-Oliver Stein, Director, South East Asia, JAGGAER

Inflation recently hit its highest level in decades, and this is having a major impact on manufacturers. Many parts of Asia are also feeling the strain, however the inflation spike in Asia should be transitory, with lesser risks towards tightening measures compared to Western economies. Inflationary pressures in developing Asia are expected to remain less severe compared to that in global peers.

Asia has become a global manufacturing hub with Singapore, Indonesia and Vietnam receiving 80% of new foreign direct investment inflows in 2019. Inflationary pressures moderating in Asia is a mixed blessing, as a recession may be on the horizon. This will cut margins on end products, especially in the CPG sector, without necessarily reducing input costs. How will businesses cope?

Ain’t no revenue when direct supply’s gone

Supply chains, already severely disrupted by a series of shocks, starting from the pandemic and now the war in Ukraine, face continued turmoil as sanctions bite and key supply sources are cut off. Companies are faced with severe inflationary risks, putting pressure on their margins. Apart from supply chain disruptions they face increasing regulatory pressures and societal expectations to follow sustainable best practices.

Organisations are beginning to look more and more into how they manage responsiveness and resiliency in a time of uncertainty. For most manufacturers in Asia that also means increased tracking of sub-tier vendors where previously there was little visibility.

The rising cost of direct materials is a constant challenge to bottom line results across all manufacturing and process industry sectors. Accounting for 20-80% of the cost of finished goods, the prices paid for materials and components that make up the final product that is sold to the end user are beyond the immediate control of the manufacturer. Yet manufacturers have a responsibility to customers, shareholders, and partners, to make every effort to minimise the impact of commodity price volatility on supply chain operations.

Your sourcing function could be a secret weapon
Cutting back on spending is simply not an option in many, if not most situations. For manufacturing companies, no supply of direct materials means no sales, which means no revenue. Building up inventory is a gamble, even if the cost of direct materials does increase significantly, as it involves tying up cash that could be better deployed to drive revenue.

Hedging may make sense if there is significant risk exposure that cannot be easily avoided, or the costs are passed onto customers. It’s a strategy that some companies have undertaken to reduce the risk of commodity volatility, but the strategy of advanced sourcing through the use of enabling technology has proven in many cases to have a more significant and beneficial impact on the supply chain as a whole.

Here are five ways in which companies can leverage the sourcing function and technology to avoid or at the very least mitigate the impact of inflationary pressures:

1. Improve spend and supply chain visibility

Everything else a company does on the supply side depends on optimising visibility on spend and supply chains. Where is spend focused and where are supply chain risks most acute? Even in inflationary times, spend analytics software can help identify opportunities for savings. Nimble supply chain risk management technology enables customers to identify supply chain disruptions, often before they occur, and take corrective or mitigating action.

2. Diversify your supply network

A manufacturer that relies on the same old established suppliers puts itself at a massive competitive disadvantage. It should gather, maintain and update market intelligence on suppliers in key categories. And it should watch out for new market entrants in particular – they are often ready to offer discounted prices to gain a foothold and will go the extra mile in providing good service and high quality.

However, at the same time, one must take care as a failure to exercise due diligence may turn out to be false economy. Advanced sourcing technology affords decision makers the market intelligence and insight vital to do this effectively.

3. Review contracts

Where there is competition to secure supplies in high demand from vendors, it pays to check whether there is a formal agreement on prices and minimum volumes, and conversely, where the organisation may be at a competitive disadvantage because it has no agreement.

Such terms may be buried in contracts signed months or years ago. Reviewing contracts manually can be a time-consuming and expensive business. Look for sourcing technology that leverages artificial intelligence to quickly identify the relevant clauses in contracts and cuts the time needed to review by 50% or more.

4. Map an optimum spread of suppliers

In certain key areas of spend for manufacturing and consumer packaged goods companies, such as transportation and packaging, there are so many variables that it is virtually impossible to identify saving opportunities. Especially if the company operates multiple production plants in various geographies.

A manufacturing company will only find the optimum spread of suppliers using software that leverages rules and complex algorithms.

For example, Rolls Royce has managed this by enhancing their supplier data management and spend processes. By getting better, more structured insights on material spend by supplier and region, they have centralised this data to better manage cross-regional spend and transparency.

5. Build cross-functional teams to protect margins

Supply chain disruptions and inflationary pressures have put procurement centre stage when it comes to reducing costs as well as margins. Companies need to establish cross-functional teams embracing procurement, R&D, operations, finance, and sales (and quite possibly others) to identify where the cost pressures are, where they can be minimised, to what extent increased costs should be absorbed or passed on to the customer, or specific products should be discontinued. This is far from easy.

Overall energy costs or energy consumption per plant might be known, for example, but it’s difficult to quantify how much energy is consumed to produce each product. How clear is the linkage between commodity goods and specific finished goods?

Simply raising prices by an arbitrary percentage across the board may make no sense at all, and only procurement, working with other team members, can determine what price increases make sense for what products.

Manufacturing as an agent of change
The manufacturing sector is in fact best placed to lead industry out of inflation. That might sound surprising. Manufacturing is being affected by the same headwinds as other sectors, some may say even more so.

But the reverse is also true. When manufacturing boosts productivity, then prices drop and consumer dollars go further. The constant modernising of manufacturing is mission critical.