How should the private and public sector react to the challenge of global inflation? Here we examine the existential crisis facing two sectors – B2B chemicals and industrials companies and industrial goods – giving guidance for companies working within these sectors on the actions they should take in the months ahead.
Inflation and The Big Pricing Dilemma for B2B Chemicals and Industrials Companies
Raw material, labor, and logistics costs across all major commodities and components escalated in 2021. With more to come in 2022, the C-suite of many B2B chemicals and industrials companies face some harsh choices when it comes to pricing.
During times of inflation, there’s a fine balance between offering customers the most favorable prices to remain competitive and ensuring your business isn’t being damaged
If prices are pushed too high, the risk of customer attrition is very real. Even worse, they may opt for alternative technologies or solutions.
At which point will important customers switch to competitors when subjected to another price increase? Likewise, is agreeing to a contractual price a realistic strategy in these times, and at what point should contracts be renegotiated? And when costs eventually turn, should pricing gains be held on to?
These are very real, and often make-or-break, questions that are currently facing many B2B chemicals and industrial companies. These are also questions which could markedly define their post-pandemic destiny. Having advised several corporations that have successfully navigated these difficulties, Oliver Wyman’s Energy and Natural Resources Partners, Varun Ratta and Pradeep Suresh, provide five recommendations that can bring clarity to this dilemma:
1. Remember, you are not alone in this - customers and competitors are also struggling with the same inflation pressures
2. Don’t forget “value-selling 101”: keep reminding customers about the tangible and intangible value of their relationship with you
3. View inflation as an opportunity to have open conversations with your customers
4. Avoid “lazy pricing” – it throws the price versus value equation out of balance
5. Use price adjustments versus surcharges smartly
A New Kind of Crisis for the Industrial Goods Sector
Our Recession Heatmap Lead Indicator has turned dark red in Q2 2022, signaling a looming #recession. While its shape, length and depth is still unclear, it’s important that industrial goods companies prepare for and implement appropriate strategies for optimization or transformation under different scenariosWolfgang Krenz, Partner, Sector Leader Manufacturing Industries at Oliver Wyman
Oliver Wyman introduced the Recession Heatmap in 2018 to help industrial businesses assess the likelihood of a recession in their respective sectors. Our Lead Indicator has the potential to warn of a looming recession as early as three or four quarters before it hits, as back-testing on the 2008 recession demonstrates.
The current crisis affecting the industrial goods sector is different from previous adverse times. Due to ongoing global volatility and rising inflation, the current crisis has a different starting point and mechanics. As a result, it requires different strategies.
So far, many industrial companies have adopted a wait-and-see attitude - hoping for a quick resolution of the Ukraine war and for China’s lockdowns to end. Unfortunately, these businesses also need to prepare for more unfavorable scenarios. Here’s how they can adapt:
- Understanding different scenarios, as well as the decisions your business will need to make when experiencing these events, will be more important and difficult than in typical recessions, especially as the triggers of the recession may not be temporary but reflecting global and economic changes.
- Secure financing of unusually high working capital. The high, far-reaching order books can involve significant margin risk that need to be mitigated.
- Review and reconfigure their supply chains to increase resilience against further supply shocks in the future.
More than ever, those companies that use the downturn for transformation will be the winners in the next upswing – something you will see when our heatmap turns green again. Read more here.
Inflation is triggering broad transformations that have been pushed back for too long. Check back in with the Inflation Shift to discover how the public and private ecosystem could aim for better production, better consumption, ESG mindsets, transformed organizations and more.