We have entered a new era of with inflationary pressures. It started during the pandemic due to limited supply, but it has been spurred on with the rising oil and gas prices, commodity shortages, and rising food prices. Navigating successfully through these inflationary times will make the strong companies stronger, and the weak companies weaker. In our view, there will be more winners that propel forward during this period of time than any other since the Great Depression. Are you reacting to inflation or thinking three steps forward so that you can take advantage of the opportunities that arise?

Utilize SIOP to Take a Strategic Look at Customer & Product Profitability

To support customer needs and be prepared to pursue revenue opportunities in an inflationary environment, the smart are taking control. They aren’t waiting to see how their supply chain partners respond or what customers request. Instead, they are getting on top of what they should do to thrive during an inflationary environment NOW! The smart are utilizing SIOP/ S&OP (Sales and Operations Planning) programs to quickly determine which customers and products are profitable and their impact on their future business.

SIOP will provide a view into customer forecasts. Those forecasts will be translated into operations and supply chain plans, and options will emerge for how to successfully fulfill the forecasts. Before proceeding with a specific alternative to meet customer forecasts such as adding capacity, repositioning your supply network, nearshoring critical components, and/or purchasing additional warehouse space, look strategically at your customer and product profitability in conjunction with your forecasts to determine what to prioritize and the down-the-line impacts of your decision.

Since SIOP projects future sales, manufacturing requirements, supplier purchases, and inventory levels, if you add costs into the mix, it will also forecast profitability. You can take it one step further by analyzing what if price and cost changes into your SIOP model. It will become a powerful process for evaluating options and making strategic decisions.

Customer & Product Profitability Example

An industrial gear manufacturer wasn’t keeping up with inflationary pressures and margins were declining. We worked together to quickly develop a directionally correct SIOP process. We started with a revenue forecast by customer based on historical trends and customer insights, and we extracted data and partnered with key resources to categorize by market, customer type, product line, and manufacturing cell. We had to deep dive into rebates, discounts, and other adjustments to gain a reasonably correct net sales picture.

Next, we gained a directionally correct view of manufacturing/ assembly requirements. Since they weren’t keeping track of operational costs at the detailed level and it wasn’t feasible near-term, we worked with the appropriate resources to develop directionally correct cost estimates for groups of products. The end result is that we were able to dissect the following:

  • Top/ bottom customers by revenue dollars and margin percentage
  • Top/ bottom products by revenue and margin and margin percentage
  • Top/ bottom customers and products by margin dollars
  • Top/ bottom items by revenue dollars and margins
  • Average selling price trends
  • Projected change in revenue and margin with new pricing and/or new costs or improvement plans.

The leadership team could slice and dice this data to evaluate pricing options and determine the best way to maximize efficiencies and margins in supplying the items. Thus, they could insource, outsource, implement operational improvement plans for the cells that would provide the largest return for their strategic or key customers, etc. The bottom line is that they had the information to proactively evaluate options to quickly increase customer and product profitability.

Taking Actions to Thrive in an Inflationary Environment

Leaders should quickly pivot, utilize their SIOP process to gain data and insights into key information for decision-making, and consider several actions. Our most successful clients are reviewing the following actions:

  • Quick and successive price increases as needed to integrate cost increases
  • Strategic purchasing for key materials/ ingredients (forward purchases, contracts that include escalators and ranges, etc.)
  • Evaluate capex investments required to meet future demands including market share increases if the competition isn’t as proactive.
  • Rigorous focus on operating cash flow
  • Prioritize and /or address customers and products based on customer and product profitability and related capacity analyses
  • Reevaluate inventory from a strategic and tactical point-of-view. From a daily planning perspective, consider upgrading your planning processes to better manage working capital levels while achieving high customer service levels (OTIF, lead times, etc.)
  • Reevaluate your manufacturing footprint – reshoring, nearshoring, finding new partners
  • Invest in your people and culture to think 5 steps ahead of the competition and successfully deliver improvements.

SIOP Is Not a One-Time Solution

Setting strategy for the next 5 years no longer works! In fact, most companies find that setting strategy a year out can be a tall order. During times of volatility and change, it is critical to stay on top of your changing market conditions and customer needs, incorporate new and changing product and service offerings, and constantly reevaluate your end-to-end supply chain for what will best position you for success.

SIOP is not an off-the-shelf solution, and it is not a one-time “magic bullet”. Instead, the most successful clients look out a minimum of a year to three years (if they have long-term customer contracts) on a monthly cadence, incorporate changing conditions, and evaluate results. Typically, they will reconfirm prior decisions and priorities and address critical changing conditions. Of course, this process must be accompanied with strong execution. If you follow this path, you will thrive during this inflationary environment.

Refer to our blog for many articles on SIOP. Also, read more about these types of strategies in our eBook, Thriving in 2022: Learning from Supply Chain Chaos. If you are interested in talking about what it would take to purse the SIOP journey in your business, contact us.

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Taking Control of Customer Success Using SIOP