By Bob Brennan, Maine Pointe
The 2020s may be starting out with unprecedented challenges, but we are seeing hints of a return to a more dynamic era of prosperity. Despite overwhelming supply chain problems and a global pandemic, 2021 saw near-record levels of growth in the private equity market, surprisingly high multiples and a frenetic deal pace. That hyper-driven pace is expected to continue through 2022, with increases in deal count and value, and pressure to move quickly to gain deeper visibility across the end-to-end supply chain.
Considering the rapid pace of deal-making, 2022 will also face more uncertainty – although firms which adhere to a few specific operational strategies will enjoy the highest levels of success. Those strategies include: gaining greater visibility of the end-to-end supply chain; guarding against the unexpected with more optionality and resiliency; leveraging digital technologies to improve decision-making.
The disruptions we continue to see in the supply chain are laying bare the winners and losers. While those on the losing end tend to be those who lacked resiliency in the supply base, the winners planned ahead with better inventory positions, a more resilient supply base, greater optionality and usage of digital technologies, and labor and production practices that encouraged loyalty and attracted top talent.
How inflation will impact growth
According to a survey by Chief Executive magazine, 48% of CEOs and 50% of CFOs expect inflation to get worse over the next 12 months. The consensus is that inflation will remain elevated for 2022, supply chain disruption will continue and the impact of covid-19 will continue to be felt globally.
Inflation will continue to drive instability in commodity prices, resulting in higher input cost and margin erosion, and contributing to greater supply chain and productivity shortages. Overall the inflation factor is difficult to project, although more recent analysis from the Federal Reserve indicates it is likely to last longer than was initially expected. Inflation can still be mitigated by exploring supply chain optionality, and by driving productivity in manufacturing to increase resilience.
Who’s going to do the work?
2022 will be a very good time to be in the job market. Companies will be offering higher pay, both to keep up with expected inflation and to attract top talent. But if you are on the other side of the hiring desk, you are being challenged, especially in food services and manufacturing. There are multiple actions that can be used to mitigate these issues, for example, implementing cross-functional working groups and capturing the skills of your people who, if needed, can be re-deployed to ensure that critical aspects of production continue.
Getting the goods when you need them
The pandemic has revealed the need for clients to implement a strategic sourcing process and avoid more risky methods such as single-company or single-region sourcing. Relying on historical patterns of demand almost always results in too much of the wrong kind of inventory, and not enough of the right kind.
In one example, our client, an automotive materials company, recognized the immaturity of their supply chain, having relied too much on tribal knowledge and a small number of suppliers. We rolled out a new S&OP process to create more optionality in the supplier base, resulting in an increase in EBITDA by 11 percent.
That optionality and resilience may require rebalancing onshore, nearshore and offshore footprints, analyzing disruptions in transportation and shifting towards decentralized warehousing, and finally, exploring alternative supply, manufacturing, storage and distribution routes.
Those bottlenecks on the supply side are more obvious as companies faced shortages in raw materials, but demand side challenges continue to exist as well, some of which can be attributed to the release of pent-up demand and a shift in consumer preference. Some companies are addressing this imbalance by optimizing manufacturing processes, focusing on Overall Equipment Effectiveness (OEE), and rebalancing work content and work cell redesign to improve flow.
Better forecasts and multiple-region sourcing will improve the situation, but none of this can be accomplished without more modern technology. We were able to provide a solution for our client, an agricultural company, by rolling out new decision support tools to gain more insights into how to position inventory across the business, optimize margin and gain a competitive advantage. The result was improved EBITDA, and better efficiency and accuracy through data visualization and spatial analytics.
The challenges of the pandemic need not spell disaster for companies, and those which come out ahead will be those that have aggressively re-examined their end-to-end supply chain operations, created resiliency, expanded optionality and leveraged technology.
Bob Brennan is vice president, private equity, at Maine Pointe, an operational, implementation-focused consulting firm that works with private equity firms.