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: