No matter your industry, you have likely seen the impacts of raw material inflation in your business. From continued supply chain disruptions due to COVID-19 to the war in Ukraine, global markets continue to face challenges pushing up prices for everything from steel to food.
As we move into the second half of 2022, these trends will likely continue, which means businesses must be prepared with strategies to mitigate the impacts.
For businesses, raw material inflation can have a significant impact on the bottom line. In order to stay competitive, it is crucial to understand the causes of inflation and how your business can respond.
Inflationary Trends - A Global Crisis
Inflation rates are on the rise globally, with the U.S. median rate at 7.9% year-over-year, according to the latest figures. Energy and food prices are largely to blame, spiking at more than double the rate from one year ago.
While inflation in Western European countries is comparable to the U.S., rates in France are lower and as high as 20% in the Baltic states.
The problem of inflation has caused widespread economic disruption, particularly in developed countries.
In the United States, for example, inflation has contributed to the stagnation of wages and the increases in housing costs. It has also been a major factor in the decline of purchasing power for retirees and other groups on fixed incomes.
The Federal Reserve has responded to inflation by raising interest rates, but this has led to concerns about a possible economic slowdown.
For those operating in raw material markets, the question is how to cope with the challenges posed by inflation. Materials such as steel, aluminum, and copper have all seen significant price increases in recent months.
The situation is made worse by the fact that many materials are sourced from China - a region beset by continuing trade tensions and COVID-19 lockdowns.
If your business relies on fast and consistent access to raw materials, you need to have a plan in place for dealing with inflationary pressures. Let's break down five tips that you can utilize to help keep your business afloat during this time of economic disruption.
1. Work with trusted suppliers with a proven track record.
In an inflationary market, working with suppliers you can trust is more important than ever. This means suppliers with a proven track record of meeting deadlines, honoring contracts, and providing consistent quality.
It can be tempting to go with the lowest bidder when trying to save costs, but this is often a recipe for disaster. In an inflationary market, you need suppliers that you can rely on to deliver the goods (literally).
Why? Because raw materials are likely to become more expensive as inflationary pressures mount. If your supplier is constantly changing prices or running out of stock, it will be difficult to maintain consistent margins.
To avoid supply chain disruptions, work with suppliers that have a good reputation and a history of meeting their obligations. This is critical when building long-term relationships with vendors.
2. Diversify your supplier base.
In an inflationary market, it's also essential to diversify your supplier base. This means having multiple suppliers for each raw material or product that you use.
Diversification provides two key benefits:
- Supplier diversification gives you more negotiating power with each supplier.
- It protects you from supply disruptions caused by external factors such as weather, political instability, or pandemics.
If one of your suppliers experiences a production shutdown, you can source the same material from another supplier. This will help to keep your business running smoothly and avoid costly delays.
For example, if you're a contractor who uses steel in your projects, you should have access to multiple steel suppliers. This way, if one supplier experiences a production shutdown, you can source steel from another supplier.
However, make sure that you're not overpaying for steel by signing long-term contracts with multiple suppliers.
3. Lock in prices with long-term contracts.
If you can, try to lock in prices with your suppliers through long-term contracts. This will help to insulate your business from short-term fluctuations in the market.
In an inflationary market, prices are likely to rise over time. By locking in prices now, you can avoid having to pay more for the same goods in the future.
Long-term contracts also give you more negotiating power with suppliers. If a supplier knows that you have a long-term contract, they will be less likely to raise prices arbitrarily. This can be key for maintaining healthy margins regardless of inflationary pressures.
4. Hedge your raw material costs.
Hedging is a financial tool that can be used to protect against price fluctuations. In the context of raw materials, hedging involves entering into contracts to buy or sell materials at a set price in the future.
Hedging can be done through futures contracts, options, or other financial instruments.
Hedging can be complex, so it's important to work with a financial advisor to ensure that you're doing it correctly.
Hedging can be an effective way to protect your business from inflationary pressures. By hedging your raw material costs, you can avoid having to pay more for the same goods in the future.
5. Invest in supply chain and logistics capabilities.
Finally, it's important to invest in supply chain and logistics capabilities. This is particularly true for businesses that rely on just-in-time (JIT) inventory management.
In an inflationary market, raw materials can become more expensive and difficult to source. This can lead to supply chain disruptions and inventory shortages.
To avoid these problems, businesses need to invest in robust supply chain and logistics capabilities. This includes things like warehouse management systems (WMS), transportation management systems (TMS), and third-party logistics (3PL) providers.
By investing in these capabilities, businesses can improve their ability to source, store, and transport raw materials. This will help to insulate them from inflationary pressures.
Partner with a Trusted Shipping and Packaging Company
Inflation is a fact of life in today's economy. Businesses must learn to adapt and respond to these pressures in order to remain competitive. It is essential to place orders early and strategically as raw material suppliers are raising prices regularly, and the supply chain continues to feel the strain.
Businesses can effectively manage the effects of inflation by diversifying their supplier base, locking in prices with long-term contracts, and hedging their raw material costs.
One way to ensure that your business is prepared for inflation is to partner with a trusted shipping and packaging company.
At Alta Max, we help businesses in both the private and public sectors ensure that their products are shipped safely with a variety of products, including security seals, high-grade packaging materials, and more.
Our team of experts can work with you to develop a tailored shipping solution that meets the unique needs of your business. Contact us today to learn more about how we can help you prepare for inflationary pressures.