How business operations can respond to price hikes

Santo Domingo.- The aftershocks of the covid-19 pandemic continue to shake the world economy, reflected in the rise in world input prices, a challenge that adds to the availability of the existing supply chain.

In the case of the United States, the consumer price index grew by 7.5 percent between January 2021 and January 2022. In Germany and the United Kingdom, the equivalent figures were 4.9 and 5.4 percent, respectively.

This increases the upward pressure on wages. Private sector labor costs in the United States rose 4.4 percent last year while in the leisure and hospitality sector, where staffing shortages have been especially noticeable, labor costs rose 8 percent while banks Central banks around the world are promoting plans to keep potential inflation in check.

Antonio Novas, partner and manager of the firm McKinsey & Company in the Dominican Republic, understands that it should not be surprising that prices are among the priorities on the agenda of senior managers.

According to a regular McKinsey & Company survey released in October 2021 among senior managers, it showed that inflation had joined supply chain disruption as one of the biggest perceived risks to growth.

At the national level, according to the Central Bank of the Dominican Republic (BCRD), it was reported that the monthly variation of the consumer price index (CPI) in December 2021 was 0.73 percent, placing year-on-year inflation, measured from December 2020 to December 2021, at 8.50 percent, a figure that exceeded the estimates made by the institution’s governor, Héctor Valdez Albizu.

Why are prices skyrocketing?

There is no simple answer. The recovery in demand is an obvious factor. After months of minimal activity during the pandemic, businesses and consumers have made up for lost time in the past year.

Another factor is the limitation of supply, since many companies had reduced production. Another factor is greater liquidity in the market, because as part of the support measures to face the pandemic, governments have boosted the money supply in the main economies to an all-time high.

The interplay of macro and micro factors is affecting different categories of goods and services in different ways. This means that the picture of price increases across economies and sectors is highly varied.

In the agricultural sector, the price of corn and wheat increased last year by 44.1 and 31.3 percent, respectively. Meat and dairy prices grew much more slowly, at 12.7 and 16.9 percent, respectively, while rice fell 4 percent.

When will it end?

The complex combination of factors that has driven prices up in unpredictable ways also makes future trends for specific materials, products or services extremely difficult to predict. In some categories, the key question buyers face is when price stability and availability will return to “normal” levels.

“We think companies can rethink their response to rising costs. They can go beyond conventional business levers and take a more holistic approach, addressing opportunities to control costs and reduce the impact of volatility across the entire spectrum of the organization’s activities,” Novas explained.

The role of business operations

He specified that business operations are one of the areas most affected by the increase in costs, they are reflected from labor, energy and materials to logistics services.

Some of the most powerful responses to rising and volatile prices require structural changes to supply chains, production footprints, and even entire business models.

Novas indicates that there are various solutions contemplated. The first step for any organization is to ensure that it has a comprehensive understanding of the true underlying costs of the products and services it purchases, for example, creating a dashboard that tracks the price trends of key raw materials and other inputs. within a supply chain, this data would help companies conduct fact-based negotiations with their suppliers, avoiding price increases.

Procuring critical inputs from multiple suppliers in different regions can improve supply chain resilience and price stability.

In the long term, companies could start with a reassessment of make-or-buy and offshoring decisions as well as reducing the number of intermediaries in their supply chains.

“The possibility of rethinking what are the necessary inputs within a production chain and within them, which can be exchanged for those that provide greater ease of acquisition, can also help improve dependence on an exclusive raw material; the idea is to preserve quality but be willing to vary the ingredients”, detailed Novas, regarding the capacity for resilience and new ways of solving the price and existence debate.

In the long term, companies could start with a reassessment of make-or-buy and offshoring decisions as well as reducing the number of intermediaries in their supply chains, bypassing mid-tier distributors and suppliers to buy directly from original producers. of materials or components.

Developing a cross-functional “business operations cost watchtower” strategy that acts as a central repository for cost data and discusses mitigation strategies could be very helpful, this could be complemented by high-level representatives from the management functions. purchasing, manufacturing, supply chain, finance and commercial, who will work together to identify, quantify, prioritize and apply the most promising levers.

win in any case

Novas points out that even if the significant increases in prices turn out to be transitory, the companies that have focused on improving their operational dynamics will enjoy a better response mechanism in the future.

“In the face of inflation, companies that adapt their business operations quickly and decisively to reduce their exposure to rising costs will be in the best possible position to maintain margins and growth even if price increases prove to be transitory. because the levers that help the organization respond to rising costs will also equip it with the tools and capabilities it needs to thrive when prices go down,” concluded Novas.

Leave a Reply