Case Study: Strategies to Successfully Navigate Inflation
By Lisa Anderson
Inflation continues to plague the world with escalating prices across a spectrum of products and services. The price of oil and gas has continued to rise and supply chain challenges persist, creating inflationary pressures across the board. Even though interest rates are rising, inflation isn’t yet getting under control. Thus, what are the best of the best doing to thrive under these extraordinary pressures?
One strategy to successfully navigate inflation is to quickly understand and evaluate your sales forecast in conjunction with customer and product profitability analysis to make appropriate decisions. For example, an industrial equipment manufacturer saw a dramatically increased need for their large filter product. Although the growth was exciting, this increase created a capacity shortfall. Of course, not all capacity shortfalls are as easy to solve as others. In this case, they increased output as much as possible but were limited by the lack of people and the appropriate infrastructure to expand the capabilities of the larger-size filters. Additionally, although their offload suppliers could support the expansion of small and medium filters, they didn’t have the appropriate infrastructure to expand the production capacity quickly for large filters. Thus, lead times were extended.
Of course, as is true with every manufacturer, the prices of raw materials and components remain high. However, not all margins are created equal. In analyzing these filters from a product profitability standpoint, they saw lower margins in comparison to the rest of their product line. Although they would be willing to invest in the appropriate infrastructure if it made sense from a strategic standpoint, based on the customer and product profitability analysis, it was determined that it wouldn’t make sense to prioritize investment in this product line. This analysis prompted the sales team to re-review large filter orders, customer profitability, priorities and pricing strategies.
In addition, the company looked at strategies to offset inflationary pressures by getting ahead of demand with suppliers and increasing efficiencies in operations while keeping customer service intact. Since material shortages continued to plague production, they prioritized material forecasts and worked proactively with suppliers to prioritize deliveries. Sales and operations worked together to align on a sales forecast and converted that forecast into a product line forecast so that they knew how many of which types of products would be needed. From there, they could derive a directionally correct materials forecast so that they could align with key suppliers, get ahead of the curve to minimize prices and prioritize critical purchases.
From the operations perspective, they focused on creating a master production schedule to see what was coming down the pike and plan appropriately. This longer-term view allowed them to put together cross-training, hiring and equipment plans. In addition, instead of jumping through hoops daily to determine if they had the materials for production and adjusting schedules constantly, they put together a production schedule for the week that was sequenced optimally in advance. This allowed them to check material availability and establish a flow with materials delivered when needed and schedules stabilized. The overall result was a 40 percent increase in output, improving efficiencies and profitability.
By staying resilient amidst changing conditions, this manufacturer successfully navigated inflationary pressures, partially offset the negative cost impacts and was able to successfully serve customers. Establishing a collaborative sales and product forecast was key to analyzing changing demand patterns and customer and product profitability while proactively managing materials deliveries and operational plans, which allowed the company to grow revenue substantially and gain market share.
Lisa Anderson is the founder and president of LMA Consulting Group Inc., a consulting firm that specializes in manufacturing strategy and end-to-end supply chain transformation that maximizes the customer experience and enables profitable, scalable, dramatic business growth. She recently released a new “Thriving in 2022” eBook download that offers insights from 22 experts in manufacturing, supply chain and technology to thrive amid the current challenges facing businesses. To download the ebook, visit:
www.lma-consultinggroup.com/thriving-in-2022.
