What Impact Will a 9% Drop in Profits Have On Your Organization?

Unless your Supply Management organization takes it to the next level, your company is facing a 9% drop in corporate profits this year due to rising prices and other inflationary pressure according to a recent Hackett Group study. For a typical Global 1000 company with 27.8 billion in revenue, Hackett’s study estimated that commodity and offshore labor inflation will drive a 150 million per year hit to the bottom line. Ouch!

Why? While most companies are now able to effectively anticipate commodity price increases, more than 60% of companies surveyed by Hackett in the recent study have not been successful at mitigating these cost increases. The reality is that few executives have experienced significant inflation, which is now at levels not seen in 30 years (when inflation rates hovered around 13% back in 1981).

And while inflation may not yet be at 13%, it is bad. Not only do respondents to the Hackett study expect the rate of inflation for commodities overall to rise by more than 30%, to 6.3% a year, but commodity price volatility has increased nearly 60% since before the recession. Making matters worse, at the same time, due to the talent crunch, the rate for internal labor is expected to more than triple from 0.7% to 2.2% and the rate of inflation for external labor is expected to more than double from 1.2% to 3%.

The problem, as identified by the Hackett study, is that most companies tend to take a fragmented, siloed approach to anticipating and mitigating costs. And while more advanced companies will forecast prices and do some basic hedging by adjusting contract length, purchase volumes, or inventory levels, few take the cross-functional approach required to combat the mitigation. The majority of companies do not do the analysis required to understand the impact of commodity cost increases on profitability, do not use specialized analytics to anticipate future commodity costs, and do not provide clear direction and policy for making hedging decisions. A future post will explore in greater detail some of the options presented in Hackett’s study on Taming the Inflation Dragon and why your organization must adopt more advanced