According to Forbes, the inflation reading from January 2021 to January 2022 was a whopping 7.5%. Let’s face it, we are certainly facing inflation, and nobody is exempt, including the chemical industry. So what can chemical companies do to handle inflation and still manage to succeed? Today, Victoria Meyer shares five strategies for how chemical companies should manage and lead through these current economic times.
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Worried About Inflation? 5 Ways To Succeed During Inflationary Times
I am recording a solo show specifically to talk about how chemical companies can and should be managing and leading through these current economic times. We are certainly facing inflation. There is no doubt about that. There’s some discussion about whether or not we’re in a recession or entering a recession, and points of view across a variety of economists differ on that. As I talk to clients and people across the industry, how they’re managing inflation, how they’re handling the current business environment, and where it may go is certainly a topic.
What I’ve done is I’ve gone out and asked and received input from over twenty leaders across the chemical industry, focusing on how they’re handling it. From those inputs and other inputs, I’ve distilled it down to some best practices in terms of how companies can and should be approaching the current economic environment. We look at inflation and a potential recession, and more.
There is no doubt about it. Where we sit now, inflation is a fact. As individuals, we see it in our pocketbooks. We see this across the globe. It varies by region. The US is seeing somewhere between 6% and 8% inflation. The UK is seeing 7% to 9%. Italy is close to that. Switzerland is at a nominal 2%, but for them, that’s a high percentage.
In fact, when we look at inputs from the World Economic Forum, the OECD, there is no doubt about it. In fact, the Consumer Price Index, which of course is a key indicator for all of us, coming from the OECD shows a 9% increase in April. We’ll see where it plays out in May, June and July, as we’re here recording this. That report lags by a couple of months, but there’s no doubt that inflation is here. Consumers are feeling it. It’s starting to impact different parts of the industry differently.
Where are these influences coming from? What’s causing this? No doubt about it, energy. Oil has been up above $100 a barrel, although it’s dropping. The latest reports I saw said it might get down to like $65 by the end of the year. We will see. Certainly, oil price is high, natural gas price is high, and electricity as a result of that is high. The war or the conflict in Russia and Ukraine is definitely an impact.
We’ve been talking about and seeing this over the past couple of years is the effect of stimulus spending. During the pandemic, as many people stayed home, many individuals and families, their own personal economics, and ability to work were impacted. We saw stimulus spending from a variety of countries and regions, which certainly in many ways, overheated the economy.
In certain markets, we know that it shifted demand patterns when we looked at what was going on. As everybody stayed home, there were a lot of home repairs, new homes, pools, all kinds of excitement. Now that the economy and the borders are back open, as COVID has reduced an impact, we’re seeing airplanes full, hotels are full. People’s purchasing patterns have changed significantly over the past two years. Certainly as we look at 2022, where they’re spending today versus where they were a year ago, it’s completely different.We are facing inflation. There is no doubt about that. Consumers are feeling it, and it's starting to impact different parts of the industry differently. Click To Tweet
A recession is less certain. The technical definition of a recession is a fall in GDP in two successive quarters. Somebody else is going to report on that. That’s not my thing. We need to be prepared. In fact, I talked to some financial experts and they said, “We think it’s coming. We’re advising our clients to get their financial houses in order.”
Nonetheless, whether we’re in a recession or whether it just feels like a recession, we’re certainly seeing that. We’re seeing the demise of stimulus spending. We hear that because of the high cost of goods, whether it be gasoline for automobiles, energy prices, and electricity, people are tapping into some of those savings that they might have had over the last couple of years as they weren’t going out and about, and as they were receiving stimulus checks. We’re seeing a reduction in some spending patterns in a lot of industries, especially durable goods, especially elsewhere.
When you talk to folks and to different economists and different people that are monitoring this, some of this may be a return to a steady state equilibrium. We’re certainly not there. If you think about this in the context of process control, and as a former plant and process control person as I do, we saw a spike over the last couple of years. Now, we’re seeing it come back down. As every reaction settles, it doesn’t settle evenly. There’s a bit of bump. This is not a smooth and steady return to our normal equilibrium, normal markets. It may feel like a recession. It may look like a recession, but we probably should be acting like it’s a recession.
