Hackett Group Study Shows Price Increases on the Horizon
Now that many US companies have exposed billions in cash by addressing supply chain financing, inflation is about to swallow up that cash. A study conducted by global business strategist Hackett Group revealed that business leaders expect a reduction in corporate profits of up to 9% during 2011 and 2012, due to inflationary pressures throughout the supply chain.
Commodities, labor and offshore services are given credit for an expected $150MM decrease in the bottom line. Inflation in commodities is expected to “increase significantly during the next 12 months”. Along with raw materials, there is a labor and offshore services component that is expected to see pressure in China, India and other low-cost labor markets. According to the study, indicators for China and India show a 6-10% inflation rate.
Hackett Chief Research Officer Michel Janssen explains that a history of myopic supply chain management strategies has left many executives scratching their heads as to how to mitigate commodity cost increases. He indicated that few corporations take a cross-functional approach to volatile supply chain costs or provide adequate hedging policies to reduce risk and exposure.
Survey respondents indicated they expect commodity prices to rise nearly 30%, while internal labor inflation is expected to triple, moving from .7% to 2.2%. The rate of external services is projected to rise from 1.2% to 3%. “Inflation has become one of the top issues for our clients,” says Janssen.
The study provided some guidelines to consider for improving input cost mitigation. For example, an integrated approach to commercial risk management that connects procurement and finance, which includes a co-owned “spend portfolio” that both departments manage, can help attain corporate objectives. Hackett recommends companies take a broader, cross-functional approach to cost mitigation in order to exploit supply chain logistics and financing.
Hackett senior research director Pierre Mitchell sees the coming storm as an opportunity. “There’s no question that companies are facing a real roller coaster when it comes to input costs in the coming year,” he said. “It’s a ride that senior executives would love to get off. But most companies simply don’t have the metrics, tools and organizational models in place to make this happen. The looming threat of rising inflation is an opportunity for executives to build a business case for developing new capabilities, and improving cross-functional capabilities.”
