Some Moves to Avoid in an Inflationary Period – At the last KMS webinar there was a good deal of interest around the issue of inflation and what to do with the surge in the economy that has essentially been feeding that inflation.
Here is the dilemma that many companies are facing. They are seeing more demand than they can keep up with. They have orders for product that extend well into next year and they are seeing more of that demand appear every day. They simply do not have the capacity to meet that demand and that leaves them with two options.
The first is to scramble like mad to build that capacity – hire more people, add new machines, expand physical plant, even make some acquisitions. They do not want to leave money on the table and don’t want to risk losing market share.
The second option doesn’t sound at all appealing as it means telling consumers they have to wait or will even have to look elsewhere.
It would seem that option one would be preferred but there some major dangers involved. The most obvious is that all this extra demand may fade in the months to come. There is an incredible amount of extra cash in the hands of the consumer at the moment as they had no other choice but to save last year and now they have money burning a hole in their pockets. They are even willing to ignore these price hikes for the time being as they have desire and the wherewithal to satisfy it. That situation does not last forever and at some point demand starts to flag.
What does a company do with that extra capacity now? It is not possible to just return those machines or fire all the new hires. What’s worse is that all that expansion took place in an inflationary period and prices were all elevated. Now the obligations are still in place and demand is not supporting the decision.
The cautious move is to determine what future demand will really look like and prepare for that. Hasty moves to gear up when prices are high will leave financial stress when demand conditions return to more normal levels.
A replay of the Q3 2021 Economic Predictions for Manufacturing Webinar is available HERE.
Managing Director, Armada Corporate Intelligence
Story from the July 16, 2021 Black Owl Report