With Inflation Quickly On The Rise, Here Are 4 Reminders For ESG Consumer Product Companies
Inflation is as bad as it’s been since the early 80s.
It’s not hard to see why. The pandemic caused major supply chain challenges as countries all over the world adopted brand new safety protocols. Now, Russia’s offensive in Ukraine has thrown a wrench into global energy markets, sending crude oil prices skyrocketing and causing Europe to backtrack on ESG goals.
As the CEO of an ESG-centric consumer product company, I’ve seen how inflation and geopolitical turmoil can put major obstacles in the way of companies trying to make an impact.
But I’ve also seen how we can avoid them.
For consumer product companies trying to reduce the world’s carbon footprint, the challenge is threefold:
- Present consumers with a unique selling proposition
- Produce scalable margins
- And maintain a competitive price point
That’s never easy to pull off, but in times of economic stability, it’s easier than in times of economic turmoil. Even amid global unrest, there are a handful of things ESG consumer product companies can do to mitigate risk and stay competitive.
How to protect yourself:
1. Stockpile raw inputs. Before the pandemic, it was common practice for manufacturers to order raw materials as needed. Car manufacturers would buy roughly as many semiconductor chips as they had orders, ensuring efficiency of materials
That works well when supply chains are unimpeded. But once there are obstacles, it causes not only shortages, but a complete overhaul of the philosophy. Recently, it’s become common for manufacturers to stockpile raw inputs, holding much more inventory in the event that supply chains are compromised.
If we’ve learned anything over the last few years, it’s that supply chains can rupture when you least expect them to. Stockpiling the raw materials it takes to make your products will at least help you weather the storm.
2. Diversify your supply chain. Especially in consumer product companies’ early days, it’s common to under-evaluate supply chain options. Hoping to jumpstart revenues and get product out the door, businesses often pick the simplest option (or the first option) without shopping around, bidding out business, getting tiered price breaks, etc.
Putting a lot of upfront thought into where your products are coming from—and contingency plans for if and when those sources get compromised—will save you a lot of headaches down the road. Inflationary times are challenging enough for consumer product companies. By keeping supply chains as diversified and cost-effective as possible, you hedge against some of the risk that times like these bring.
3. Manage your purchase orders carefully. Especially if you’re an early-stage, low-volume business, you have to manage your purchase orders very carefully. Generally speaking, young companies are not buying huge product volumes. If you lapse into poorly calibrated purchasing habits, you risk the kinds of budget overruns that can be the difference between surviving inflation and going under.
4. Hedge your risk with the “right” product design. Today’s inflation isn’t just affecting energy prices. It’s also hitting aluminum, copper, steel—base commodities that are essential to many consumer products.
Hedging against this risk starts with product design. How can you design your product to minimize its dependence on volatile commodities? The less exposed it is to commodity risk, the stabler you’ll be in otherwise unstable times.
The overarching theme is to do a lot of upfront thinking about how to manage inflationary risk. For about 40 years, we didn’t have to think much about inflation, and the freed-up liquidity lulled many into a false sense of security. Now, we’re seeing the hazards of that utopian thinking. Margins are more important than ever. Proactive, prudent planning will help keep your margins as healthy as possible in illiquid times.
And a closing note: Given what everyday citizens are undergoing in Ukraine right now, we should all count ourselves lucky that inflation is our biggest concern.