I saw this blog post from the World Bank and my jaw dropped. Not that any of this is really news anymore. The post just puts into sharp relief the magnitude of the impact of commodity price inflation facing us. I had just been waiting for the "other shoe to drop", and now the true impact of the Ukraine war is filtering through in the numbers.
This is not the first time this kind of external event has happened, but I am struggling to recall a time when there was so much pressure on costs from so many sources, across so many fronts. It has been a while, which means that mid-cap Value Creation levers employed in the consumer and industrials sector probably need adaptation.
Clearly, from a productivity perspective, manufacturing efficiency and automation are more important than ever. But from the perspective of raw material, component and packaging costs, there is obviously little leverage on the supply side. No easy wins there. Also, given the hits to consumer confidence and disposable income, not all of this can be passed through. So "demand-side" cost reduction strategies will have come to the forefront again.
Value Engineering is the broader term used to describe one effective demand-side lever: it is an approach pioneered and codified by GE in the 1940s against the backdrop of raw material and skilled labour shortages caused by the Second World War. In the approach, unnecessary costs are designed out. So if something is too expensive, design to use less of it, so that form and function can still be delivered.
Not that larger manufacturing companies have ever stopped doing this. But the approach will need to find wider application in Value Creation plans across mid-market portfolio companies in the consumer and industrials space to weather the current storm.