By Martin Kotula
U.S. prices rose at an annual rate of 8.5% in March, the biggest year-over-year jump in 41 years. The costs of doing business are going up accordingly. Inflation can seem like an irresistible force of nature, a macroeconomic tide lifting and lowering all boats regardless of seaworthiness. But it’s really more of a storm, and the smart use of technology helps weather it. Let’s look at how inflation impacts a few different parts of a business and how technology can blunt those impacts.
Sourcing and procurement
With inflation, minimizing the time between paying for inputs and charging for outputs is critical. The decision to raise your prices because your costs are going up is a complicated one. But failing to hike prices when it’s the right call erodes margins. Too often, management lacks the costing information it needs to make that right call in a timely way. A system capable of the real-time capture and delivery of all relevant purchase-order and invoice data – including shipping costs – helps management understand costs quickly. That same data can also shed light on nascent delivery delays and supply shortages that otherwise remain buried, delaying appropriate action.
Analytics can play a role here. They can provide insights based on myriad contract terms, helping management understand where a price adjustment with a supplier may be possible and whether it can be offset elsewhere in the supply chain. These systems can also parse costs on a product-by-product basis based on fuel, materials, or other inputs. A precise, immediate understanding across the product spectrum then enables a portfolio view of costs and better decisions about how to address them.
Over the longer term, a fine-grained understanding of costs feeds into strategic decisions such as the need to geographically diversify the supply chain based on supplier-concentration, geopolitical, and other risks.
Costlier inputs present a business dilemma. The easy answer is to pass costs on to your own customers through higher prices. That’s not always the right answer.
Systems can provide a holistic view of how inflation affects sort- and long-term profitability based on different sales scenarios. Doing so requires the ability to capture relevant data from many sources, scenario-plan and simulate with analytics, and present results in ways that managers can act on in pursuit of tactical and strategic goals.
Inflation affects employees in many ways. Their cost of living goes up, which puts upward pressure on wages. Supply chain and procurement professionals whose performance metrics depend on cost containment may appear to be underperforming. Conversely, salespeople may appear to be overperforming as the top line grows with rising prices.
Technologies to capture employee experience – as well as that of contingent talent – can provide real-time insights across the entire workforce. In an inflationary environment, the timely capture of employee sentiment can, for example, trigger targeted bonuses and other carrots to keep critical talent in place.
Margin pressure from inflation can lead to stingier capital investment. The faster information flows, the quicker finance can make adjustments and work with affected business units, causing less disruption. Separately, decisions related to diversifying the supply chain can impact everything from financing working capital (inventories may rise to compensate for sourcing irregularities; warehoused inputs may be worth more than when bought) to determining hedging strategies. Some companies are establishing control towers – centralize data hubs – that help cross-functional teams including finance, procurement, and sales manage the inflation challenge.
It’s not just about inflation. The systems that help companies navigate inflationary environments also help manage volatility from geopolitical or other surprise disruptions – and, for that matter, help steer through the day-to-day challenges of doing business. They establish an aligned data model and harmonized data layer to manage supply chain, customer, employee, and other master data to cut redundancy and feed analytics. They provide centralization tools to consolidate data flows across the often-diverse systems global enterprises run. And they are interconnected externally and with buyers and suppliers to enable the exchange of purchase orders, invoices, planning and forecasting data, and more.
Amid inflation, nimble action that maintains profitability while avoiding being blown off course from long-term strategic aims is the goal. The right systems are indispensable to attaining it.