Because we live in a global, supply chain disrupted world amidst record-breaking prices for food, commodities and oil (and all products dependent on these industries), not only are businesses looking to navigate inflationary pressures, but also deflationary pressures. Inflation can lead to deflation as consumers panic and demand softens. On the other hand, there is still a lot of money in the market and pent up demand, and so, according to the experts, it is unlikely the recession is imminent yet it looms in the future. Thus, companies must be prepared to navigate inflation as well as deflation.
Let’s start with inflationary pressures. There are several strategies for successfully navigating inflation and volatility. In addition to placing orders in advance to secure supply and pricing, think about the following
- Customer & product profitablity: Using S&OP (also known as SIOP) to analyze and make strategic decisions based on customer and product profitability.
- Proactive cost & pricing decisions: Using the information from S&OP, business intelligence, and predictive analytics to analyze cost increases and related business and market impacts, to set priorities and make pricing decisions.
- What-if assessment of manufacturing & supply chain footprint: Analyzing the impact of various what-if scenarios from S&OP and the resulting impact on S&OE (also known as planning and execution) to determine where to increase control (change suppliers, reshore/ nearshore, vertically integrate, etc.), where to offload/ outsource (temporarily and/or long-term), and where to position distribution centers throughout your network.
- Get your house in order: Think ahead and don’t be afraid to invest capital to prepare for the future while also rigorously managing cash flow, maintaining your ability to be resilient and gaining an edge with your people.
- Strategic capacity & inventory decisions: Proactively position inventory and capacity to take advantage of opportunities and maintain flexibility while minimizing the cost associated with this flexibility.
As businesses see costs escalate and customers push back on price increases, concerns about deflationary pressures increase. Of course, the truth is that it depends on your industry, your position, and many factors that are out of our control. What is largely agreed upon by the financial experts is that a recession is likely down-the-road; however, very few believe it will be near-term. No matter the exact timing, it behooves executives to not hide their heads in the sand.
In order to get ahead of deflationary pressures, our best clients are focusing on the following strategies to mitigate the effects:
- Manufacturing automation: The best businesses are automating everything that can be automated. In fact, the proactive executives have been focused on this initiative to minimize the low-skilled labor requirements since they cannot find people, wages and benefits are increasing, social distancing can be a challenge, and automating can minimize errors. There are all sorts of opportunities to automate in manufacturing environments, and as prices continue to increase, the payback increases.
- Logistics automation: Similarly to manufacturing, logistics has even more opportunity to automate. Not only has the rise of e-commerce led to a dramatic increase in workload (if not automated), but the equipment and technologies are readily available and the return on investment is significant. In some cases, it is required to simply meet customer requirements.
- ERP automation: For administration functions, planners, buyers, expediters, analysts, and more, it has become critical to meet increasing customer requirements as well as to deal with the lack of resources and the need to engage employees to retain talent. For example, unfortunately, a few clients have called because they lost key resources and needed to fill the gap, upgrade the process, and automate so that their people could focus attention on thinking about exceptions instead of mindless keying and manual processes.
- Reduce costs without decreasing service and frustrating employees: There are many ways to reduce costs. The key is to focus on innovation and the use of technology instead of simply cutting costs. Instead of thinking about cutting people (which seems to be the default for many corporate executives and Boards of Directors) as your first approach to cutting costs, use your SIOP process to dig into your cost drivers so that you can focus your innovation efforts in these areas.
- Inventory reduction to free up cash flow: It is always a good idea to ensure you are proactively managing inventory levels with changing conditions from both the demand and supply perspective. There are demand, production, capacity, replenishment, materials, and logistics planning strategies to ensure you minimize inventory in your supply chain with high service levels (on-time-in-full, OTIF). Additionally, this must tie to your strategic decisions with S&OP.
- Data analytics & predictive analytics: Undoubtedly, you’ll be able to pivot quickly and stay in front of changing conditions and take appropriate actions if you can slice and dice your demand and supply data as well as predict where to focus additional resources and what strategic decisions will put you ahead of your competition.
- Pricing, product rationalization & new product introduction: Just as customer and product profitability analysis will support you during inflationary times, this information will support you during deflationary times. Price not for the current situation, but instead for what you see occurring in your industry and the opportunities that will arise. Likewise, prioritizing which products to inactivate, upgrade and introduce will directly impact your future revenue and cost structure.
Simultaneously Managing Inflationary & Deflationary Pressures
Unfortunately, we are in unprecedented times. There is no playbook for the current situation of managing inflation, deflation, and global supply chain transformation simultaneously. The closest example is stagflation from the 1970’s; however, there are many key differences. The successful will pave the way forward. The rest will dwindle, be purchased, or go out of business. On a more positive note, the executives that prepare for this new opportunity will thrive like no other time in history. The closest example occurred during the Great Depression. It drove more companies to success for decades to come than ever before – until now.
Client Example of Simultaneously Managing Inflationary & Deflationary Pressures
The best clients are preparing to successfully navigate inflation, deflation, and global supply chain disruption simultaneously. For example, a building products manufacturer has seen unprecedented demand during the pandemic, and is seeing signs that demand will remain robust while also seeing signs of a pullback. They are not panicking. Instead, they are focusing additional attention in talking with customers and industry players to stay abreast of changing conditions and opportunities and incorporating this input into the S&OP cycle.
They are also proactively reviewing customer and product profitability and syncing sales feedback with ordering patterns and market adjustments. They have been approving and completing projects to automate, increase efficiencies, and upgrade systems and processes. As opportunities arise to cross-train, increase flexibility, secure offload capabilities, and better utilize capacity and/or supplement capacity availability in their plant network, they take advantage of them. Managing inventory levels has become a critical priority while ensuring there is sufficient inventory to support high levels of customer service. And, they have invested in people, both upgrading and adding key people where needed to support growth and innovation. Each of these elements are incorporated into the S&OP process so that they are prepared for inflation, deflation, further supply chain disruption, or whatever else might occur. The bottom line is they are prepared to take advantage of sales opportunities while proactively managing customer service, profitability, and working capital.
SIOP Is Not a One Time Solution
If one thing is clear, it is that the future is unknown and volatility is in the cards. During times of volatility and change, it is critical to stay on top of your changing market conditions and customer needs, incorporate new and changing product and service offerings, and constantly reevaluate your end-to-end supply chain for what will best position you for success.
SIOP is not an off-the-shelf solution, and it is not a one-time “magic bullet”. Instead, the most successful clients look out a minimum of a year to three years (if they have long-term customer contracts) on a monthly cadence, incorporate changing conditions, and evaluate results. Typically, they will reconfirm prior decisions and priorities and address critical changing conditions. Of course, this process must be accompanied with strong execution. If you follow this path, you will thrive whether we are experiencing inflation, deflation, or other global disruption. In fact, the resilient and innovative companies have a once-in-a-lifetime opportunity to gain significant market share during these volatile times.
Refer to our SIOP landing page for information about SIOP and how to get started on your journey. Also, read more about these types of strategies in our eBook, Thriving in 2022: Learning from Supply Chain Chaos. If you are interested in talking about what it would take to purse the SIOP journey in your business, contact us.
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Proactively Addressing Global Events to Grow Market Share & Ensure Seamless Customer Service Using S&OP