The world was just bidding goodbye to the COVID-19 pandemic when the Russian-Ukraine war loomed over the global business environment. It resulted in inflation that forced governments to raise interest rates to reduce its negative economic effects. SMEs need to develop strategies to overcome the bad effect of inflation on overall business performance.
Small to medium businesses are disproportionately impacted by inflation due to a lack of resources that can sustain business operations. SMEs can overcome the challenges caused by inflation by following these supply chain management strategies.
1. Proper forecasting
Don’t underestimate the role of forecasting in generating savings for the business. The COVID-19 pandemic and the Russia-Ukraine war both increase the costs of producing goods. The cost of procuring materials can increase the financial burden of businesses. To tame the impact, SMEs need to forecast the demand to avoid overproduction that can lead to losses. The excess products, if not sold, can become waste and will not generate profits for the business. There are various ways to forecast demand, but the two simplest methods are the simple moving average and the time-series model.
Simple Moving Average (SMA)
Conducting a simple moving average will reveal the trends in sales. It is done by getting the average of the selected period to forecast the demand for the next month. For example, if calculating the expected demand for next month, you can get a 3 to 5-month sales average. This will give insights into the quantity of demand to expect next month and the trends in sales. It will clearly show upward and downward trends to aid production decision-making. Another method is based on historical sales.
2. Time-Series Model
Time-series methods refer to past performances. In using this method, you can use the number of sales in the past months to determine future demand. It will also show if the trend is upward or downward to help decision-makers determine the appropriate quantity to produce. The time-series methods also apply to seasonal products. The historical data can be adjusted to generate a prediction.
Forecasting can lower the procurement and production expenses of SMEs as it allows producing the quantity of products enough to satisfy the demand. It avoids unnecessarily large inventories that can lead to financial losses. The savings generated can reduce the need to pass the additional expenses to the customers. SMEs can maintain a stable demand for their products as consumers can still buy them at their regular prices. Consequently, the business can avoid the negative effects of inflation on profitability. In line with proper forecasting, SMEs can implement the JIT method.
2. Just-in-time (jit)
Just-in-Time (JIT) is a popular inventory management method that refers to procuring materials only when needed. After forecasting the demand, the business can plan to procure raw materials based on the result of the forecast. JIT also avoids overproduction and keeps inventory small. Implementing the JIT method has many benefits. These include;
The unnecessary high volume of production is not always good for businesses. It can cause some of the products to become unsold and sit in the inventory for a long time until they become less usable. For example, the performance quality of a machine that has not been used for a long time may decline. The business will not be able to sell it at its regular price; hence, it can generate a loss.
Reduces Inventory Cost
JIT can lower the cost of inventory. Since it involves ordering materials or holding products only when they are needed, there is no need for a large storage facility. The products are moved promptly, which doesn’t take up much space for a long period. As such, it reduces the holding inventory costs. The implementation of JIT can also reduce waste.
Reducing the cost of holding inventories can help SMEs dodge the adverse effects of inflation. It can avoid the need to raise product prices which can affect overall sales. Keeping the pre-inflation price of the product can encourage even price-sensitive consumers to continue making purchases. Thus, businesses can continue to prosper despite inflation.
3. Avoid Wastage
As inflation increases procurement and inventory costs, it is logical to avoid wasting resources. Some of the ways to avoid waste include being organized, proper storing of inventories, and organizing clearance sales.
Being organized makes tasks faster, which can generate savings for companies. Organized inventories can help employees easily find what they are looking for. As it avoids spending too much time looking for the items they need, they can become more productive. A high level of productivity benefits the company as it can influence higher sales for a period of time. It means that the business can maximize its profitability without hiring more manpower. As such, firms can generate savings and increase their revenues by being organized. Properly storing the inventories can also curb expenses.
The way inventories are handled can also prevent wasting resources. Improper storage can lead to breakage or useless inventories. For example, fragile materials, when not stored in secured spaces can break into pieces. Some raw materials also need to be placed at room temperature to avoid them from going bad. The broken and spoilt raw materials can consume funds allotted for the production of products. They can lead to resource shortages that can cause the cost of goods sold to increase.
Business owners need to learn the proper way of storing raw materials and products to avoid wasting them. It can significantly curb the inventories and production expenses which can help reduce the financial burden caused by inflation. Finally, SMEs can also organize clearance sales.
Despite proper forecasting and inventory management, it is sometimes inevitable to experience a lower volume of sales. In some cases, the unsold products can become less functional or they may become unfit for consumption. The inability to sell these products can reduce the returns of the company. Thus, it is recommended to organize clearance sales.
Clearance sales offer discounted products. Some of these products are those that were unsold from past inventories. As those products cannot be sold at their regular prices, the business can lower their prices to stimulate demand. Discounts can range from 20 to 75 percent depending on the need to move the products right away. Clearance sales are an effective way to move products that are about to get bad or unusable and to recover the cost of producing them.
