Rather than trying to perfect the supply chain, a better approach is to focus on risk, then build out the capabilities needed to manage it.
Economic turbulence and inflation are hitting energy-intensive sectors such as the metal, paper, glass, and cement industries especially hard. Rising prices across the board and supply chain volatility are forcing companies, particularly those in Europe, to take immediate steps to ensure profitability and even survival as mill products face down inflation.
Increasing prices for customers or reductions in purchasing and manufacturing costs are two main ways to address the crisis. Both are only possible within certain limits, and finding the right balance isn’t easy. How do you set the right price to remain competitive and profitable at the same time?
Let’s delve into the challenges mill products industries face today and ways they can weather the tough economy to not only survive, but set a path for future growth.
High-wire act: Challenges in manufacturing
The economic crisis is creating a number of daunting issues for mill products industries:
- High volatility and difficult predictability of raw material prices. On the one hand, there must be enough supply of raw materials for production. One solution could be building up large inventories, even if purchasing prices are high. However, this strategy might expose companies to the threat of high write-offs if prices fall again in a few months.
- Supply of common supporting materials. Some required substances, such as hydrochloric acid, are produced as a by-product in industrial manufacturing. If the supplier suspends production of the main product for cost or energy reasons, bottlenecks can suddenly occur. This requires finding alternative sources of supply on short notice.
- Sales forecasting. The last decade was often characterized by stable, slowly changing sales volumes, which made statistical forecasting relatively easy. Now, however, manufacturers must expect a larger and short-term fluctuation in demand – both downward and upward. This renders many of the classic forecasting methods useless.
- Transportation. Rising energy prices, and the aftermath of COVID have left their unwelcome marks on transportation companies. This can be seen in the form of rising prices as well as decreased transport capacities in the market. For example, in the paper and packaging industry, transport costs have a significant impact on profitability and competitiveness.
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Action plan: Investing now and for the future
By taking the right steps and with the support of the right tools, you can tackle the crisis – and potentially come out of it better than the competition.
Of course, money for big investments is scarce in tough times. Companies must establish priorities that achieve the greatest effect to protect the company right now. However, since every crisis eventually comes to an end, these investments should also support the medium and long-term development of the company.
Consider this three-phrased approach:
- Identify which areas can be improved in the short term to best navigate through the downturn. This is where you should prioritize the areas of greatest impact. These investments can serve as the foundation for the more long-term initiatives below.
- Boosting resilience is essential: Nobody knows when the next crisis will come and what it will look like. Prioritize investment areas that will contribute to strengthening the company in both the medium and long term.
- Prepare for growth: Just as suddenly as this crisis emerged, an upturn may already be around the corner. The economic baseline could initially be lower, but this applies equally to all companies in the industry. Outperform the competition with above-average growth by making investments that support flexible orchestration of growth.
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Strategies and steps for improvement
Here are six areas where mill products industries can make short-term improvements to outsmart inflation while supporting longer term growth plans.
1. Financial management and optimization
Mitigate financial risk through better forecasting, hedging of material and commodity prices, and optimization and monitoring of energy contracts. This includes better management of energy consumption, gaining an accurate view of cash positions and forecasts, and using comprehensive cost models for better decision-making.
2. Transparency across the value chain
Increase visibility into energy consumption, costs and the supply chain with proactive exception management and capabilities for simulation of what-if scenarios. Get immediate improvements improving supply and delivery assurance execution using real-time GPS based information. Longer term, focus on proactive supply chain management using AI, IoT and other technologies. Industry 4.0 approaches can help increase visibility across the top floor and shop floor in manufacturing.
3. Business planning optimization
Adjust product mix to volatile energy and material prices and respond to short-term demand signals to remain profitable. Optimal utilization of transport capacities. Achieve quick wins by simulation and comparison of different scenarios for demand, supply and financial changes considering different future prices for material, energy and sales.
Moving forward, focus on understanding customer ordering patterns and react faster to short term changes to adjust forecasts and drive profitability. Optimize transportation costs through better utilization of the transportation capacities.
4. Adapt production
Optimize energy consumption and efficiency through better maintenance and fast implementation of improvements, estimation of energy demand, and consideration of energy and material costs in production planning. This includes improving the performance and reliability of installed production lines and optimizing maintenance strategies.
5. Supplier management
Manage your suppliers in turbulent times and secure access to crucial production materials and reduce dependencies. Find alternative sources of supply to reduce the risk of supply chain disruptions. Then, aim to optimize direct spend from product design through manufacturing execution and delivery. Make risk due diligence part of the source-to-pay process to protect revenue and reputation.
6. Boost competitiveness
Adapt to market changes with dynamic price adjustments to protect competitiveness and profitability. Add new services and innovations for customers and collaborate with partners using business networks. Enable business experts to implement innovations without coding.
Laying a foundation for better times ahead
There’s no magic formula for dealing with inflation or economic turbulence. In times of crisis, weaknesses can surface, whether that’s a lack of transparency or poor planning and response capabilities.
Taking action to mitigate these weaknesses can be the first step to improve the overall resilience of the business and provide a foundation for post-crisis growth.