Without revealing my age, I must say it feels like I’ve gone “Back to the Future” because I remember a time decades ago when inflation rates mirrored the rates we see today, a fact that the media won’t let me forget. Unsurprisingly, explanations for the current rate environment vary depending on who I ask or what I read. Still, it always comes back to balancing supply with demand while recognizing industry, segment, and product differences. A larger question remains: how are specific industries handling the impact of inflation on prices and inventory planning?
As I shop and travel around the country and local communities alike, I clearly see the inflationary impact. Most new car dealerships seem to have become used car dealerships, thanks to the limited availability of new cars (marked with list prices well above MSRP) that have made lots sparse and used cars highly valuable. In fact, current used car prices have me thinking of selling my own vehicles and buying them back when the situation returns to “normal.”
Grocery shopping has become an adventure within itself; walking the store perimeter while looking for fresh fruit, vegetables, meat, fish, and packaged products is now a stroll of surprise, as availability and prices have changed dramatically. Eating out has also shifted as restaurants serve smaller portions at higher prices.
If that isn’t enough, fuel and energy prices are more volatile than the local weather forecast. And while we do not have the shortage issue that EMEA faces, the US has prices that have skyrocketed to heights we have not seen in ages. As a result, consumers are starting to keep cars longer, and auto parts suppliers see the impacts on their top and bottom line for maintenance-related items.
It is no secret that commodity costs have risen, too, and may now be seeing a new norm. Supply constraints and demand volatility are still growing from raw materials to finished goods. Businesses are starting to realize that planning and forecasting must include the assumption of disruption, and data must be relied on to navigate the new normal. The days of steady and dependable supply chains that enable long-term lean and just-in-time replenishment to manage costs are officially behind us.
Higher prices greatly impact procurement professionals and supply chain planners in their day-to-day roles. Inflationary environments make it challenging to determine the price increases that suppliers need to offset. This difficulty is especially cumbersome in commodity markets where commodity producers have endured years of low margins and are trying to recover in an inflationary environment. So, what can a planner do?
One option is to take the standard approach of collaborating and communicating with suppliers on ways to share risk and minimize cost avoidance, but that only goes so far.
The ideal strategy for battling inflation depends on the business scenario, product mix, and the capabilities of an organization’s supply chain planning solution. Regardless of nuance, Blue Ridge Global has the leading supply chain planning and price optimization solutions that can help an organization integrate planning and pricing to offset the pain of inflation. Additional inventory and pricing approaches include Blocking, Transferring, Hedging, Deflecting, and Operating.
- Blocking is limited to scenarios where there is high demand power and readily available inventory from multiple suppliers. In this case, buyers can refuse to accept, or block, the price increases.
- Transferring shares risk with suppliers by locking in prices for a longer period than normal in times when price forecasts are trending upward.
- Hedging enables protection against future inflation in situations where risk tolerance may be high. Hedging is common in the consumer packaged goods industry, where the need for commodities such as wheat, soy, corn, and sugar is both high and stable.
- Deflecting is used with products that have low price elasticity. Cost increases are passed on to customers and thus deflected by suppliers, which typically occurs in energy, oil, and gas markets.
- Operating is an option for companies with sufficient capital and capacity to build their inventory or produce in-house.
While there are many options, the best inflation-fighting inventory and pricing strategy ultimately depends on a company’s overall risk tolerance, operational constraints, end-product market dynamics, and supplier relationships. Various industries are seeing organizations implement multiple tactics in each category with different suppliers as they aim for an effective – and lasting- approach.