Tag Archive: inflation

1. A 2022 Retrospective, and 2023 Predictions

   January 19, 2023 3:00 pm Leave a Comment

   

   Last year, we posed some questions for 2022 (see the original article here), based around a few common sense predictions on what was likely to happen in the year ahead.

   After the positive reaction to that post, we thought it would be fun to review how accurate our thoughts for 2022 were, and to consider what we think will happen in 2023.

   What did we predict in 2022? 

   Based on the experience of our collective team of consultants, our clients across multiple industries, and research into macro-economic trends, we suggested certainty around three key economic factors:

   1. The after-effects on Covid-19 pandemic would continue
   2. There would be supply chain and labor market shortages
   3. There would be high inflation

   Any reasonable assessment of 2022 would conclude that these predictions proved to be accurate.

   However, the subsequent questions that we raised ended up being less reliable predictions of what most businesses did (even though we still believe our recommendations were valid!).

   What actually happened?

   • In terms of our suggestions on Price Increases: many businesses instituted price increases in 2022, but based on anecdotal observation, many of our fears on the effectiveness and medium to long-term effects of poorly implemented price increases seem to have been well founded.

   In fact, many organizations were relatively slow to implement price increases in 2022, often waiting until later in the year, meaning much work may still need to be done in this area in the year ahead.

   • In terms of Data Literacy: we saw plenty of businesses come to the realization in 2022 that, in light of supply chain difficulties and other challenges, their data and reporting tools and capabilities left a lot to be desired.

   But in 2022 very little of this translated into the action (in terms of skill development and technology investment) we were suggesting. Admitting that you have a problem is the first step, but companies seem to be overwhelmed by the perceived challenges and cost of addressing these gaps (more on this later).

   • In terms of Automation: many businesses suffered from the labor market shortages we predicted for 2022. However, most businesses tried to address them by raising pay (on top of inflation driven increases), or tried to mitigate them and “struggle through”, hoping they could maintain output (but likely not growing as much as they could have, or achieving their full revenue and profitability potential).

   With everything that happened in 2022, many businesses focused on “business continuity” versus investment, believing that 2022 was “not the right time” to revisit automation. While we have a lot of empathy with the sheer magnitude of challenges that businesses faced and continue to face, we would contend that now is exactly the right time to consider automation opportunities, as the underlying drivers and business cases have the potential to fundamentally transform business performance.

   • In terms of Cost Structure and Expenses: it wasn’t until the third and fourth quarters of 2022 that we saw signs of significant “belt tightening”, as evidenced by the layoffs in big tech firms and the like, and many companies landing on their individual long-term policies and philosophies to flexible working etc..

   While it is true that labor is often a significant expense for most businesses (and therefore one that is focused on when reviewing cost structures), and that some businesses over-expanded their labor forces during the pandemic, we would argue that few business have yet done the work that we suggested: taking a deep and holistic view into how cost structures and all major business expenses have changed in light of the pandemic.

   As an example: it is only recently, and often driven by additional factors (such as the invasion of Ukraine, the reliance on Taiwan as a source of semi-conductors, and continued geo political concerns related to China), that some firms are taking a look at their supply chains and considering strategies including re-shoring and moving production from China either closer to home (e.g., Mexico, South America) or to other low-cost locations (e.g., India, Vietnam).

   What do we think will happen in 2023?

   If anything, uncertainty and ambiguity is even greater this year than last.

   However, three things we can be relatively certain of in 2023 are:

   1. The economic challenges of 2022 (inflation, dramatic shifts in supply and demand, wild swings in critical markets such as labor, housing, automobiles, and travel) and supersized economic policy responses to them will likely carry over to 2023.
   2. While a recession is not guaranteed, 2023 is likely to feature declining inflation and slower growth as we return to more stable equilibriums/new norms.
   3. Stabilization of supply chains will likely mean that job openings remain abundant (with the same “skill gaps” as 2022), but there will be fewer labor shortages, while declining inflation will likely mean that prices will revert to pre-pandemic trends

   So what questions should you be asking yourself in 2023?

