In 2022, the annual inflation rate for the U.S. was 6.5%: a bit lower than the previous year, but still hovering around 40-year highs. And if you’ve talked with anyone about the cost of a dozen eggs lately, it’s clear that single-digit inflation number doesn’t really reflect the higher cost of many basic commodities. Egg prices are up 59.9% and fuel oil 41.5%, for instance – and these continuing inflationary pressures are causing consumers to alter their buying habits.
According to a new report from market research firm The NPD Group, more than 8 in 10 consumers are planning to rethink or even reduce their product spending in the next three to six months. Marshal Cohen, the chief retail industry advisor for NPD, describes “a tug-of-war between the consumer’s desire to buy what they want, and the need to make concessions based on the higher prices hitting their wallets.”
And in its latest earnings call, Walmart observed that inflation has changed its shopper buying habits. Customers are purchasing cheaper private-label products instead of name brands, buying fewer items per shopping trip, and choosing not to purchase discretionary items. Across more than a dozen core consumer goods and services categories, December prices were up by double-digit percentages year-over-year.
What’s Affecting Consumer Demand – and How to Navigate the Changes
Higher food, gas, and rent or mortgage prices are hitting people hard, leaving them with less disposable income for non-essentials. Less disposable income means shrinking demand for goods and services.
This means your company needs to get even better at demand planning, forecasting, and sensing consumer behavior, all of which drives manufacturing, transportation, inventory management, and sourcing of raw materials. You’ll need to include leading market indicators, real-time consumer trends, and other external data signals into demand forecasting to better predict forward-looking product mixes and volumes.
Inflation is also driving up the cost of raw materials, labor, energy, and transportation, making it more expensive to manufacture, store, and ship goods. Raw materials have increased significantly in cost, and availability is frequently limited. Getting the materials available shipped to manufacturing plants is also taking longer and costs much more. To add to the strain, the labor force is limited and wage pressures are increasing.
Demand planners and schedulers need to have software tools available to rapidly respond to changes in raw material availability. Tools such as Profit Network allow for optimization of transportation networks and reduce overall transportation costs. As labor costs rise and finding qualified employees becomes more difficult, the use of scheduling optimization tools such as Aspen SCM is critical to reduce changeovers, setups and overall downtime.
The Federal Reserve has increased interest rates in an attempt to tame inflation.
As a result, now you need to closely monitor and optimize management of working capital and inventory buffers. This is key because when your business needs cash, the last thing you’ll want to do is borrow at high rates while capital is tied up in unused inventory. You need to know exactly what’s needed and manage available inventory closely and effectively based on real-time variability of demand and supply.
What does all this doom and gloom mean for forecasting and demand management professionals?
Inflation can have dramatic and rapid impacts on demand and supply chains, and inflationary pressures are being felt all along the supply chain.
Surviving these changes and thriving in the longer term will require:
- Closer alignment between the sales team, forecasting team and plant scheduling.
- Integration with external data sources for vendors, customers, and spot markets.
- Supply chain technology that allows for rapid decision-making.
- Forecasting systems that can rapidly import data from external and internal sources and quickly adjust forecasts.
When market conditions are steady, it’s easier to accurately forecast demand with a time series model. But in periods of high inflation, rapidly climbing prices tend to dramatically affect demand patterns, making the accuracy of demand forecasts more critical and requiring more complex analytics and forecasting methods such as regression.
Inflation has been absent in global markets for so many years that many demand planning professionals have never needed to consider it in their forecasting methods. At Profit Point, we’ve spent more than a quarter-century developing high-quality demand forecasting tools that quickly adapt to changing consumer behaviors and market conditions – and what we built in the past can help you build a more solid, responsive, and successful future for your business.