When I talk to various leaders, they don’t seem hugely concerned. They’re monitoring this, no doubt about it. They’re not ostriches with their heads in the sand, but they’re certainly taking this with a moderate approach. Monitoring and ensuring that there are good business practices in place, but right now business is still strong. In fact, I talked to one leader who said, “I can’t even imagine this. We have two days of inventory in the network. A drop in demand, is that going to affect us? It’s hard to say because we are so focused now on making products, shipping it to customers.”
I will tell you. There’s a danger in that. If we’re not looking up and out and around at what’s going on in the market and what might be coming, you’re in danger of missing it and not responding quickly enough. I would say most companies and most of the executives I’ve spoken with, they’re monitoring, they’re taking steps to prepare, but they’re not overly worrying about it.
What are some of the indicators that people are watching? The things that you would expect are housing inventory, housing sales, consumer demand, how that Consumer Price Index is tracking, consumer defaults. Looking at personal financial impacts. Retail inventory, that’s an interesting one because I think we’ve all heard the news and information that many large retailers have seen an abundance of inventory because they pre-ordered.
Supply chains were sluggish for so long over the past two years, and while supply chains are steadying out, people are starting to receive those orders that they purchased. Yet, consumers may or may not want it. There’s a lot of inventory that they’ve got. There’s going to be a balancing of that. When I talked to a couple of leaders, they’re like, “The retailers know how to figure this out.” This is not new and they are figuring it out. We need to be on top of it and keep monitoring it.
Interest rates, of course, is another one. Employment rates are actually a good news, bad news thing. We’re going to get to that in a little bit. Those are some of the things that people are watching for. Housing inventory and sales, consumer defaults, retail inventory, the fed and interest rates, employment rates, consumer demand. What are you watching for? Send me a message and let me know. That would be awesome.
Good Financial Management
Here are five best practices and five steps to winning, if you will, in inflationary and recessionary markets. The first is good financial management. The reality is this should be true at all times, but as we all know, when you’re feeling richer, you might spend richer. When you’re feeling poor, you spend poor. This is true across individuals, as it is in business leaders and companies.
Managing cash, for some businesses, this is not a change. They have a cash focus, but managing cash is critical. Understanding and reassessing credit risk is critical. If you haven’t done this with your customers yet, you do it. Obviously over the past couple of years, as prices have increased, as the market has changed, that’s been understood. Now as we move into higher inflation, higher interest rates, this definitely changes the credit profile, and potentially the credit risk of your portfolio of customers and your individual customers. Understanding cash, managing, and reassessing credit risk is critical.
The second piece is disciplined S&OP, or Sales and Operations Planning. A lot of companies feel like they’ve gotten really good at this over the past couple of years because of the variability and the instability in the supply chain, but the reality is this is another look, more disciplined S&OP, which looks like optimizing inventory and working capital. As one leader I spoke with said, “We don’t want to get stuck with a lot of high-priced inventory, or with the wrong inventory. That’s one aspect of it, better forecasting.
Sometimes that feels like a pipe dream. You’re relying on your customers, on your sales teams, on other people to help you forecast, but forecasting is a big part of a disciplined S&OP. As one distributor executive told me, “We are being careful buyers, and being smart about products and inventory purchased. Then shifting inventory management from FIFO, or First In First Out to moving the most expensive, or LIFO, sometimes it might be considered, Last In First Out.”
It’s interesting, right after I got this input from this executive, it showed up in the paper in a different context. I think this is something that the chemical industry and other industries are looking at. Making sure you’re not getting stuck with high-priced inventory, being wise about what your inventory, and what your safety stocks are.
That leads me into scenario planning. It’s number three. I talked to somebody who said, “We don’t like to do a lot of scenario planning because the scenarios are always wrong.” They are. It is rare for a scenario to be right because by its very nature it’s uncertain. The reality of scenario planning is it allows you to have a point of view, understand what the impact may be, particularly when we look at global businesses where the impact of inflation and recession is going to be different.Value comes through differentiation. During inflationary and recessionary times, figuring out your points of differentiation and maximizing them becomes critical. Click To Tweet
Finding And Creating Opportunities
We need to understand duration. It’s very different if we’re in a period of recession for 3 months versus 12 months or 18 months or longer. Understanding, putting together scenarios that reflect duration, regional impacts, product line impacts is critical. The fourth thing is finding and creating opportunities. What’s interesting is across the board, almost all the leaders I spoke with, see inflationary and recessionary times as a time of opportunity.