   Last year we mentioned the term VUCA, which is an acronym for volatility, uncertainty, complexity, and ambiguity. Policymakers worldwide have warned of a more unstable period where global conflicts, pandemics and climate change are the norm, and 2023 will be a test of whether the world is truly entering a new period of persistent shocks. That is, ones that creates persistent supply challenges and makes it harder to maintain low and stable inflation.

   Therefore, we think one of our questions for 2022 (Data Literacy) carries through to this year, but in an even more magnified way: if 2023 is going to be even more VUCA than 2022, do you have the right data, at the right time, and the right people to interpret the data and make decisions as things change?

   If you do not, and want to start to understand this better or address the underlying issues, Core Catalysts is here to help you. We have completed multiple engagements in this area, and sourced multiple employees for our clients to manage the improved systems and processes we have put in place. We can show you that the challenges and costs of improving data literacy are not as overwhelming as you think, and the returns on investment are also clear and compelling!

   Likewise, we think our questions on Price Increases and Automation also still stand and carry over to 2023. Do you need help in analyzing, planning, and implementing price increases? Are you interested in identifying opportunities for automation in your business, and the costs / benefits / business case for doing so? If so, Core Catalysts can help!

   Finally, the other major questions for this year revolve around Expense Structures and Supply Chain.

   Expense Structure

   In terms of the question of expense structure, where we challenged you to challenge costs in light of the impacts of the pandemic on ways of working, we challenge you to do this again. This time, however, keep in mind the impact of inflation on the underlying margins and profitability of your business.

   You may have increased prices last year, but have you maintained your underlying margins, and will you be able to contain input costs and expenses this year so that price increases (if any) can be smaller this year?

   If the answer isn’t a clear yes, Core Catalysts can help you identify cost and expense management opportunities that maximize your efficiency and effectiveness. We can help you craft pricing and price increase strategies that will ensure that margins remain healthy in the short, medium, and long terms.

   Supply Chain

   Equally, last year we flagged the need to improve supply chain management in light of what we thought would be short to medium term shocks, but this year, despite the fact that China has reopened, we believe that continued Covid-19 related supply chain uncertainty there, plus geo-political policies and upheaval elsewhere (e.g., Ukraine, 2022 CHIPS act, etc.) means you should be considering your supply chain more deeply. Ask questions such as, “are my suppliers and manufacturing located in the right place?”, “what are my supply chain vulnerabilities?”, “what should I be doing to improve my supply chain flexibility and resilience?”, and “what changes to my supply chain can I make to minimize risks to revenue and profitability?”.

   Again, these are all things that Core Catalysts has helped multiple clients across multiple industries and situations both assess and address, and we’d be happy to discuss in more detail how we might be able to help you!

   Thank you for reading. We hope you enjoyed this article. As always, comments, questions, and invitations to provide more information are welcomed!

   – Mark Jacobs, Client Service & Delivery

2. Questions for 2022 Pt. 2: Price Increases

   February 16, 2022 11:00 am Leave a Comment

   Two weeks ago, we wrote about four questions for 2022 based on factors that we can all agree will influence our business this year. We went further and addressed the first question: Is your organization data literate enough?

   We’ve received some interesting comments related to the need for greater data literacy in organizations. This would enable better examination of weak links in the supply chain, operations process improvement in areas susceptible to disruption, and generally increase organizational flexibility and dexterity across all functions in response to this new “VUCA” world.

   This week, let’s dive into the second question we raised: Should you be considering price increases?

   What we already know:

   Once again, let’s take what we know about 2022, and then apply it to the question:

   • It’s generally accepted that inflation in the United States is currently running around 7%.
   • Unprecedented supply chain challenges and labor disturbances brought on by the pandemic have throttled output. At the same time, the pandemic has increased various costs (such as increased expenditure on PPE, safety protocols, etc.) leading to both increased business expenses and decreased productivity.
   • Conversely, unprecedented fiscal and monetary stimulus has turned demand in the opposite direction to supply.
   • Unemployment rates are at historical lows, creating additional worker shortages and upward pressure on labor costs (meaning additional incremental business expenses).

