For many business leaders, inflation is more of a theoretical concept than a reality. After all, it's been 40 years since inflation has reared its ugly head, so it's just not been part of everyone's lived experience. Until now.
Inflation is not only driving up the cost of everything, it is also wreaking havoc with long-established ways business leaders understand, plan and forecast product demand, supply chain resources, inventory and cash flow. Formerly reliable ways of doing these things just won't hold up in inflationary environments.
The question everyone needs to ask is, what will? Let's take a closer look.
Food, rent or mortgage, and gas prices are hitting consumers hard, leaving them with less wallet share for non-essentials. This means your company needs to get even better at demand planning, forecasting, and sensing consumer behavior, which in turn drives manufacturing, transportation, inventory management, and sourcing of raw materials. You'll need to include leading market indicators, real-time consumer trends, and other external data signals into demand forecasting to better predict forward-looking product mixes and volumes.
It feels like a perfect storm on the input cost front, doesn't it? Materials are scarce and pricy - and getting what's available shipped to your manufacturing plants and warehouses is taking longer and costing more. At the same time, you've got the Great Resignation underway, driving up labor costs.
All this has put significant pressure on margins. Business leaders need to better plan resources and materials. For example, they need to account for variability ahead of time and have scenarios prepared to balance cost with service and alternate use of resources and carry multiple market scenarios into the regular sales and operations meetings so they can respond swiftly as trends solidify.
As a result, now you need to closely monitor and optimize management of working capital and inventory buffers. This is key, because when your business needs cash, the last thing you'll want to do is borrow at high rates while capital is tied up in unused inventory. You need to know exactly what's needed and manage available inventory closely and effectively based on real-time variability of demand and supply.
Thriving amidst these inflationary impacts will require:
Closer alignment between departmental disciplines and the finance department
A digital platform that records all transactions as they happen and interoperates this data for accurate modeling, planning, and forecasting
Tying in external data sources (such as economic data) and supply chain networks
Inflationary dynamics are changing so quickly, CEO's might wake up Monday morning to dramatic economic changes affecting revenue, cost, and margin assumptions. As a result, finance, demand, and supply chain planning must be closely coordinated on a frequent basis. Know your cash position in real time to make informed planning and budgeting decisions.
These strategies will enable your business to be more predictive, prepared and agile, which is vital to navigating economic ups and downs. Many companies are beginning to engage in probabilistic planning, where they develop multiple planning scenarios based on best, worst, and "middle" or "likely" realities so they can respond swiftly as things change.