How Smart Manufacturers Are Navigating Interest Rate Hikes
By Lisa Anderson
Interest rates have increased by a historic amount within the last year. Increases of almost five points on such an aggressive timeline are already having a significant impact on the ability of manufacturers and distributors to fund and support their business growth. With typical business loans renewing every five to seven years, the impacts will continue to pile up.
In addition to high-interest rates for loans and lines of credit, costs have been increasing at a rapid pace during the last two years. The producer price index (PPI) rose by over 15 percent in the last two years. Typically, clients have been able to pass on part of these increases to customers, but most, if not all, have absorbed part as well, driving margins down. On top of that, wage rates have been increasing in alignment with these factors as well. Thus, manufacturers and distributors are experiencing higher input costs and higher costs to secure capital. This situation will not change anytime soon, so smart manufacturers must take control of their destiny.
Top-performing manufacturers are proactively and aggressively managing inventory. That doesn’t necessarily mean cutting inventory without analyzing the whole picture, as that would negatively impact their ability to service customers and grow the business. Instead, they are right-sizing their inventory with best-practice supply chain planning processes. Start with SIOP (Sales Inventory Operations Planning), also known as S&OP as this process defines your demand plan and sales forecast and determines how to best supply that plan to reliably service customers at the lowest cost and with the least amount of inventory tied up unnecessarily. The SIOP process will also highlight the appropriate strategic decisions required to keep ahead of changing conditions.
Beyond SIOP, best practice supply chain planning processes encompass the end-to-end supply chain from the material planning stage, where firms determine what to order from suppliers, on to production planning/scheduling to determine what to run to optimize the manufacturing facility to best serve customers while minimizing safety stock inventory. Lastly, through distribution/replenishment planning to get the right product to the right place at the right time. Depending on your manufacturing process (make-to-stock, configure-to-order, engineer-to-order, etc.), the lead times, order frequency and several other variables, there are different planning methods. In addition, it is key to provide training, mentoring and education for your planners. With a heavy dose of common sense, it is possible to accelerate cash flow and minimize the need to borrow.
This kind of strategic planning approach also offers additional benefits like minimizing costs through optimized operational efficiencies, reductions in waste, advance notice to help develop long-term contracts with suppliers and more. For example, while consulting with an aerospace manufacturer, the executive team wanted a strategy to reduce inventory to free up debt and the associated interest payments while maintaining service to customers. The end goal was to improve their ability to sell the business for a maximum price. Thus, the client established priorities by dedicating an executive to the role, providing supply chain consulting support, rolling out SIOP and best practice inventory planning processes, and then emphasizing and rewarding the team for reaching the goal, which centered on aligning the facilities to share inventory. Success followed and inventory was reduced by more than 30 percent on the core product lines.
High-interest rates are just the latest challenge. Smart manufacturers will prioritize SIOP, roll out best practice supply chain planning processes and support the process with proper resources. This is the best course to successfully navigate turbulent times and be better prepared to serve customers successfully going forward.
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 “SIOP (Sales Inventory Operations Planning): Creating Predictable Revenue and EBITDA Growth”, an e-book on how to better navigate supply chain chaos and ensure profitable, scalable business growth. A complimentary download can be found at
www.lma-consultinggroup.com/siop-book/.