   Great, but so what?

   No one knows whether current inflation rates will be a short-term aberration or a long-term reality.

   Equally, while supply and demand-side economics may eventually achieve equilibrium, it is highly likely that post-pandemic business expenses will be higher than pre-pandemic ones, affecting profit margins.

   In order to maintain profit margins, businesses can do three things:

   • Decrease expenses
   • Increase prices (to increase like-for-like revenue)
   • Increase volume (to decrease relative costs, increase relative margin through economies of scale, and boost revenue)

   An oft-quoted McKinsey study succinctly lays out the comparative effectiveness of these three strategies:

   “A price rise of 1 percent, if volumes remained stable, would generate an 8 percent increase in operating profits – an impact nearly 50 percent greater than that of a 1 percent fall in variable costs such as materials and direct labor, and more than three times greater than the impact of a 1 percent increase in volume.”

   Put simply, like-for-like, price increases are far more effective than the alternate strategies.

   In the context of 2022, one could also contend the following: While effectively implementing price increases is difficult, it will be even more difficult (nigh impossible) to cut your way to margin maintenance or to increase volumes significantly enough, bearing in mind the expense pressures we are all facing.

   But there’s the rub: effective implementation of price increases.

   The stigma of price increases

   We’ve been involved in multiple price increase projects, and we can tell you the following:

   • Most organizations don’t like asking for price increases (and are bad at implementing them when they do)
   • Most customers don’t like price increases either
   • More than 50% of the time, the net impact of price increases (after concessions to big customers) is either break-even, or negative
   • Done badly, price increases can (negatively) affect customer relationships.

   However, can your business afford not to raise prices right now? If you cannot, what should you do?

   Build your business case for the price increase

   Data disarms. It’s hard to argue with evidence of increased expenses outside of your control, and customers with professional procurement functions will appreciate a fact-based approach.

   Communicate clearly

   In addition to a clear business case, customers respect vendors who communicate clearly. Your message should reinforce shared values, mutual respect, and commitment to an ongoing and mutually beneficial business relationship.

   Plan, Plan, Plan

   Achieving effective price increases is an important muscle in your business. If you are out of practice, the best way to overcome this is to invest the right amount of time, resources, and executive oversight into planning and managing your price increase activities.

   Conclusions

   Based on the extreme levels of expense increases your business is experiencing, you may have no choice but to consider increasing prices. This does not mean that expense reductions are impossible or inadvisable (see the third post in this series), or that increased labor costs cannot be mitigated longer term (see the fourth post in this series), but increasing prices effectively is going to take some time and effort, and you may not have all the resources, experience, and expertise to do this on your own. If this is the case, Core Catalysts may be able to help!

   Thanks once again for reading. Please share any thoughts or comments you have, and we’ll see you again in two weeks for the next question in the series: Have we adequately reviewed business cost structures and all major business expenses in light of how business has changed?

   – Mark Jacobs, Client Service & Delivery

3. Thought Starting Questions for 2022

   February 2, 2022 11:00 am Leave a Comment

   It’s that time of year again. Businesses are going about making confident predictions on what the next twelve months will hold for them. And yet, even at the best of times the accuracy of these predictions will be questionable by December. Given all that, perhaps the point of these predictions is less about being right, and more about creating engagement for the marketing folks?

   But as we all know, we are not living in normal times right now. No one can really see into the future, and it is not possible to be completely sure what the next year holds. Just as well, your time is valuable, so why waste it reading another set of bold predictions for 2022 that have questionable value just to boost someone’s marketing metrics?

   To this end, we humbly offer you a brief series of thought-starting questions that might actually be helpful and worth pondering if you are considering the year ahead. This will be the first of many blog posts to follow in the coming weeks, all of which will explore these questions a little more thoroughly.

   2022: What can we be confident about?

   There are three things we can be relatively sure of:

   • The Covid 19 pandemic, and its effects on business, are not over yet.
   • Specifically, supply chain issues and labor shortages are going to continue to be concerns for most of us for at least the next twelve months.
   • Higher inflation is definitely going to be an economic factor for the next twelve months, and possibly longer.

