Finding opportunity in rising raw materials prices and inflation

15 March 2022 4 min. read

There is not a boardroom in the land that’s not currently consumed by the burning question: how can businesses mitigate the risks posed by rising inflation and raw material prices, without impacting delivery or margins? Thibault Lecat, Managing Director and Regional Leader for Western Europe at Inverto (part of BCG), outlines several areas of opportunity amid the challenges.

The ongoing raw materials supply and price crisis has the starring role in this current drama, which is playing out on the global stage. We are already seeing profit warnings from a cross section of multinational and domestic businesses, as market conditions and the cost of raw materials, including a dramatic rise in wholesale gas, nickel, wheat and grain (among others) since this month, are hitting margins.

So, what do the plans being hatched in these boardrooms look like and is there a way to turn this crisis into an opportunity?

Thibault Lecat, Managing Director, Inverto

Strengthen supply chains & bolster stock

The most common measure taken by companies is to ensure the supply of raw materials at the best possible price by analysing the supply chain and, where possible, building up stocks. When we surveyed procurement managers and managing directors from the UK and Europe in our annual Raw Materials Study, this approach was being implemented by a good two-thirds of respondents.

More than half (55 percent) also approached new suppliers, while just under half (43 percent) moved order volumes between already known suppliers. 51 percent also stated they want to move away from a just-in-time supply chain and build up larger warehouses again – while this can be argued to be an expensive solution, it is cheaper than production downtime.

Passing on costs & price agreements

To maintain margins, three quarters of the participants (75 percent) see passing on the increased costs to their own customers as a sensible measure. However, only 42 percent are optimistic that they will succeed and with everyone suffering from the blanket cost inflation, companies who balance costs and offer attractive prices will gain competitive advantage on their peers.

Rather than passing on the costs, companies could instead look for savings in procurement, warehousing, transportation, overheads and, of course, price agreements with their suppliers. Some of the easiest ways to respond to inflation are by creating transparency, breaking down silos and ensuring better relations and communication with suppliers.

Additionally, optimising requirements and specifications, especially when they have not been reviewed over years, opens up greater opportunity for better total cost of ownership.

On the supplier side, it is difficult to avoid increased costs. In our study, we saw that fixed price models have decreased, especially compared to previous years, or suppliers only accept short time periods in which they guarantee fixed prices.

Conversely, there has been an increase in price models in which sliding clauses or surcharges have been defined for the raw material share. More than 40 percent of those surveyed were also forced to pay spot prices for at least some of the materials they need.

One way to keep everyone happy would be to implement an index-based escalator clause. This allows companies to automatically benefit when costs fall, while suppliers receive a fair price for their share of value creation.

Prioritise risk management

The constant change which we are witnessing has created a raft of new challenges and opportunities, with accurate forecasting and risk management taking on renewed responsibility. In both areas, companies have learned from the hiatus of the pandemic, with 74 percent of businesses stating that intensified risk management will be part of their daily work post pandemic, while 49 percent expect to be able to act in a more coordinated manner in future crises.

And finally…

Sadly, these issues are here to stay. The Russia-Ukraine war, rising commodity prices, the fall out from supply-chain disruptions and expansionary economic policies, tightening labour markets, and the sustainability agenda are all driving market uncertainty and pumping inflation.

Added to this, there is increasing demand among major and developing economies, while trade protectionism and climate change also create supply chain risks, increase costs, and contribute to price volatility.

However, it is the companies that look beyond the short term to skilfully secure supplies, renegotiate to accept lower price mark-ups, and maintain delivery capacity who have an incredible opportunity. They can use this moment to gain market share on their competitors this year, and beyond, and will ultimately be more profitable.