Transcript: Another Ducking Digest?! May 1st, 2023

Another Ducking Digest?!
May 1st, 2023: Inflation

Welcome to Another Ducking Digest. This is a brand new weekly 10-minute news show hosted by myself and Lindsey Smith. Lindsey has over 30 years of supply chain industry experience and most recently served as the SVP of supply chain for a mid-market manufacturer, which is actually how I met Lindsay, and we’ve become quite good friends over the last couple of years. Each week, Lindsay will share news relevant to supply chain professionals working for a small or mid-size manufacturer. At the end of our 10-minute news show, we will take questions. So if there is something that you would like to ask Lindsay about this week’s news report, feel free to drop it in the chat at any time, and we will make sure to make time at the end of our conversation.

Lindsay, there is a lot going on with inflation. I don’t think I can read any article or any news report and not hear about it. How does this impact somebody working in supply chain, in menu manufacture?

Good morning. Yes, absolutely, Sarah. The I think what we’re trying to get to with our discussion is distilling the big picture news down to what does it mean for small US manufacturer supply chain teams. So what does inflation mean for small US manufacturers? Full disclosure, ChatGPT tells us there are five areas. First, the obvious, the increase in production cost, both raw material energy as well as the other inputs to production. Second, supply chain disruption. We just can’t get away from it, right? It seems to be the new normal because there’ll be the chain reaction, what our English friends call the knock-on effect, that our suppliers, suppliers are impacted and compromised. So that affects us, the impact to exports. Those of us, plenty of medium-sized companies work on the international field.

The impact to international trade with the adjustment of currency exchange for companies that you’re either working on a budget with a line of credit, they’re gonna see the impact of interest rate changes. Companies that work in the narrow space of funding their inventory acquisition, the cost of that inventory, the cost of funding that inventory is gonna go up. Therefore, our alignment with our friends in finance, we have to pay more attention to an explicit inventory strategy and share information with them. And then fifth, the impact on demand that ultimately increasing costs affect the consumer’s ability to pay or make the discretionary purchase. So our SNOP team may have to be especially vigilant of what’s going on on the demand side.

So, Lindsay, just to recap what you said, the impact on inflation to a small or mid-size manufacturing supply chain team, you just broke it into five buckets. The first is an increase in production costs. The second is supply chain disruptions. The third is the impact on exports. The fourth is difficulty in accessing credit. And the fifth is the impact on demand. So for today’s discussion, I’d like to take a deep dive into the first bucket that you discussed, which is an increase in production costs. And I would also like to have you add some insight on best practices for small manufacturing teams in how they respond to this increase in production costs.

So coming at it bottom up from the terms of supply chain demonstrating competence to leadership, leadership’s reading the Wall Street Journal, they’re reading the numbers, they’re reading the 4.8% increase in production costs last month. They’re reading the 5.0 consumer price index inflation numbers. And that’s the big picture. That’s the first one. The second picture is what’s happening in our company? What if it matters? You know, perhaps if inflation is, say, driven by lithium or copper, or I don’t buy any lithium or copper-related products, then it matters less. So there’s a subset of the big picture that applies to my small company, and it behooves supply chain management to be able to look at that. And then thirdly, to demonstrate, to lean in on the conversation to demonstrate supply chain leadership, to enhance credibility in the management organization, to be able to lean in further and say, here’s what we’re gonna do about it.

So, you know, I think the opening statement is a typical American medium-sized company, say purchasing $20 million, identify the 4, 5, 6 very broad general commodities that we purchase and be able to point to the inflationary trend we’re seeing within each group, and maybe it’s just within each group, which manufacturers, which suppliers are driving cost increases. And then be able to say that, you know, looking at our 20 million spend, looking at the top five commodities, looking at our 200 suppliers, here’s what we’re seeing. So straight away you’re painting the big picture for the suppliers, for the leadership team.

The second idea is there’s no free ride, you know, supply chain becomes a fail when supply chain uses it as an excuse. It’s another variable. So the idea is to assimilate the supply chain event, I’m sorry, the inflation event into the work we’ve already got going on. We’re already working on cost reduction issues. We’re already working on commodity consolidation. So how does this fit in in terms of a net effect? If I’m able to save a hundred thousand dollars over here from a new engineering initiative that’s gonna lower my costs, if I’m able to consolidate and leverage suppliers over here, maybe even a low-cost region, and enjoy these savings despite this increase in these other areas, what’s the net effect on the company?