   How do these factors influence what I should be thinking about for this year?

   If you agree with the three driving points identified above, four key questions for 2022 stand out. These questions are linear and feed into each other. They are:

   #1 Does my organization have the right level of Data Literacy, and is it in the right areas and functions?

   There are some real-life “nuts and bolts” things that most businesses need to be thinking about and working on in this area.

   #2 Do we need to be considering Price Increases?

   And if they are needed, how do we actually implement them effectively, as opposed to just talking about them but not doing anything, or trying to implement them and just ending up upsetting our customers and / or not achieving any financial benefit.

   #3 Have we adequately reviewed business cost structures and all major business expenses in light of how business has changed?

   And what’s more, will it ever go back to how it was pre-pandemic?

   #4 Should we revisit (or visit for the first time) business investment cases for enhanced and increased automation?

   Historically, whether or not to invest in automation has been a decision based purely on ROI and ease of implementation. If wage inflation and labor shortages continue, increased automation may cease to be a choice and become a necessity to ensure operational viability, continuity, and long-term business sustainability. In other words, can you afford to not automate more?

   Exploring Question One

   This week, let’s dive a little deeper in thinking about the question, “Does my organization have the right level of Data Literacy, and is it in the right areas and functions?”

   What we already know:

   Once again, let’s take what we know about 2022, and then apply it to the question:

   • It’s generally accepted that inflation in the United States is currently running around 7%, and no one knows whether this is a short-term aberration, or if it will be a longer-term reality.
   • Based on current lifespans, average retirement age, and the law of averages, at least 80% of the current working population have no experience living or managing a business in a prolonged (or even relatively short) period of such high levels of inflation.
   • Likewise, most people working today are used to Just-in-time (JIT), Kaizen, and other lean manufacturing and supply chain practices (implemented across the eighties, nineties, and aughts, creating significant cost savings in a time when economies struggled) and either have not experienced or barely remember a time when things worked differently.

   Great, but so what?

   Well, the challenges of 2022 mean that having people who can work with current IT systems, pull data, and then report on and take standardized or rote actions just isn’t enough anymore.

   What businesses now need are people who can interpret the stories behind the data. People that can develop insights and actions that consider imperfect supply chains and labor availability are in high demand. These are people that can see the many complex dependencies and interdependencies, both internally and externally, that are either hidden or are not things that businesses previously had to worry about (pre-pandemic).

   Recognition of a deficit in required data literacy in many organizations is the reason why it is so hard to hire demand planners, business analysts, and supply chain specialists right now. This deficit isn’t just a supply chain and manufacturing issue. It spans across all functions, including administrative functions like HR (such as labor planning, scheduling, etc.) and finance (such as maintaining margins during times of extreme changes in expenses/revenue).

   The question, then, is as follows: Do you have the right people with the right skills to interpret and manage through a time of great variability and ambiguity? We’re in business territory that most people have never experienced, and businesses need skills and experience that perhaps they once had, but that have also likely atrophied after an extended period of disuse.

   Conclusion

   Your answers to this question will probably lead nicely to the next post on price increases. A subset of data literacy is the ability to pull together all the information needed to identify whether or not price increases are needed, how much they should be increased by, and the data that is needed to justify increases to customers. Even if you have this capability, when is the last time you asked for a price increase, and how well did it go?

   Here at Core Catalysts, we’ve helped multiple clients analyze their data literacy. In doing so, we’ve also helped clients identify issues and opportunities with meaningful impact to their top and bottom lines, and then helped them fill important gaps in organizational capabilities. This allowed them to take action to capitalize on available opportunities, spanning everything from IT system evaluation and implementation through identifying and hiring new employees. If you believe we could help your organization with this, why not reach out to us and schedule a call?

   In the meantime, we hope reading this article and thinking about these questions has been worth your time. We welcome comments and additional thoughts, and please reach out if you’d like to talk more about your current organizational data literacy and tackling some of these challenges!

   – Mark Jacobs, Client Service & Delivery