Inflation Headwinds Ahead – What Will Help?
Inflation Headwinds Ahead – What will help?
The new Government has their feet under their new desks, and its legislative agenda is underway. The Treasurer, in a speech to the House yesterday, stated, “The headwinds our economy is facing – higher inflation at the top of that list, along with slowing global growth – are now reflected in the revised economic outcomes and forecasts.” The RBA is responding to this bout of inflation by raising interest rates.
Nothing new here; I am sure you are all aware of this. I feel there are a couple of matters to think about here:
- What has caused this?
- What opportunities does this present
- How do we maximise those opportunities?
What has caused this?
Essentially it is a large, broad-based and persistent imbalance between supply and demand. China has been dealing with COVID in their own way by locking down cities. This has meant manufacturing plants and ports have not been able to operate at the same capacity as normal and sometimes not at all.
Add to this the situation where shipping lines reduced the size of their container fleet when COVID started and they haven’t been able to replace this capacity quickly.
Add still further the fact that we have an imbalance of container availability. That is, there are lots of empty containers, but they are not located in the places where manufacturers can load them; they are sitting idle in container parks halfway around the world from where they are needed.
Add to that still further, the war between Russia and Ukraine has reduced the availability of raw materials for many products. Ukraine is a major supplier of food (wheat as an example) through to Neon, a material required for semiconductor production. Russia is an important producer of metals like aluminium, nickel and copper used in semiconductor production. And all of a sudden, we have vehicle manufacturers not able to make or sell cars – resulting in used cars with relatively low mileage now worth more than new cars.
All these factors are contributing to the supply shortage. Governments have also been printing money and paying people, via business support payments, to stay home during COVID. So the demand for goods has increased. When demand outstrips supply, prices rise.
What opportunities does this present?
Well, firstly, the price of an item isn’t everything. I would contend that value is the most important thing of all; that’s why I am a strong advocate for EVA as a key dashboard measure. I believe the opportunities lie in your ability to understand what elements of the service you provide are important to your customers. Reliability of supply, for example. The support you provide to your customers and the level of communication you provide to them are other examples. This might be demonstrated by the number of times, and how, you reach out to them. What information can you provide about orders they have with you? Even if it’s bad news about a delay, you can enhance your reputation with customers by giving timely and accurate information about orders. Activities like this can enhance your reputation as a reliable supplier.
How do we maximise those opportunities?
I recorded a webinar with my SAC (Society for the Advancement of Consulting) associates on this topic on Thursday. When the link is available, I will publish it on my website in the Resources section.
Essentially the conversation centred on the opportunities that exist and what you need to do to take advantage of them. There are eight things you can do to thrive in these turbulent times. The overarching and most fundamental of them all is: Closely manage your Business 101 activities.
The eight things in more detail are:
- While buying more inventory is a natural reaction and “strategic purchasing” is a valid response – and I wrote about the JP Morgan survey in my last newsletter – having solid inventory management habits utilised in the business is essential to thriving. Managing your inventory tail becomes critical. If you don’t, you will have capital unnecessarily tied up in stock that is not adding value to your business and contributing to an unsatisfactory cost to serve (discussed below). If you buy more in general or as knee-jerk, then you risk buying up things that won’t move. Capital deployment will become more important as the cost of money increases.
- Cash flow. Buying more inventory and your strategic purchasing efforts will eat up your cash. You need to improve your monitoring and management of your cash. ERP systems are often weak at helping you manage this. Make sure you are getting accurate and timely information on your cash management position.
- Supplier relationships are important so take steps to improve them with all, but specifically your key suppliers. High-quality collaboration with multiple tiers of your supply chain. Most breakdowns in the supply chain during this disruption have occurred in second and third tier companies. Take steps to build relationships and communication channels with your second and third tier suppliers.
- Understanding customer profitability will become essential. I have had many clients who initially did not understand that while their sales were rising, their profitability was reducing. Undertaking a detailed “cost to serve” analysis will be critical to thriving in these difficult times. It will identify those customers who are profitable and, more importantly, those who are not. It will help identify what products add value to the business and those you should stop selling. Move your focus to serving those customers and add value to your interactions.
- The ability to raise prices will also be critical. Look for opportunities to add value.
- Engage with your sales team to ensure you compete on “Value Delivered”, not just price. Ensure you understand your margins and what impacts them.
- Having the right people supporting you matters.
- Look for opportunities to innovate. Innovation will always place you at the head of the pack and gives you that value advantage over price.
© David Ogilvie