Inflation – without a crystal ball
All of us in the manufacturing sector are knee-deep in the throes of inflation. Price increases on raw materials and external production services are frequent. Staffing shortages are making it difficult to get supplied goods. Rising interest rates make fiscal management and growth possibilities challenging. And, no one can predict the future. So how do you successfully manage a manufacturing business during an inflationary cycle without the benefit of a crystal ball? Here are six ways we have our eyes on.
Foresee the foreseeable
While it’s only in the last year or so that people have been talking about inflation, the reality is inflationary pressures began with the pandemic – three years ago. The cascading effects of Covid – supply chain, the great resignation – made it impossible to avoid an inflationary cycle.
Today, we’re close to peak price increases but that too was foreseeable. The reaction to inflationary conditions by the governments of most Western countries has been to offer various forms of assistance. Unfortunately, by putting money into the economy, those assistance programs have contributed to inflation. In addition, interest rate hikes by central banks could be predicted. The common economic wisdom is that interest rates should be one and a half to two points higher than inflation. Rising costs and prices forced the hands of central bankers.
In this market, you have to be a smart buyer, exploring every possible avenue and looking for better prices and better value. For example, it took us several months to secure the supply of materials we need to make our RollX™ wheels. When we found it at a favourable price point, we committed to quantities that will allow us to maintain RollX production for months. The same is true for the plastics we use to make Envirothane™ wheels.
This also applies to capital investments – except the stakes are higher. When spending hundreds of thousands, if not millions, of dollars on equipment, manufacturers need to make well-informed buying decisions. Over a year ago, we committed to a new 300-ton stamping press and locked in the price. When we take delivery later this month, the market price for that machinery will be much more than we paid.
There’s no question that we are now seeing some of the highest price increases in years on our input materials and services. We’re doing everything we can to keep prices stable. That includes improving productivity and considering some creative work-week options for our employees. We haven’t raised our prices in a year and with the current market conditions, that’s quite an accomplishment.
Higher interest rates add a new dimension to decisions about whether to buy from overseas suppliers. Longer lead times mean that buyers’ money is tied up for much longer. When you have to pay 5% interest for two months to get overseas products, it eliminates most of the cost savings. Add to that the uncertainty of both the quality and accuracy of what is received, and it makes more and more sense to buy North American. We’re getting many calls every week from customers who want to shift to onshore suppliers.
The Opportunity Cost of Investing
Manufacturers today have a difficult choice. On one hand, they can invest in their businesses, often having to borrow money at higher interest rates to make that happen. The return on that investment is far from guaranteed and can only be realized over a significant period of time. Success depends on the effectiveness of sales efforts and market conditions. On the other hand, business owners can invest their money and earn 5% or more. It’s guaranteed and it’s immediate. It’s hard not to make that choice. Many businesses that are not operating well or don’t see a solid future for themselves, will choose to take the money. We’re all in on investing in the future of Algood.
Follow the Cycles
There are natural cycles that govern the ebb and flow of business in various industries. Periods of declining growth are generally followed by periods of accelerated growth. It’s possible to anticipate growth conditions by monitoring economic trends. By making investment, production, staffing and buying decisions that synced to market cycles, you greatly improve the possibilities for success.
The next year will be a test for manufacturers. Some will weather the storm and even be able to grow. Others will succumb to market pressures, deciding to put their money elsewhere or being forced out of business. Being able to stay focussed on the six items above could be the difference between success and failure.
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