Inflation Effect On Manufacturing
What is inflation and why is important?
Inflation is measured by looking at the Consumer Price Index (CPI). This is calculated as a basket of goods and services and how much they cost over time. The CPI is used as an indication of how much prices are rising or falling in general terms. The Bank of England (BoE) defines inflation as “a sustained increase in the general level of prices”. In other words, it is when prices go up compared to last year or last month or last week. Inflation occurs when there is more demand for goods than supply and this drives up their price.
However, inflation is not just something that affects businesses – it also has a direct impact on the cost of production, which can be passed on to customers. Rising prices mean that companies must pay more to buy materials and services, increasing their operating costs and reducing profit margins. In addition, rising prices make it more difficult for consumers to afford products and services. This can result in decreased sales volume or lower profit margins if a company cannot pass along these increased costs to its customers.
The business of a manufacturer is to buy raw materials and convert them into something the market needs or wants. That process determines making calculations upon the cost of goods needed as input to convert them to the product. You must include wage costs, energy costs, and machine costs in the input costs to arrive at total input costs.
“The relationship between manufacturing and inflation is more complex and multi-faceted than most news reports give it credit for.” Ethan Karp, Forbes.
Inflation has been a hot topic in recent years, with the Bank of England (BoE) raising interest rates for the first time in a decade.
Increase in the cost of production
The cost of production is the price at which a company sells its goods to consumers. It includes the total cost of producing and delivering those goods, including all labour costs and the cost of raw materials. The cost of production is one of the most crucial factors in determining a company’s profit because it allows you to calculate your gross profit margin.
Producer input prices rose by 22.1% in the year to May 2022, up from 20.9% in the year to April 2022; this is the highest the rate has been since records began in January 1985. Producer output (factory gate) prices rose by 15.7% in the year to May 2022, up from 14.7% in the year to April 2022.
Businesses must therefore grow by at least 8.1% to keep things static. Consumers around the world are all facing similar inflation concerns. If their income does not rise by the level of inflation, they will be worse off than being unable to afford to buy what they used to before the rise in inflation. So, a manufacturer faces the double hit of increasing costs and potential declining demand from the end-users.
Add to the above problem the uncertainty of being able to acquire the products for your input in a timely fashion and you have an incremental problem. The ‘supply chain’ blockages that have occurred from China Covid lockdowns, food export shortages from Ukraine or fuel shortages from the Russian trade embargos and your problem is enhanced.
Can you curb inflation in your business?
It is time to take a hard look at how you use your resources. Inflation can be managed by adjusting prices and costs — and there are many ways to do that without sacrificing quality.
Here are six quick tips for dealing with inflation in your business:
- Keep an eye on your labour costs.
- Invest in an affordable technology that will provide end-to-end business transparency, helping to identify gaps and offer ways to increase efficiency while lowering the costs of production.
- Look for opportunities to outsource parts of your business.
- Stay abreast of changing regulations and laws that may affect your business (such as minimum wage increases).
- Watch out for price hikes from vendors or suppliers who are passing along increased costs of doing business due to inflationary pressures or other factors outside their control (like tariffs).
- Be prepared for changes in technology, as well as the costs associated with upgrading equipment or software to meet new industry standards or secure compliance with new regulations affecting your company’s operations (for example, if you have employees with certain types of skills who have now become more expensive because they are hard-to-find resources due to the scarcity.Business Intelligence and labour tracking tools such as TotalControlPro resource management alongside real time Inventory management will assist above all you need your technology to be agile as you need to be in a changeable market.
Unpredictable supply chain
The supply chain is the link between raw materials and end products, and it is often a major contributor to the success or failure of your business. The supply chain has been a key point of focus for many years, but most companies still struggle with unpredictable supply chains that are difficult to manage.
“The interconnectedness of global supply chains means that when one price goes up, others tend to follow. Increases in labour, energy and transport costs are contributing to inflation around the world, posing difficult policy challenges.” Economic Observatory, 2022
Managing Your Supply Chain
The key to managing your supply chain is having accurate information about when and where shipments will arrive at your facility. This allows you to plan accordingly so that you can meet customer demand while also staying within budget. Planning and Resource Management software is an excellent way to improve this process because it gives you access to real-time information about every shipment coming into your facility — including location details such as ETA (estimated time of arrival), status (tracking number) and more. You will also have access to all sorts of reports that allow you to monitor trends over time so that you can identify potential problems before they
Businesses need to progress and adapt to challenging economic conditions – and they should always be looking at ways they can increase productivity and boost efficiency so they can save money where possible. The Office of National Statistics published that UK businesses are more confident than before, proving that there’s hope for entrepreneurs and small businesses who want to achieve growth this year.
Technology has an impact on competition and market structure by increasing productivity and lowering the rate of wage growth. As technology becomes more accessible, barriers to new company creation in many areas are reduced. Market competition is exacerbated, and prices are affected. It is therefore imperative to invest in technology today that will increase productivity, improve efficiencies and improve turnover.
TotalControlPro® prides itself on providing software solutions that utilise cloud technology to put you in control of your production facility, providing real-time visibility to your entire enterprise. TotalControlPro® provides advanced planning, customer management, inventory, execution and intelligence capabilities to help you increase the profitability & productivity of your organisation.
Total Control Pro is your technology partner, and we have listened to our clients and know that Cash is King – we have responded by removing all upfront set-up costs – through our Foundation user package, we will invest our upfront service into the long-term monthly SAAS agreement so our clients can focus on their business.
Book a discovery session here and find out why more people are choosing TotalControlPro® to track all elements of the manufacturing process to improve efficiency and productivity.