Innovation Junkies Podcast

1.60 BONUS: Inflation Tactics

The Jeffs discuss practical business strategies for dealing with inflation. They dig into how businesses should look at inflation, why constraints lead to innovation and how companies should assess their competitive position.

Jeff Standridge (Intro): This is Jeff Standridge, and this is the Innovation Junkies podcast. If you want to drastically improve your business, learn proven growth strategies, and generate sustained results for your organization, you’ve come to the right place. Welcome to the Innovation Junkies podcast.

Jeff Standridge: Hey guys, welcome to another bonus episode of the Innovation Junkies podcast. I’m Jeff Standridge.

Jeff Amerine: This is Jeff Amerine. Glad to be back.

Jeff Standridge: Hey man, we are talking about inflation today. So, talk to us about how businesses should be looking at inflation. We know that it’s here, we know that it’s happening. So, give us your best shot there.

Jeff Amerine: Yeah. I’m glad we’re talking about economic inflation and not deflation of football so that Tom Brady can win another Super Bowl.

Jeff Standridge: Touché.

Jeff Amerine: But let’s get into that. Let’s get into that a little bit. One thing that we’ve realized, and regardless of how you want to pinpoint the source, we are, for the first time since the late 1970s, in a highly inflationary environment. The Fed originally said they thought it was transitory. The Secretary of Treasury as well. It’s clearly not, and they’ve kind of backtracked on that. It’s here to stay for at least some period of time. And so you’ve got businesses that are facing input costs, raw materials, labor that are going up anywhere from three to 10% and more. And on the other side of that, particularly if you’re a smaller mid-market company, you’ve got customers that are not going to be able to accept all the price increases that you may need to pass forward.
As an example, if you’ve got a business and you’re doing injection mold, plastic tank designs, or whatever it may be, you’ve got big customers that are like, “No, we can’t afford to take on those…,” enterprise customers, “… all those price changes,” but you’ve got input costs that you don’t have any control over because they’re coming from offshore or wherever else. Transportation costs are up. Oil and gas is up, all of that. So, what do you do? That’s really the question. And I think part of what you do is, and we did this a little bit in the motor freight world, is you have to, first of all, educate the people that are in the next place on the value chain from you to say, “We’re going to have to pass along some increases.” So, I think you start that conversation honestly, and then strategically you decide how much can we pass along and still be fair versus how much do we have to eat and just realize that they can’t pass it along to the next person in the chain for them.
So, I think there’s got to be open and honest conversations in both directions. The other thing that I think you’ll see is they’ll begin to be more serious hedges that come into place, where small business, medium business, and large businesses are going to buy these commodities and these inputs at the lowest price that they can find, and they’ll buy and bulk the lock a price in. When you’re in an inflationary environment, where you can forecast that the prices are going to continue to go up, hedging of oil and gas and other input materials is going to become more common. And there’s actually technology platforms that do some of that. So, I think that’s part of what you have to do.
So, it’s conversation, and it’s figuring out how to hedge some of those costs by buying them at the lowest possible rate. Some of that will require capital in order to be able to do some of that hedging. But I think those are some of the strategies. And then you just have to hold on to hope that economies of scale and a global rebalancing of the supply chain will level out in a way that these prices don’t stay high and continue to rise forever.

Jeff Standridge: Well…

Jeff Amerine: I don’t… Go ahead.

Jeff Standridge: Well, I was going to say, and you know, we talk with our clients all the time about the only thing required, or at least one thing required for innovation to occur is constraints. And so we should also be looking for ways that we can revisit our own supply chain, the components of what makes up our core product and service offering. Can we do it better? Can we do it faster? Can we do it cheaper? So that in those instances where we can’t pass those costs along directly to our customers, we have an alternative to maybe recoup some of those costs by doing things a little bit differently. And I would even suggest that a degree of competitive analysis probably needs to be done as well to say, “Hey, what alternative does our client have, if we were to pass along all of those costs directly to the customer?” Because the general public’s going to get it. Everyone knows that prices are higher. All you have to do is go to the grocery store and look at the meat counter, right?

Jeff Amerine: Sure.

Jeff Standridge: Go to the gas station and see the gas prices. So, the general public knows, to your point, we may not be able to pass all of those costs along, but to go through the cognitive exercise with our teams of saying, “What are our customers’ alternatives? And do we have a leading position among those alternatives? And how should that influence how we change our pricing structure or the degree to which we change our pricing structure?”

Jeff Amerine: Yeah, I think it’s a great point, and you can argue is there any inelasticity or any elasticity on how you’re going to price based on where you are? And someone once said, an economist said that the best cure for inflation high prices is high prices because eventually, it impacts demand. People buy less. And as soon as you begin to impact demand and overheated economic situation, it reduces the strain on supply. I think we’ve seen it kind of from all angles because we had the Great Resignation, as we talked about. So, labor rates are increasing. We had global supply chain impacts. I mean, all those confluence of things coming together. I don’t think it’s going to last more than this year if we do some wise things in terms of how we source. And I do think that companies are going to just have to strap in and be as frugal and careful as they can, and do exactly what you said in terms of assessing what they’re doing in their competitive position.

Jeff Standridge: Now’s the time to take a few steps back, look at your business, look at the inputs and the outputs, and make some decisions about, again, where you need to conserve, where you need to constrain, where you need to innovate, where you need to adapt. So that, as you say, when this inflationary period passes us by, we can be left standing stronger than before.

Jeff Amerine: Hang in there, would be the main message. This too will pass. It’s not going to last forever. I think that all the things that existed from the early 1980s to just recently, in the economies of scale and technology innovation, are going to drive a restriction on inflation as we go forward. But we’ll see. Hang in there. It’s going to be an interesting year.

Jeff Standridge: All right. Thank you so much, Jeff. This has been another bonus episode of the Innovation Junkies podcast. Thank you for joining.

Jeff Amerine: See you next time.

Jeff Amerine (Outro): Hey folks, this is Jeff Amerine. We want to thank you for tuning in. We sincerely appreciate your time. If you’re enjoying the Innovation Junkies podcast, please do us a huge favor. Click the subscribe button right now. Please leave us a review. It would mean the world to both of us. And don’t forget to share us on social media.

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