I participated in a round table for SOCMA, and we asked this question, “Are you concerned about inflation and recession?” Overall what they said is inflation and recession creates opportunities. In the case of SOCMA, a lot of these companies are doing custom manufacturing, creating custom blends, fine chemicals and custom chemicals. What they see is as interest rates go up, their customers, the bigger companies, are being more disciplined in their financial management. They’re being more disciplined in investment, and so that creates opportunity.
They can’t build a plant or they can’t afford to allocate space in their current assets to make a new product or to make a smaller product, which then shifts over to folks that are in SOCMA’s wheelhouse that that’s their business, custom manufacturing, totaling. There’s a point of view that many of the services are in a better cost position.
Austin from BluePallet, when he and I connected, he sees this as an opportunity for even greater opportunities for their platform. They’re in a unique position that as inflation increases, if a recession hits as markets soften, which we’re starting to see a little bit, that there are more people moving to their platform. It’s a buildup before they come and they need it, but it’s turning what could be a bad marketplace and environment into an opportunity for BluePallet.
The other piece that a number of executives really talked about, and I believe this, is labor. This could be a good thing. Hear me out. The point of view of this is we certainly know that the stock market has gone down, and retirement savings has decreased. It’s just costing more to live at the moment. It’s costing more to fill up your car with gasoline. If you’re running an EV, it’s costing more to recharge your car in an EV. It’s costing more to purchase groceries for your family. This actually could be driving more people into the labor market.
What I’m hearing from folks are a couple of things. One is monitoring labor carefully. Depending on where you are in the market and what your current situation is, maybe you will delay making some hiring decisions. In other cases, we have a number of companies across the industry that are having challenges in hiring people. This creates opportunity. Getting more people into the workforce may be one of the outcomes of the inflationary times that we’re in, which in turn can be actually really good for companies ready to hire, looking to hire, and bring more people onto the team.
The fifth thing is about creating differentiation. That came through from a couple of folks, and I believe this. You guys have heard me say this before. People I consult and work with know that value comes through differentiation. During an inflationary and recessionary time, figuring out your points of differentiation and maximizing them becomes critical. It creates opportunities.
When we think about products that are maybe more sustainable or green, circularity, companies that can bring those kinds of products to market faster, if they’re already ready, if they’re in their portfolio, that’s going to have durability. It’s going to drive demand. Services, the customer experience, how are you serving your customers? The reality is that at all times, customers have a choice. In inflationary times and if there is some demand destruction, which is possible, markets start getting a little bit longer, the customer experience becomes ever more important because customers have a choice.
They’re going to go not just where they get the best product. Frankly, products are pretty easily replicated. They’re going to where they get the best experience. Do you understand your customer’s experience? Are you treating them as valued customers? Are you making their customer journey easier? That’s something that you can do to create differentiation, and to drive opportunity in these markets.
The last thing is I’m calling it an enabler. This is around digital transformation. When I spoke with Martijn van Noordennen on the show, one of the things he said is, “Hard times are when companies that have taken action on digital transformation will reap the rewards.” It’s hard to start today and expect to see results today. As they say, “When was the best time to plant a tree? Twenty years ago. When is the second best time? Today.” I would say in the case of digital transformation, when was the best time to start your digital transformation? Five years ago, maybe more. When is the second best time? Today.
If you’ve already started to embrace a new way of working as a result of digital transformation, digital business processes, you’re in a place to reap the rewards, whether it be through streamlined business processes, whether it’s about your customer and supplier journeys, and having a better clarity on that in terms of what it is and how you engage. Then it’s also around data and analytics because companies are going to have more robust digital data and digital analytics. Is that an oxymoron? Maybe.
They’re going to have more success, especially if and when we hit a recession during these inflationary times that we’re in. That’s what I’m hearing, folks, and that’s what I see as ways that you can win in these markets in these inflationary and recessionary times. Anyway, I’d love to hear what you think. Reach out to me, and send me an email. Send me a message on LinkedIn. Tell me what you and your company are doing to create opportunities, and be more robust and resilient in these inflationary times. We’ll talk to you again later. Thanks for reading.
- Martijn van Noordennen – Previous Episode
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