So, Lindsay, what you’re saying there, just to recap for the audience, is to look at the big picture. Don’t just focus on one commodity or one aspect of the business. Something may be increasing, but another piece of the business may have a decrease or a savings. You want to look at the overall net impact.

Yes, and tie the big picture to the small picture, and then what are we gonna do about it? Big picture, small picture. So what are we gonna do? Finance can be our front. Finance often knows what they want but not how to get it. Supply chain can work closer with finance to say, here’s what I’m seeing for projected spend in the upcoming monthly buckets. Here’s where I’m seeing cost pressure and where I expect to see an increased cost of acquisition. Finance will be, you know, anytime we can improve our organizational alignment with supply chain, aligning to their sensitivity to the pain points of executive leadership and the CFO, then we’re going to elevate so that the supply chain function within the organization, the traditionally, you know, financed sometimes yeah, the traditional P&L often breaks out things like inbound freight as a separate P&L item.

So, you know, when they’re doing, whenever they’re doing that, whenever they’ve created a KPI, if you will, that they’re watching, even though it may be somewhat secondary, it’s important not to dismiss it. You know, for our $20 million spend, medium-sized manufacturer of 200 suppliers, maybe my inbound freight is only $100,000, but we want to be able to demonstrate that, hey, we’ve rerecorded our small package inbound freight with the primary carriers, DHL, UPS, FedEx. We’re working to a typically, you know, 82% reduction of open market list price. So we’re managing it. And, by the way, it’s, you know, it’s less than 1% of our spend. So, being able to again align, even though it’s perhaps easy for supply chain managers to say, “I don’t care about inbound freight, it’s a secondary element of my cost.” Yeah, but if other elements of the organization are gonna be watching it, then be able to demonstrate that we’ve got that one pegged as well.

Yeah, if finance cares about it, you should care about it.

That’s probably a good rule. And then last, if I have a minute, I think I’d say coaching, it’s a coaching opportunity. The coaching opportunity for the weekly purchasing team meetings that have a round table discussion with buyers on what’s successful in working with suppliers to push back on requested cost increase, have senior buyers mentor the younger members of the team, the less experienced members of the team on here’s what I’ve done to be successful or have anyone share their wins of how they were able to maintain an acceptable cost basis. And, you know, it’s an opportunity for the department to align around a problem rather than you don’t want the purchasing team to be fearful of how much money they’re paying for things they want. You want that to be an open conversation.

And especially if there’s a dialogue, for instance, that says, “Look, we appreciate you’ve got inflation or cost pressures. As an organization, we’ve decided not to pass along cost increase to our customer base, even though it’s gonna put pricing pressures on us. And as a partner, we’d appreciate if you took the same position. In fact, what we’d like to see is what you’re doing to con to be able to hold that position by driving out costs within your operation.” So if that’s putting together a storyline like that, that’s shared across all the purchasing teams so that they know this is what I do, rather than just say the Barbara Bush “just say no.” Right? Yeah, a little bit more context to it.

I would call that prioritizing and having a supplier management strategy. The first step is being aware that you need to have one, and then the second is actually implementing some sort of strategy like you just mentioned.

Yeah. And I’d say lastly, Sarah, if I may, but I think the overall umbrella KPI for inflation management would hopefully show on our month-to-month net PPV report. So we can show introduce a PPV KPI at the leadership cadence meetings and say, “Here’s my monthly KPI, here’s my monthly PPV. Here are the big issues, whether it’s machined parts or copper or even overseas sourcing freight. But here’s the net effect.” So we’re demonstrating to the management team that supply chain is more than just the problem, it’s more than just passive. It’s leading in and taking leadership on the issue.

So, Lindsay, I like to be very conscious on our show of not using too many acronyms. So what does PPV mean?

Purchase price variance.

Perfect. Join Lindsay and me next Monday at 10:00 AM Central time for your weekly supply chain manufacturing news for small and mid-size manufacturers.