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How Manufacturers Combat Rising Inflation Costs

 

Inflation affects consumers worldwide. In June, the U.S inflation rate stood at 9.1%. 

 

The pandemic crippled the supply chain, and disruptions created shortages and increased demand and prices. To combat labor shortages, manufacturers must pay higher wages to procure enough staff. 

 

When the U.S imposed sanctions on Russia, gas and oil prices reached a record high. Therefore, transporting raw materials from the source to factories became expensive. So did the transportation cost to transport finished goods from factories to stores.

 

Manufacturers have a daunting challenge in this turbulent environment. Price increases can be detrimental to their sales. On the other hand, if they don’t keep up with inflation, their businesses won't make it.

 

The cost of raw materials directly influences the buying price of the final product. When raw materials are expensive to produce or procure, production costs go up.

 

When production cost increases, it shows in price tags. Consumers have to cut down on buying to manage everyday life. 

 

This is not healthy for manufacturers. Hence, they have to find ways to combat rising inflation to stay afloat.



How to Measure Inflation?

It all boils down to the cost of living for a citizen. It’s largely tied to the prices of many goods and services they consume.

Monetary bodies conduct household surveys to find out commonly purchased goods and services. The cost of obtaining these items is tracked over time. It may contain expenses such as:

 

  • Housing (rent & mortgages)
  • Food
  • Transport

 

The consumer price index (CPI) is the basket cost of these expenses at a given time, relative to a base year. 

 

The percentage change in CPI over a time period is consumer price inflation, also known as inflation.

For example, if the base year CPI is 50% and the current CPI is 65%, the inflation rate for the relevant period is 15%.

 

How Do Manufacturers Take Back Control of Their Profit Margins?

Traditional cost-containment methods may have worked before, but not anymore. Simply adjusting prices according to the cost of goods is easy but not sustainable.

 

Most industry leaders are looking to implement agile management systems. These methodologies prove to be quite resilient in a turbulent business environment.

 

Better Supply Chain Management 

The unavailability of raw materials and components will continue to be an issue for manufacturers.

 

One way to ensure smooth supply is to negotiate long-term contracts. An aggressive approach will be to secure availability using purchase order contracts. This will lower input costs and ensure the availability of materials.

 

Here are some proven strategies to start focusing on for better supply chain management:

 

  • Strengthen supplier relationship
  • Improve supply chain transparency
  • Improve demand forecasting
  • Improve productivity (ample warehouse, and automated production)

 

Informed Pricing Decisions

Increasing your price together with input price inflation may seem like the natural response strategy. Before you do that, figure out how the market is managing the crisis. 

 

Competitors may find it advantageous to learn about your price hike. You increase 40%, and they raise it by just 25%. Hence, panicking will only put your company at further risk of losing market share.

Some questions to start with before you make a major pricing decision:

 

What is the nature of this input price inflation. Is it temporary or permanent? If it’s temporary, avoid price changes, as customers won't forget, and it doesn’t look good on your brand image.

 

Are your competitors increasing prices? 

 

Is volume adjustment (or shrinkflation) a better strategy for your product? Is your ideal customer price-sensitive?

 

Rethinking Talent Management

Labor costs add up to a hefty amount, but you can’t operate without them.

Instead of looking for permanent or full-time workers, find ways to outsource work to freelancers or part-timers. This way, you keep labor costs low, and temporary, without increasing your budget permanently. 

 

Revisit job descriptions. Adapt them to filter by prioritizing skills over experience. A veteran could get your job done. But if their skills are outdated, you will be wasting time, and this is something you can’t afford.

 

Another way to increase workforce engagement in your manufacturing plant is to introduce training programs. There is always space for upskilling. Maybe a salary hike will motivate them to learn. Same people, more work, low cost – what better combination than that?



Conclusion

Inflation is never a walk-in-the-park. It’s a vicious game with victims from all corners of the economy. Manufacturers have to increase efforts to survive, but also have to be sensitive towards customers. 


At MMI, we have helped leading brands leverage our extensive network and sub-brands to overcome manufacturing and supply chain challenges. Our decades of experience will help you bring products to market on time both domestically and abroad.

 

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