Look past the scary headlines and stay focused on business plan fundamentals.
Welcome to 2023. As ready as we all try to be when beginning the annual cycle of booking orders, scheduling resources, shipping product, and oh yes, collecting payment, this year many are still tweaking their annual budgets. The effects of rising inflation and a prolonged unstable supply chain are causing many to rethink how they must operate their business to maintain margin and profitability.
Business plans always require some degree of forecasting and estimating, as well as a list of assumptions that underpin the metrics used when budgeting. In (relatively) normal years, some of these prove inaccurate, yet the majority are reliable. It could easily be argued, however, that the times we are in are not necessarily “normal” and few of the business leaders of today were around 40 years ago when inflation last escalated and was a serious economic concern. In such times as these, it is normal to find yourself rethinking basic operating assumptions and adjusting the business plan frequently to stay in step with the ever-changing cost structure and supply availability.
As daunting – if not confusing – the current business environment may appear, we must stay focused on what’s important rather than becoming absorbed by the hype. While headlines about inflation, global supply-chain logistics issues, and how they may impact the economy tend to be sensational, to me, the focus should be on the far simpler and more manageable three basics of business: profit margins, inventory management and customers.
Increasing, or at least maintaining, profit margin encompasses a variety of efforts throughout the manufacturing organization. Yes, costs are a big driver of margins and are currently impacted dramatically by the inflationary environment we are operating in. Increased costs, however, do not automatically result in decreased margins. How and from whom items are purchased can mitigate rising costs, and equally, efficiencies in manufacturing can also create savings to offset higher material costs. Finally, pricing adjustments may also be a tool to share an increased cost with the customer.
In short, maintaining margin is an all-encompassing activity that impacts all aspects of the business. During inflationary times, involving people throughout the organization is essential to both communicate the magnitude of the challenge as well as solicit ideas that may help mitigate the impact of increasing costs, and maintain or increase operating margins.
Inventory is often the first place inflation-driven cost hikes rear their head – and is often the place to focus attention to reduce both the impact of higher costs as well as the potential shortage of materials and parts caused by supply-chain disruptions. One of the keys here is to expand your supplier base. Inventory management does not just include the level of inventory on the shelf, but from whom that inventory was sourced. Multiple suppliers can expand the options of where a material or part can be sourced, as well as open some level of competitive pricing to partially mitigate increasing costs.
Over the years, many companies have diligently reduced the number of suppliers they work with to leverage the value of the “buy” from suppliers and decrease costs. In times of inflation, that strategy may not be as valuable as having a number of diverse suppliers that compete for your business with both pricing and inventory availability. Likewise, when the global supply chain is unstable, materials and parts availability expands when multiple sources are a viable option. Seeking suppliers in different locations and with alternative sources of their own could be the critical difference between having and not having parts. Managing inventory in times of rising costs and shortages of materials and parts is always critical to business success – now more than ever.
Customers are the final arbiter of any business’s success, so remaining in constant communication with them is the single most important activity company leadership should undertake. As all businesses are experiencing the same challenges – rising costs and supply shortages – working with your customer may be not only the most valuable strategy for success, but also the easiest to implement.
Openly discussing the cost and supply challenges you are experiencing, understanding customer needs and priorities, and suggesting how a customer can assist by the visibility of or timing of their orders, lot sizes, etc., may enable you to be more efficient in the manufacturing and inventory processes, and allow you to order materials and parts in a way that the extended lead times do not negatively impact you or your customer. Most of all, when being open with customers, any price increases will be understood and be met with a far better reaction than when buyers are not involved in the process.
Focusing on the basics of business has always been the most important task of every business leader. In these uncertain times, when inflationary costs and inventory availability are ever-changing, sticking to the basics is still the surest way to succeed. Customer communication and involvement are critical, and actively involving all in the organization to both understand the challenges and solicit input is essential. Most of all, don’t be afraid to tweak your business plan, frequently and continually, as changes take place, events unfold, and customer input is received.
