costs - Detailed cost analyses can uncover opportunities for efficiency without compromising quality.

Should-cost analyses

Understand the actual cost of materials and components to improve supplier negotiations. Actual costs for a single component are calculated bottom-up, based on the material used, labor costs, energy costs, manufacturing process, depreciation of tools and logistics. Using a calculation matrix, manufacturers can determine the should-cost of components, which can then be used as a baseline for further scenario assessment.

Value engineering

Simplify product designs to reduce production costs and waste. For example, an auto manufacturer who offers a car in 20 different colors can reduce the number of available colors to 10 without significantly losing customers because it has a take rate of 3%.

Process benchmarking

A gap analysis can help companies compare internal practices with industry standards to pinpoint inefficiencies. By comparing their product to a competitors’ product, a manufacturer can better identify how those products differ in design and cost, and uncover solutions to solve for inefficiencies.  

Overall, these techniques lower costs and build stronger supplier relationships based on transparency and shared goals.

3. Invest strategically for long-term efficiency - Rather than focusing solely on immediate cost savings, manufacturers should consider investments that position them for sustained success.

Prioritize automation

Reduce reliance on labor and enhance productivity. As labor becomes more cost-effective, less automation is required. So, when relocating manufacturing to higher-labor-cost countries, a manufacturer’s decision comes down to whether the CAPEX for the automated plant divided by volume is less than the necessary costs of labor. 

Build supplier partnerships

To navigate supply chain volatility and tariff uncertainties, manufacturers must establish strategic supplier partnerships that go beyond transactional relationships. Securing long-term agreements for critical materials helps stabilize pricing and reduce exposure to market fluctuations.

A strong partnership requires shared risk and commitment, meaning suppliers should have a vested interest in operational efficiency and cost competitiveness for their clients. This could involve co-investing in production capabilities, collaborating on cost reduction initiatives, or committing to volume-based pricing structures that create value for both parties. By fostering mutually beneficial agreements, manufacturers can enhance supply chain resilience, reduce cost volatility, and ensure a steady flow of essential components, even in the face of geopolitical or economic disruptions.

Align capital with strategy

Balance cost-reduction measures with long-term growth initiatives. For manufacturers, it’s about answering the question, “Do I want to use my capital to improve sales in my existing product, or do I allocate funds for future growth with a new, high-value product?”

For instance, the chemical industry’s high automation and capital intensity would make a chemical company vulnerable to supply chain disruptions and price volatility. While long-term supplier agreements can stabilize costs, companies should also diversify into higher-value products to reduce reliance on commoditized markets. Strategic repositioning—whether through product shifts, supply chain adjustments, or relocation—can enhance resilience and drive sustainable growth.

Manufacturers who wait to address rising costs risk falling behind. By fortifying supply chains, examining cost drivers more closely and aligning investments with strategic goals, companies can better navigate current challenges.

The focus is clear: prepare today to secure tomorrow.