How to Respond to Prolonged Inventory Shortages
There’s a shortage of inventory across the board. We as consumers are the last to feel it. B2B manufacturers, distributors and logistics providers have been living with the squeeze for months.
You’ve seen the headlines, and probably experienced the impact in your personal life. There’s a shortage of inventory across the board. We as consumers are the last to feel it. B2B manufacturers, distributors and logistics providers have been living with the squeeze for months.
COVID-19 lockdowns caused a drastic slowdown in manufacturing production in 2020, while social distancing and other restrictions meant fewer workers have been available at major ports. A lack of output has run headlong into a surge in demand that has outpaced companies’ ability to ramp back up to pre-COVID levels.
But It’s not just the pandemic. Fierce winter storms in the gulf coast shut down petrochemical factories and destroyed crops. An explosion in Louisiana last fall has tanked the supply of chlorine. The Suez Canal incident further stressed already taxed shipping lanes. While the dominant trend of Just in Time manufacturing has been a boon for investors, its flaws are being exposed by these cascading crises, per the New York Times.
“It’s sort of like supply chain run amok,” said Willy C. Shih, an international trade expert at Harvard Business School. “In a race to get to the lowest cost, I have concentrated my risk. We are at the logical conclusion of all that… People adopted that kind of lean mentality, and then they applied it to supply chains with the assumption that they would have low-cost and reliable shipping. Then, you have some shocks to the system.”
The bottom line – everyone from chipmakers to food distributors to building supplies manufacturers to plastics suppliers are low on goods and struggling to formulate a commercial response.
A Measured Intelligent Approach
The latest Zilliant whitepaper, Inflation and Pricing: Time is of the Essence, examined the current short-supply situation and the urgency with which B2B companies need to act. The kneejerk reaction is to uniformly raise prices in a low-inventory market. Indeed, prices need to move up. But by how much? How should price moves be doled out to specific customers? Where are you differentiated versus commoditized?
These questions reveal the nuances beneath the surface of a price increase strategy.
What we have learned from past inventory shortages, and advise our customers to do, is to be surgical and asymmetric when raising prices. The heavy-handed approach of increasing price across the board based largely on guesswork is outdated and can leave margin on the table or put strategic customer relationships at risk.
Predict the outcomes of various pricing strategies
Price optimization powered by artificial intelligence (AI) allows companies to calculate the price elasticity of each micro-segment to understand which customers are more and less sensitive to price changes. With Zilliant Price IQ®, it’s possible to conduct “what-if” simulations to predict the outcome of pricing strategies before publishing new prices. For example, pricing teams can see clearly how a 1% price increase will impact revenue and margin in one segment versus a 5% price increase in another. These insights breed agility and reveal which products are candidates for a higher price increase to offset commodity items that are more price sensitive. This way companies can maximize margin percentage while limiting volume loss.
The process of deciding to make price increases, manually updating the entire pricing architecture, and informing sales and, ultimately, customers of the changes is often outpaced by the market itself. By the time new prices are published, new market triggers have changed the calculus again. Modern data science platforms can mine massive data sets and uncover insights at lightning speed, while price management tools like Zilliant Price Manager™ automate the administrative tasks and pricing rules that power time-sensitive price moves. Pairing AI with leading price optimization and management solutions allows B2B companies to turn those insights into actions at scale across multiple systems and sales channels.
Companies across the industry spectrum will turn to allocation to prevent running out of inventory before it can be replenished. It’s critically important to protect the most strategic customer relationships by extending them priority allocation, while choosing the ideal areas to pass costs through. This type of granular decision-making is made possible through customer-specific price guidance, elasticity measurement and seamless communication between pricing and sales-facing tools.
Execute smarter campaigns
When inventory is low, sales behaviors must change quickly. Think about your current means of communicating major changes in corporate strategy to your sales team. Can you effectively create, execute and track new campaigns in the field in an automated fashion? With a tool like Zilliant Campaign Manager™ your pricing, marketing and sales operations teams can quickly create an action that directs sales reps to push for higher margins on low inventory parts. Simply isolate the impacted inventory and attach a talk track that helps sales justify higher prices. Alternatively, the pricing team can enact a price-aggressive strategy in Price IQ, which can then be executed with a pricing action in Campaign Manager.
Most experts expect shortages to persist throughout 2021. As FreightWaves put it recently: “Not only do retailers and wholesalers not have the inventory they want because they can’t take possession of the inventory they’ve ordered, but in some cases, they can’t even place the orders. Producers are saying, ‘We’re not going to accept your order. You have to get in line.’”
Paul Bingham, director of transportation consulting at IHS Markit put a finer point on it:
“We’re too far into the year without having recovered [inventories] to get out of this in 2021. We have to look to 2022 for any hope. So many portions of the supply chain are so far behind that it’s not going to happen in the next six months.”
Companies that implement a long-term plan now, backed by data science and cloud-native software, will stay ahead of the curve even if their warehouse shelves remain short-stocked.