Clearance sales also have a bonus benefit. It can become a method to introduce the brand and engage with more consumers. As consumers will be drawn to clearance sales, sales representatives can use the opportunity to communicate with the consumers and build connections. Giving them a good buying experience can increase the number of repeat customers. Thus, clearance sales can help businesses tame the adverse effects of inflation by recovering the cost of producing the goods and expanding the client base. Aside from avoiding wasting resources, SMEs can also consider local suppliers.
4. Look for Local Suppliers
Effective supplier management can reduce the costs of production, which can help tame the negative effects of inflation on businesses. Part of supplier management is choosing the right supplier that can give value to the business. SMEs that don’t have sufficient capital to buy bulk from large and popular suppliers can consider partnering with local suppliers. They can offer lower costs of materials that can help reduce the need to increase the prices of products due to inflation. Local suppliers can generate various benefits for SMEs including;
Reduced Transportation Cost
Instead of looking for suppliers elsewhere, SMEs can select local suppliers to reduce the cost of transportation. The raw materials don’t have to travel far to get to their destination because local suppliers can be found within the vicinity of the business location. It can significantly reduce the cost of transportation. Today, when there is a global oil price hike, choosing local suppliers is a wise move. Local suppliers can also deliver materials more promptly.
Considering that local suppliers are nearer to the business than their counterparts, the deliveries are faster. Faster deliveries of raw materials can benefit the business because it can guarantee faster production of materials, which can help increase productivity. It can help the business maximize its sales and therefore generate stable revenues that can help minimize the blow of inflation. Selling a higher quantity of products can increase sales, which can offset the burden of the increasing costs of raw materials and production. Faster deliveries can also increase customer satisfaction.
Customers that receive their orders promptly are more likely to become satisfied and recommend the business to other people. It can expand the loyal consumer base of the business, which can help obtain stable sales revenues even when the price of the products increases due to inflation. In addition, choosing local suppliers can reduce the costs of raw materials.
Local suppliers are more likely to offer lower prices. To compete with large-scale suppliers, local suppliers will lower their prices. They can offer affordable materials as most of them develop or produce them themselves or without the help of third-party or contractors. For example, local suppliers such as farmers produce their own crops or dairy to sell to businesses. They bypass middlemen, which results in lower prices. Hence, choosing local suppliers can help manage the cost of production and avoids the need to increase product prices. Further, choosing local can help build connections.
Supporting local suppliers is beneficial for the business as it can build important connections. A network is important for the business as it facilitates business growth. For example, local suppliers can connect you with potential customers, which can increase the potential for entrepreneurial success. A network can help curb the impact of inflation as it can open opportunities for more business ventures and can help gain more affordable suppliers for various business needs. All things considered, choosing local suppliers can help SMEs overcome the challenges caused by inflation. SMEs should also improve their supplier relationship.
5. Improve Supplier Relationship
Supplier relationship management is an important aspect of supply chain management that can help manage the costs of production and inventories. Companies that build a strong connection with suppliers receive quality raw materials that are delivered on time. Quality materials and prompt deliveries positively impact productivity and cost of production. Hence, SMEs need to take care of their suppliers. Some of the ways to ensure positive supplier relationships include;
SMEs need to ensure that suppliers can easily contact your business. To enable good communication, the business needs to develop a communication channel and hire a representative that will speak directly to the suppliers. The representative can answer the query and address the concerns of the supplier. Ethics is another thing to keep in mind when developing supplier relationships.
SMEs need to demonstrate ethical business practices. In this case, companies need to make sure that suppliers receive the assistance they need and the compensation they deserve. It is important to not lowball the offer to the suppliers to avoid damaging the relationship. Suppliers that are treated well are more likely to reciprocate fairness and good treatment. This can become a source of competitive advantage as you can receive quality materials for a reasonable price, which can help your business retain its prices despite inflation. Finally, businesses can also consider forward contracts.
6. Forward Contracts/Buying Forward
Forward contracts and buying forward allow businesses to buy products at a pre-determined price in the future. In these strategies, the buyer and the seller agree to a certain price of a commodity. For example, the agreement can state that 100 toys will be sold for $50 after 6 months regardless of whether the price of goods increases or not. It can help reduce the impact of inflation and manage the cost of production.
SMEs that procure products or materials overseas, can benefit from forward contracts. Companies that import products are exposed to foreign exchange rate fluctuation. For example, a company that imports products from China can increase the costs of procurement if the value of the Renminbi increases against the dollar. Entering a forward contract that pre-determines the exchange rate can avoid the adverse effects of currency fluctuation.
In some cases, inflation is inevitable. Businesses can either endure its effects or raise their prices to maintain profitability. However, the latter can often result in lower sales. The presented strategies can help SMEs manage the cost of production, which can help avoid increasing the prices of products that can cause a financial burden to consumers.