The squeeze is on, as uncertain demand combines with persistent inflationary pressures. In this climate, margin expansion directly depends on your ability to drive operational efficiencies – efficiencies that can both counter increasing costs and fund revenue initiatives.
The strategic imperative for operations to free up working capital is increasing as the underlying economic fundamentals are concerning:
- Although consumer spending has maintained better-than-expected economic performance, persistent inflationary pressures combined with the $17.3 trillion of consumer debt and reduced consumer confidence will weigh on spending outside those with disposable incomes
- Increasing energy, transportation and logistics, material, and wage costs — and now the added cost of carbon — are creating a next wave of inflationary pressures
- The reduced likelihood of the Fed lowering rates will keep the cost of money high for longer.
In this business climate, companies need to maximize the resources available to drive revenue. Or differently stated, companies need to avoid having capital buried in unproductive inventory and having operations become a barrier, not a remedy, in protecting or expanding margin.
Sales, Inventory and Operations Planning (SIOP), aligned and managed at the appropriate level, and executed at the item level, enables companies to align and then optimize operations while maintaining or improving service levels to their most important customers. It’s a methodology driven by item-level analytics.
Even with those expected outcomes, leaders may be cautious about launching revenue and operations initiatives at the same time. Concerns for overtaxing resources, working cross-purpose, and making system changes that disrupt the business are all rational reasons to defer SIOP given the prioritization to strengthen revenue performance in this economy.
But what if SIOP can be sequenced to minimize disruption, but more importantly, to fund the revenue initiatives along the way? That’s not just a possibility; it should be your expectation given the pressure on margin performance.
Our approach is to start with a rapid assessment that identifies issues affecting operations, identifies options, sizes the cost and capital reduction, and creates an initial sense of timing so that you gain an early view of how much funding can be available and when it would be available. From that initial assessment, we execute SIOP in stages, organized by business line, and product that allows us to work sequentially to keep resources and complexity in check, yet enables us to fund revenue initiatives along the way.
In a subsequent post, we will walk through the methodology able to deliver these outcomes.
If not, you are competitively disadvantaged in a market consisting of more business risk than business reward.
Margin expansion — or even margin protection for some – will prove challenging over the next 12 months driven by the toxic combination of uncertain demand, supply disruptions, and continued inflationary pressures. Undoubtedly, leaders will need to expand revenue initiatives to capture the growth that is available. The question goes to funding. What if you can fund these through methodical and predictable operational efficiencies? Well, you can – and you should.
