Managing a company in a turbulent economic environment
15 August 2022
The business environment is currently characterised by turbulent economic changes that will affect the future direction of many companies. Manufacturing companies and others are under pressure to increase their own costs and under the weight of this avalanche must increase prices for customers. This situation is putting pressure on companies to change suppliers and redefine many supplier-customer relationships. When negotiating prices and future business relationships, the internal efficiency of business partners and their processes are facing increasing scrutiny from buyers and financing partners.
The enormous upward pressure on customer prices, for example for manufacturing companies, has been significantly compounded by the increase in energy prices, with the price of electricity rising from EUR 52/MWh in January 2021 to up to EUR 273/MWh in December 2021. We also saw price increases for most industrial metals in 2021 (copper +26%, aluminium +41%, steel +10%, zinc +19%), with the price index for plastic materials increasing by 49% (includes LD/LLDPE, HDPE, PP, PVC, PS, PET, ABS, PA, PC, PMMA, POM). In addition to rising input prices, companies are facing volatility in demand or a shortage of skilled workers in executive, middle management, etc. In terms of the cost of financing, the three-month PRIBOR rate has risen from 0.36% in January 2021 to 4.05% in December 2021. In contrast, the three-month EURIBOR rate was -0.545% in January 2021 and -0.588% in December 2021.
Given the economic realities, the environment cannot be expected to return to the pre-pandemic situation. Those that adapt to the new conditions will continue to develop, not stagnate or disappear.
In such an economic environment it is appropriate to focus on:
- Forward-looking financial models – preparation of forward-looking models and assessment of various scenarios, whether it is a cash flow forecast, open currency position, framework capacity plan, alternative organisational arrangement, fixed cost utilisation, etc. CRM data related to sales/key accounts and its systematic use for business strategy and reporting plays an indispensable role in this respect. The processing of regular agendas must be supported by automated processes.
- Change project management – multi-disciplinary projects that have not been handled within the companies' standard processes are thus more frequent. These targeted transformation projects will require coordination across the existing organisational structure, or dedicated project managers, or a project-oriented organisational structure.
- Strategic sourcing – alternative suppliers will need to be approached more frequently to diversify risks of non-delivery, excessive price increases, changes in financial terms of the business relationship, etc. Having the process of selecting a new supplier managed by an independent entity allows a wider range of suppliers to be approached and verifies any habitual practices within the purchasing relationship.
- Strategic partnerships – to expand the customer portfolio and increase the use of fixed costs, situations will require new strategic partnerships, either in the form of alliances or capital injections.
For a more detailed consultation of your specific situation, please do not hesitate to contact us. We will be happy to help you with issues related to improving company performance through purchasing processes, business operations, financial management and transformation projects.