Finance teams, economists, and banks have long used an estimated inflation rate of 2% for planning and budgeting. This past March, the consumer price index rose 8.5% in the U.S., and while that is expected to be the peak for 2022, experts still estimate this year’s inflation rate to be 5.5%. Worldwide supply chain issues, labor shortages, and the war in Ukraine’s effect on natural resource, agriculture, and mineral markets mean that higher prices everywhere are going to be with us for a while.
So what are corporate leaders supposed to do under these macroeconomic conditions? Is it simply a matter of raising prices to counteract inflation and maintain margins? Corporate leaders must focus on more than just profitability. There are other actions the C-Suite can take by leveraging data to chart a new course and continue on the path to digitization.
Business executives must think about how to use data to reimagine entire business cycles. Some changes LRS recommends are:
Digital, Visible, and Integrated Supply Chains: One study showed that only about half of the respondents knew the locations of their tier-one suppliers and the risks faced by them. For the same executives, only 2% knew the same information for tier-3 and beyond. This is vitally important, as many of today’s shortages, such as semiconductors, come from the lower tier of the supply chain. Organizations need to push for data to map and understand their n-tier supply chain model. Knowing where your suppliers are concentrated helps you identify and manage operational risk in the areas of regulation, reputation, and delivery, to name a few.
Strategic Repricing: Customer reaction to raising prices is unpredictable. Instead of across-the-board increases which erode customer loyalty, companies can take a more tailored approach to inflationary pricing by focusing on certain product lines or customer segments. Strategies here include raising prices on secondary products that aren’t as price sensitive for consumers while maintaining prices on key value items. Another strategic pricing approach is to intelligently segment the customer base, leverage purchase behavior data to launch promotions on groups who are more sensitive to price increases and passing increased costs to those you know can more easily absorb them. Measuring reaction to inflationary repricing by tracking sales metrics, customer reaction, your own inventory levels, and competitor’s pricing moves can become the foundation for a regular price optimization program moving forward.
Refocus Procurement Around Value, Not Just Lowering Cost: In the near-term, Procurement teams will continue to provide stability to prices paid for supplies and raw materials. Looking forward, Procurement should have a seat at the table on cross-functional strategic teams dealing with inflation mitigation. Procurement needs to be given the data and tools to pinpoint the individual drivers to suppliers’ price changes, understand the current state of those drivers, and share how to use those changes in negotiations to create new savings opportunities.
Inflation is a challenge for everyone, but it also highlights the importance of having managed, organized data that can be used by cross-discipline teams focused on corporate goals. With a solid information architecture, you’ll be able to maintain revenue, margins, and loyalty through inflation or any other large-scale disturbances.
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About the author
Steve Cavolick is a Senior Solution Architect with LRS IT Solutions. With over 20 years of experience in enterprise business analytics and information management, Steve is 100% focused on helping customers find value in their data to drive better business outcomes. Using technologies from best-of-breed vendors, he has created solutions for the retail, telco, manufacturing, distribution, financial services, gaming, and insurance industries.