By Proxima

18 May 2020

Proxima argues that supply and demand have been disrupted in short order and not in equal measure across the board, which may lead to price volatility

Price volatility is here. We are going to have price pressures both up and down at the same time! Suppliers are going to hide behind a narrative of disruption to try to justify changes beyond necessary to your disadvantage and not matching the underlying reality. You need to pay attention and not trust the patter.

Four horsemen of inflationary apocalypse are riding towards you. Many manufacturing industries face supply market disruptions of varying levels of duration and intensity, which will produce inflation.

Industries have shut down production, which has taken spare stock and capacity out of the market. As businesses reopen, there will be a delay before they get back to normal as they struggle to source all of the parts needed from supply chains getting up to speed at varying rates. 

Second, many conversations with procurement leaders of FTSE and public sector organisations suggest future costs will be higher. For some time, businesses will struggle to return to previous efficient operations pre-vaccine. Offices will have to adapt to some degree of social distancing and additional costs. Factories will run with more stock and less just-in-time so that they can accommodate future swings better.

Third, some suppliers (particularly smaller ones) will not come back – cash has drained, and for those that survive the crash, growth will also leave casualties because growth requires capital to fund it. There will be markets where competition diminishes, unleashing more attempted price hikes.

Fourth, at the other end of the spectrum, some companies have seen real growth of demand and have converted this into higher prices. We already see change, with PPE suppliers almost universally raising prices. Others will follow.

In contrast, there are going to be sectors and companies where prices will fall. They may have a surplus capacity for some time to come; travel is a well understood example. If the Chinese economy is a guide, then our economy may operate at 90% level for a while. Businesses with high fixed costs or spare capacity will be keen to make any contribution to these and will consider dropping their prices for those that seek such reductions. 

In the services industry, the offer of spare capacity might be misleading. Unlike in manufacturing of products, not all personnel providing services are interchangeable. Those that are available because demand has dropped in their specialism are not always in possession of the skills needed in other areas, which again means keeping a beady eye. An offer that looks too good to be true, in services often is.

So you will face suppliers coming to you with demands for excessive price rises, and others not sharing with you their willingness or ability to operate at lower prices.

And one typical defence technique won’t work. Relying on normal indices won’t help. At a country-wide level, the Retail and Consumer Price Indices consist of a weighted list of goods and services reflecting an economy that no longer looks like ours does today. So for the next 12 months or more, these indices will be distorted averages at best. 

The answer is hard work, market awareness, and commercial astuteness. To avoid being taken for a ride, invest in street smart commercial capability in your organisation that is not insular and is out in the market conducting a lot of testing, exploring, and discovering. Process is not enough.

The alternative is do nothing and let your suppliers take advantage of your corporate naivety. The public sector remains an attractive target for many companies, offering financial stability and attractive payment terms at a time where liquidity has never been more important. You may not be thinking about it, but your suppliers surely are – a great global reprice is coming, and they are planning now.

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