Five Ways Manufacturers Can Mitigate the Hit of Inflation

Inflation recently hit its highest level in decades, and this is having a major impact on manufacturers. True, there are recent signs that inflationary pressures may be moderating slightly, but this is itself a mixed blessing, as a recession may be on the horizon, which will cut margins on end products (especially in CPG) without necessarily reducing input costs. How will businesses cope?

No direct supply means no revenue

Supply chains, already severely disrupted by a series of shocks, notably the pandemic and now the war in Ukraine, face continued turmoil as sanctions bite and key supply sources are cut off. Companies are faced with severe inflationary risks, putting pressure on their own margins. Apart from supply chain disruptions they face increasing regulatory pressures and societal expectations to follow sustainable best practices. A dilemma for stakeholders, notably investors.

The rising cost of direct materials is a constant challenge to bottom-line results across all manufacturing and process industry sectors. Accounting for 20-80% of the cost of finished goods, the prices paid for materials and components that make up the final product that is sold to the end user (whether consumer or business) are beyond the immediate control of the manufacturer. Yet the organization has a responsibility to its customers, its shareholders, and its partners, to make every effort to minimize the impact of commodity price volatility on its supply chain operations.

So, what is to be done?

Cutting back on spending is simply not an option in many, if not most situations. For manufacturing companies, no supply of direct materials means no sales, which means no revenue. Building up inventory is a gamble, even if the cost of direct materials does increase significantly, as it involves tying up cash that could be better deployed to drive revenue.

Hedging may make sense if there is significant risk exposure that cannot be easily avoided, or the costs are passed onto customers. It’s a strategy that some companies have undertaken to reduce the risk of commodity volatility, but the strategy of advanced sourcing through the use of enabling technology has proven in many cases to have a more significant and beneficial impact on the supply chain as a whole.

Here are five ways in which companies can leverage sourcing technology to avoid or at the very least mitigate the impact of inflationary pressures:

1. Improve spend and supply chain visibility

Everything else a company does on the supply side depends on optimizing visibility on spend and supply chains. Where is spend focused and where are supply chain risks most acute? Even in inflationary times, spend analytics software can help identify opportunities for savings. Supply chain risk management technology such as riskmethods and GoSupply, integrated into the JAGGAER platform, enable customers to identify supply chain disruptions, often before they occur, and take corrective or mitigating action.

2. Diversify your supply network

An organisation that relies on the same old established suppliers puts itself at a massive competitive disadvantage. It should gather, maintain and update market intelligence on suppliers in key categories. And it should watch out for new market entrants in particular – they are often ready to offer discounted prices in order to gain a foothold and will go the extra mile in providing good service and high quality. However, at the same time, one must take care as a failure to exercise due diligence may turn out to be false economy.

Market intelligence and insight is vital to to do this effectively. JAGGAER provides a lot of this intelligence itself, either directly or through specialist partners such as TealBook.

3. Review contracts

Where there is competition to secure supplies in high demand from vendors, it pays to check whether there is a formal agreement on prices and minimum volumes, and conversely, where the organisation may be at a competitive disadvantage because it has no agreement. Such terms may be buried in contracts signed months or years ago. Reviewing contracts manually can be a time-consuming and expensive business. That’s why JAGGAER was pleased to launch Contracts AI, It uses artificial intelligence to quickly identify the relevant clauses in contracts and cuts the time needed to review by 50% or more.

4. Leverage advanced sourcing technology

In certain key areas of spend for manufacturing and consumer packaged goods companies, such as transportation and packaging, there are so many variables that it is virtually impossible to identify saving opportunities. Especially if the company operates multiple production plants in various geographies. A manufacturing company will only find the optimum spread of suppliers using software that leverages rules and complex algorithms, such as JAGGAER’s Advanced Sourcing Optimizer.

5. Build cross-functional teams to protect margins

Supply chain disruptions and inflationary pressures have put procurement centre-stage when it comes not just to reducing costs but also reducing margins. Companies need to establish cross-functional teams embracing procurement, R&D, operations, finance and sales (and quite possibly others) to identify where the cost pressures are, where they can be minimized, to what extent increased costs should be absorbed or passed on to the customer, or (in some cases) specific products should be discontinued. This is far from easy.

Overall energy costs, or energy consumption per plant might be known, for example, but it’s less easy to quantify how much energy is consumed to produce each product. How clear is the linkage between commodity goods and specific finished goods? Simply raising prices by (say) 5% across the board may make no sense at all, and only procurement, working with other team members, can determine what price increases make sense for what products.

What have we learned?

All of the above ways to get to grip with inflationary pressures rely on sourcing and procurement technology and data management. But while this is a necessary condition for success in the current inflationary climate, it is insufficient in itself.

Expertise and experience are also vital. Whereas most procurement software companies tend to be focused on indirect spend, JAGGAER has an exceptional track record of helping companies to optimize direct materials sourcing and procurement, especially within the DACH region, with its rich and diverse manufacturing base.