The Impact of Inflation on the Manufacturing Sector


Today, manufacturers are facing a combination of unprecedented events that strongly impact their operating margins. They are dealing with higher input costs across their business, from raw materials and energy components packaging, and transportation. This leads to an overall increase in the prices consumers pay for their products and services as manufacturers need to protect their margins.

On top of the existing inflation-related challenges, manufacturers also need to focus on innovation to respond to the rapid changes in consumer trends and boost their online and e-commerce presence. Yet, the focus must also be on reducing the operational environmental footprint and improving product sustainability.

To help understand how manufacturing and inflation are related, the current causes of price increases will be explored in detail, along with a set of possible countermeasures.

The factors that are negatively impacting the manufacturing sector

Labor shortages and wage increases

Manufacturers struggle to acquire and retain talent as wages and alternative job openings increase, consequently increasing labor costs. They struggle to keep operations going at maximum capacity and to remain fully staffed without rising wages.

Also, the fact that prices rise without wages increasing is affecting productivity and increasing employee turnover, resulting in decreased throughput, delayed deliveries, and lower invoicing. In this sense, manufacturers that are more capital-intensive than labor-intensive are the least affected by inflation.

Increasing materials costs

The manufacturing sector comprises any industry that makes products from raw materials through manual labor or machinery and depends on materials price variations.

Currently, due to political instability and social crises, costs are rising faster than prices, which is affecting every manufacturer, especially the ones with tighter margins where the manufacturer’s pricing structure determines how strongly inflation is felt.

In times of disruption, when certain materials are harder to find at reasonable prices, manufacturers may either find ways to produce their products without certain supplies or accept that they will have to pay more for them. This does not only apply to raw material prices but energy prices too. With the recent increase in oil and gas prices, manufacturers must add another price increase to the pile.

Supply chain struggles and bottlenecks

While the rise of input costs is becoming a major concern of manufacturers, they are also struggling with a crisis of supply availability – from raw materials to parts and components. Supply chain disruptions are a result of the current challenging environment. It regards considerable events that make it more difficult, expensive, or time-consuming for manufacturers along the supply chain to obtain the materials they need.

When it came to the pandemic, some manufacturers downsized operations, as not everyone along the supply chain could keep up, resulting in shortages of some items. The conflict in Ukraine led to further disruption, shortening the supply of some products manufactured in the affected area.

What can manufacturers do to reduce the impact of inflation?

Reduce production Lead Time and labor needs

To improve overall productivity and reduce the negative impact of labor shortages and wage increases, manufacturers must reduce their need for manual labor and increase the automation of repetitive tasks.

Some possible solutions include:

Reduce energy and water costs

To improve energy and water efficiency, manufacturers must focus on real-time measurements of energy consumption hotspots and execute a cost/benefit analysis to identify critical equipment whose energy performance should be primarily improved.

Also, to reduce the operational environmental footprint, they must look for ways to cut resource consumption and strive for circularity in energy and water consumption.

Reduce raw material stock

It is key to refine the manufacturer’s stock management policy to guarantee the right balance between coverage levels and stockouts. Likewise, the right link between production and logistics will reduce raw material stock. This may occur by implementing a planning algorithm based on historical data, replenishment Lead Times, stock strategy for each reference, and consumption data.

Reduce raw material costs

To reduce the impact of inflation on the pricing structure, the raw material yield must be improved. To do so, it is necessary to improve process control by using Lean Six Sigma to reduce consumption variability. Also, the adoption of product re-engineering will remove non-value-added materials or technically improve the process to cut the consumption of certain materials. Another action to be considered is the reintroduction of by-products in the manufacturing process.

Supply Chain optimization to anticipate supply failures

To prevent a supply crisis, it is crucial to continuously optimize the supply chain to be prepared to operate in a disruptive business environment, boosting both agility and resilience. This could mean making longer-term contracts and improving cost transparency with supplier partners or even taking more aggressive measures with suppliers to ensure material availability. Taking such actions involves establishing closer relationships with suppliers to enhance supply chain transparency with the use of real-time data and better predict supply chain disruptions. Supply chain optimization could also involve improving supply chain productivity through warehouse and production automation and logistics optimization.

Still have some questions about inflation in the manufacturing sector?

What is inflation?

Inflation is a phenomenon characterized by the general rise in prices for both producers and consumers for some time. When the general price level rises, each dollar buys fewer goods and services, hence inflation indicates a reduction in purchasing power per dollar.

What is an agile supply chain?

An agile supply chain is focused on responding to risk and disruption with flexibility and quickness, relying on real-time demand data for decision-making. Agile principles should be adopted in supply chain management to maximize cost and performance efficiency despite adverse circumstances.

What are input costs?

Input costs are the costs incurred to manufacture a product or provide a service that will generate revenue for the company, such as material and labor costs. All remaining costs are related to general and administrative activities.

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