12 May 2020
Topics in this article
  • Cost Optimization
  • Finance & Procurement

Price volatility is here. We are going to have price pressures both up and down at the same time! Suppliers are going to hide behind a narrative of disruption to try to justify changes beyond the necessary, which will ultimately be to your dis-advantage and not match the underlying reality. You need to pay attention and implement supply chain strategies.

Repricing is going to happen because supply and demand have been disrupted in short order and not in equal measure across the board.

The four horsemen of the inflationary apocalypse are riding towards you! Many manufacturing industries face supply market disruptions of varying levels of duration and intensity, which will produce inflation.

First, industries have shut down production, which has taken spare stock and capacity out of the market. As businesses reopen, there will be a delay before they get back to normal as they struggle to source all of the parts needed from supply chains getting up to speed at varying rates.

Second, many conversations with CPOs of FTSE and Fortune 500 suggest future costs of operation will be higher. For some time, businesses will struggle to return to previous efficient operations pre-vaccine. Offices will have to adapt to some degree of social distancing and additional costs. Factories will run with more stock and less just in time, so that they can accommodate future swings better. These companies will not move back to sole-sourcing of critical products and services – they will choose to manage risk by putting their eggs in more than one basket, seeking to manage the risks now associated with both just-in-time inventory management and low-cost county sourcing. They will accept a loss of some economies of scale (i.e. higher prices they will want to pass on) as a result. This may result in mild de-globalizing as organizations re-shore, near-shore or multi-shore.

Third, some suppliers (particularly smaller ones) will not come back – cash has drained, and for those that survive the crash, growth will also leave casualties because growth requires capital to fund it. There will be markets where competition diminishes, unleashing more attempted price hikes and a need for supply chain strategies.

Fourth, at the other end of the spectrum, some companies have seen real growth of demand and have converted this into higher prices. We already see change. Ocado is one of the first and most high profile businesses discussing raising its prices. PPE suppliers have done the same. Others will follow.

In contrast, there are going to be industries and companies where prices will fall. They may have surplus capacity for some time to come; travel is a well-understood example. If the Chinese economy is a guide, then our economy may operate at 90% level for a while. Businesses with high fixed costs or spare capacity will be keen to make any contribution to these and will consider dropping their prices for those that seek such reductions.

In the services industry, the offer of spare capacity might be misleading. Unlike in the manufacturing of products, not all personnel providing services are interchangeable. Those that are available because demand has dropped in their specialism are not always in possession of the skills needed in other areas, which again means keeping a beady eye. An offer that looks too good to be true, in services, often is.

So you will face suppliers coming to you with demands for excessive price rises, and others not sharing with you their willingness or ability to operate at lower prices.

And one typical defense technique won’t work. Relying on normal indices won’t help. At a country-wide level, the Retail and Consumer Price Indices consist of a weighted list of goods and services reflecting an economy that no longer looks like ours does today. So for the next 12 months or more, these indices will be distorted averages at best. Some specific commodity indices will also be askew, e.g., the Brent Oil price looks even less and less useful as an indicator of global and even regional pricing oil.

To win in a dynamic market, it is essential to invest in the knowledge and experience to make fast decisions. This will mean street smart commercial capability to do more than just take orders and run processes. They need to be out in the market testing, exploring, and discovering the very best options as they arise. The best will get more decisions right than wrong in the quickest timeframe. Fast and wrong is ok. Slow and wrong is not.

The alternative is to not implement supply chain strategies and let your suppliers take advantage of your corporate naivety; you may not be thinking about it, but your suppliers’ sales teams surely are – a great global reprice is coming, and they are planning now.

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