“Businesses need to be thinking about how to manage their inventory better,” Anderson says. “They need to make the right decisions on what, when, how and where to buy it, as well as where to store it. And they need to manage their supply chain network to maintain strategic inventory stockpiles.”
Also relegated to history is the unmodulated just-in-time delivery paradigm seen as a strategic hallmark after the Great Recession. While “just in time” helped companies maintain good cash flow by trimming inventory investment, the supply chain debacle highlighted the importance of moderation.
“Businesses have to ask whether it’s better to have too much inventory or to run your customers out,” Anderson says.
Given that neither situation is ideal, Anderson advises maintaining sufficient inventory stockpiles to support key customers while maintaining just-in-time stock for others.
Beefing up stock of critical items can be a smart move even in these inventory-cutting times, McQuaig says. Given the continuing supply chain issues, stocking out of a needed item can result in the loss of important customers.
“In construction, for example, even getting the right size water heater can be very difficult right now,” McQuaig says. “A lot of plumbers are having to stock units ahead of time, so they have them available.”
The decision on overstocking key items must be made on a case-by-case basis.
“Generally speaking, it’s a good idea,” McQuaig says. “The danger is the possibility of running out of cash if you do not have enough working capital.”
McQuaig gives the example of a company installing irrigation systems.
“If they know pipe is going to go up in price because oil is a big component, and they see supply might get pinched, they might stock all the pipe they need for a year,” he says. “But they won’t get back the money tied up in pipe until they receive it from their customer. They might end up in a situation in which they can’t meet their payroll.”
Companies can obviate such difficulties by running monthly or weekly cash flow forecasts.
Raising prices
Asking more for goods and services is another way to adjust cash inflows.
“Businesses are very hesitant to raise prices when they don’t have to,” Conerly says. “And they often get pushback from their salespeople. But the fact is, buyers are accustomed to seeing price increases in inflationary times.”
The amount of increase can be based on the components of production, McQuaig says.
“If you are a builder of custom homes, do you have an inflation index in there in case your costs go up?” he asks. “Prices for lumber and other significant items have been varying all over the map. If the timeframe is a year to build a house, how did you price it at the front end to make sure you were covered for inflation on the back end?”
Price changes must be carefully communicated.
“Give the white glove treatment to tier-one customers by reaching out and explaining how your costs are rising,” Beaver says. “Communicate to them that the price rise is only temporary.”
One approach is to tell your most important customers you are absorbing 20 percent of the price increases and passing along the other 80 percent. Another is to separate out any fuel charge increases from the delivery costs and explain you are only passing them along.
Above all, avoid delay.
“Businesses are most successful at raising prices when they do so quickly,” Anderson says. “Customers are more willing to absorb increases during inflationary times when they can see it makes sense in the marketplace.”
Waiting too long risks losing the opportunity, especially if inflation leads to a serious economic downturn.
New rules
Today’s unexpected return of inflation has changed the operating paradigm for businesses large and small.
The Great Recession sparked the habit of relying too much on just-in-time delivery of supplies to trim cash investments. Further, the recent willingness of customers to accept price increases was exacerbated by supply chain disruptions.
Now, businesses must modify their cash flow management, inventory practices and pricing policies to reflect both rising costs and supply chain disruptions.
“The booming economy of recent times has allowed companies to pay less attention to market developments and still be fine,” Anderson says. “But now, in a time of inflationary price increases, they have to do better. The job of managing is tougher than ever before.”
Phillip M. Perry is an award-winning journalist who is published widely in the fields of business management, workplace psychology and employment law.