In its World Economic Situation and Prospects, June 2023 Briefing, the United Nations reported a global inflation rate of 5.2%. Due largely to softening global demand, this number is down from the previous year’s 7.5% mark. Despite this decline, however, inflation remains well above the 2000 to 2019 average of 3.1%.
With so many unknowns impacting the economy, manufacturers must be prepared to deal with unstable and fluctuating levels of inflation. With the right preparation and response, companies can weather the storm and even find opportunities for growth. This blog will explore how manufacturers can mitigate inflation risks.
Mitigating Inflation Risks
As the cost of fuel, raw materials, labor, utilities, and so on rises, so too does the cost of production. This can squeeze already tight profit margins making it difficult for manufacturers to compete. Adding insult to injury, inflation generally curtails consumer spending making it even more challenging to meet targets and shareholder expectations. When this persists over a sustained period, the economy can slip into a recession. And the “R” word is anything but welcomed news for businesses.
When it comes to lessening the impact of inflation, preparation is the key. North Carolina State University offers industry expansion solutions to help manufacturers stem the tide of inflation. The article suggests that manufacturers adopt such strategies as diversifying suppliers, securing future contracts, and investing in technology.
· Diversify Suppliers: By diversifying their supplier base, manufacturers can mitigate the risk of price increases from any one supplier. This can also give manufacturers more negotiating power when it comes to pricing.
· Hedge Against Inflation: Manufacturers can use financial instruments, such as futures contracts, to hedge against inflation. This can help protect them from sudden increases in the cost of raw materials.
· Invest in Technology: Investing in technology can help manufacturers improve efficiency and reduce costs. This can include everything from automation technology to production monitoring systems.
In addition, some manufacturers are adjusting prices and cutting organizational costs. Scrutinizing all purchases and costs from office supplies and travel expenses to coffee in the break room, can help save money in tight times.
Inflation has a trickle-down effect from supplier to manufacturer and to the consumer. While no company likes the idea of price increases, in times of high inflation it is sometimes necessary. The best way to deal with this dilemma is to make sure that the price increase is strategic. Make sure that quality is not compromised and that the price increase doesn’t cause the product to lose its competitive edge.
Can Technology Help?
When times are good manufacturers are quick to pull the trigger on technology investments. In fact, automation accounts for more than half of all new investments made by U.S. manufacturers. But what about in times of high inflation when cost-conscious manufacturers are cutting spending? Is this the right time to invest in technology?
You bet. These investments create long-term benefits for manufacturers regardless of the economy. When implemented correctly, technology helps automate processes, reduce costs, and increase efficiency.
Automation in the form of production monitoring is especially beneficial. Real-time production monitoring software focuses on capturing and analyzing data directly from the shop floor. This provides real-time insights into key production performance indicators such as overall equipment effectiveness (OEE)to better plan production, capacity, and personnel requirements.
Production monitoring software delivers a wide range of benefits to the manufacturer:
· Production Floor Visibility: Real-time monitoring software enables manufacturers to track and visualize production activities. This data supports decision-making, reduces downtime, and optimizes throughput.
· Continuous Improvement: Manufacturers can pinpoint inefficiencies, quality issues, and process bottlenecks to support continuous improvement programs.
· Quality Control: Real-time monitoring software allows manufacturers to reduce the likelihood of defective products leaving the facility.
· Production Changes: Real-time production monitoring enables manufacturers to respond quickly to changes in demand, supply chain disruptions, or machine failures.
· Workforce Empowerment: Production monitoring software allows workers to monitor their own performance, identify areas for improvement, and take proactive measures to enhance productivity, efficiency, and skillsets.
So, can technology help? Research by The Harvard Business Review shows that companies that invested more in automation before the pandemic have weathered the crisis better than others. This was true in the past and the same holds true in post-COVID times of high inflation and other disruptions.
A Competitive Advantage
During times of uncertainty, it’s tempting to circle the wagons, cut spending, and hope for the best. And many manufacturers do just this. But those with an eye on capturing market share recognize that these are the times to pounce.
Investing in production monitoring technology can mitigate the impact of inflation through the more efficient use of manufacturing resources. This allows manufacturers to provide consumers with quality products at an acceptable price point.
In a Yale Insights interview (How does inflation Change Consumer Behavior?) the university’s School of Management’s Ravi Dhar explains that modest price increases are expected and generally accepted by consumers. Dhar says, “Perceptions of inflation are not based on actual changes in prices in the market but on the changes that draw our attention. When there are lots of news art on airfares going up 30% or gas prices going up 50%, that makes an impression.”
The point is, while a certain level of price increase might be inevitable, keeping that cost as low as possible can pay big dividends.
Responding to Inflation
In recent times, petroleum, diesel, and natural gas costs have risen dramatically along with raw material costs. These added costs create an added burden for manufacturers. Removing these items from their processes is not practical or even possible in most cases. Meaning that manufacturers must absorb such costs. The key is to mitigate their impact and those that can do this most effectively will gain a competitive advantage.
With the right preparation and response, inflation is a storm that can be navigated. By diversifying suppliers, using smart procurement strategies, and investing in technology, manufacturers can not only survive in such times but thrive.
Forward-thinking manufacturers understand that now is the time to invest in process monitoring technology. Worximity provides manufacturers of all types and sizes with real-time data to optimize production equipment, processes, and resources to their fullest. Contact us to learn more or schedule a demonstration!