Technology helps manufacturers battle inflation
EXECUTIVE BRIEF
Recent inflation spikes are causing manufacturers worldwide to face potential threats to profitability and risks to customer relationships. To prevent negative pricing-related fall out, manufacturers should take a broad view of their costs, product portfolio, and margin strategies. This will help put today’s economic volatility in perspective, avoid panicked responses, and reinforce the continued need for investments in digitalization. Managed carefully, the current inflation challenges can become need-driven opportunities that embrace innovation and automation. Inflation countermeasures, such as adding product value or moving distribution hubs closer to customers, can offer long-term benefits that will continue to serve manufacturers and their customers even after the temporary inflationary price pains subside.
To successfully execute these measures, manufacturers can turn to modern software technology with advanced problem-solving abilities. Modern solutions help manufacturers to analyze the potential impact of inflation and gain insight into ways to better control waste, boost productivity, and increase value-add services—an important tactic in easing customer resistance to new pricing. The strategic combination of cost-cuts and value-enhancements will be essential, giving manufacturers powerful inflation-fighting insights and creating differentiators that will long outlast cyclical economic ebbs and flows.
Pricing and thin margins
Manufacturers that use cost-based pricing will be highly impacted by rising costs and will likely find it difficult to increase their go-to-market prices enough to compensate. Shrinking margins will be the result, putting profitability at risk. These manufacturers will need to address pricing as a big-picture issue—with raw materials, product reliability, speed of delivery, and value-add services as ways to justify increasing prices to customers.
Four common inflation-related pain points and suggested coping mechanisms
Statistica reports that the inflation rate in the European Union (EU) passed 10% (as of September 2022), with prices rising fastest in Estonia, which had an inflation rate of over 24%. By contrast, the inflation rate in France was 6.2%, the lowest in the EU at the time. The current rate of inflation in the EU is at the highest it’s ever been—its prior peak was 4.4% in July 2008. Before recent inflation spikes, price rises in the EU had kept at relatively low levels, with the inflation rate remaining below 3% between January 2012 and August 2021.
US inflation has been hovering around 8%, the highest level in the last 40 years. Global supply chain disruption, the war in the Ukraine, trade tariffs, and high transportation costs are all contributing factors to widespread, climbing inflation. High costs of raw materials are universally felt by manufacturers in all industries and regions. According to a January 2022, PwC Pulse Survey, 73% of manufacturers say they’ll need to increase prices of their goods and services to protect both gross and profit margins.
The related operational pressures—such as the cost of shipping goods—are hard to avoid. These challenges impact vulnerable start-ups as well as established enterprise-size organizations. Fortunately, for each major pain point, coping mechanisms and countermeasures are available for forward-thinking manufacturers willing to embrace modern, cloud-based technology.
1. Chip shortages and disruption
The ubiquitous nature of microprocessors—and the disruption caused by the recent shortage—shows how interconnected manufacturers, suppliers, and consumers are today, thanks to e-commerce and Internet of Things (IoT) capabilities. Many products have high tech elements. Even industrial and business-to-business (B2B) components often feature chips, sensors, and smart capabilities, making them vulnerable to shortages and related inflationary spikes and price volatility.
Even with a possible end in sight for the current chip shortage, some manufacturers, particularly automakers, are still hedging their bets by launching their own foundries for chip production. But it still may take years until the entrance of new suppliers helps balance supply and demand and stabilizes pricing.
Manufacturers can better cope with chip shortages and resulting costs hikes by deploying modern, cloud-based supply chain solutions, which will help:
2. High fuel costs and shipping
Fuel prices have climbed to startling, unprecedented levels, adding significantly to the costs of goods. Global political tensions, shifts in US drilling policies, environmental concerns, and escalating demand are among the factors contributing to a complex global situation. All regions are impacted, even ones with pipelines, fuel reserves, and relaxed sustainability mandates. While politicians continue policy debates, manufacturers must take actions to lessen the impact of fuel costs—or decide to pass costs on to customers.
3. Customer experiences and alignment
Inflation is severely impacting consumers worldwide, influencing economic outlooks and spending. Some expect a recession is on the horizon—a prospect that’s further discouraging investment. Whether a manufacturer should absorb price fluctuations or pass higher costs onto its customers is a classic dilemma. The food and beverage industry has long been shrinking packaging sizes and product value as a way of keeping prices stable. This can backfire as savvy consumers tend to notice when the number of servings in a package are reduced or ingredients are replaced.
4. Product innovation and value-add services
Manufacturers can turn to innovation to help alleviate the pressures caused by inflation and increased costs of goods—applying problem-solving skills to both operations and product design. When manufacturers escalate costs to a strategic issue, the best minds in the company can collaborate on out-of-the-box concepts. Manufacturers are problem solvers that often develop the most innovative solutions when the stakes are high and profitably is at stake. Current inflation rates pose that kind of situation. The challenge can be turned into an opportunity when technology is employed to help provide insight, document key decisions, and explore the ramifications of changes.
Overcome volatility
Inflation has hit manufacturers hard in all parts of the world. Economic experts predict that volatility and high costs may be challenges that won’t be resolved quickly. Manufacturers will benefit from examining their costs, supply chain processes, services, and product strategies to look for ways to counteract increased costs, while continuing to please customers and create positive experiences. Technology, such as modern ERP solutions deployed in the cloud, will help manufacturers make data-based decisions about cost and find innovative answers to inflation-induced issues. Being proactive and strategic about their responses to inflation allows manufacturers to tap into new differentiators and stand apart from the competition.
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