Turbulent times are upon us. According to Reuters reporting from the Bank of America, geopolitics has leapfrogged inflation as the most significant risk to the market, and that was proven true as the market slumped with the expectation of Iran’s attack on Israel. With multiple wars and escalating tensions occurring throughout the globe, risk levels are elevated. With that said, stagflation is also of significant concern as inflation remains elevated yet unemployment statistics signal a recession. As volatility is here to stay, the successful companies are navigating turbulent times with SIOP.

Geopolitics Run Rampant with Energy at the Center

Geopolitics have been bubbling up over the last few years. The most recent concerns in the Middle East are driving the conversations as Iran is expected to attack Israel. Conflicts are heating up with Iran-backed Houthi rebels attacking container ships and Iran-backed Hezbollah conducting drone strikes. Attention shouldn’t be diverted from the Russia-Ukraine war and the rising tensions of China with Taiwan and aggressions with other countries in the South China Seas. For example, the Philippines and Vietnam are conducting joint exercises to bolster maritime cooperation in the face of Chinese aggression. China has also been on a buying spree through its belt and road initiative which gives it power over much of the world’s natural resources. To read more on this topic, refer to our article, Geopolitics, Natural Resources and Impacts to the Supply Chain. Meanwhile, there is political upheaval in Venezuela due to the allegedly fraudulent election, and the southern border has become a danger zone.

Of the geopolitical conflicts, Iran, Venezuela and Russia sell oil. Energy is at the center of conflicts because the world runs on energy. Fossil fuels which include coal, oil, and natural gas supply more than 80% of the world’s energy. Not only is energy required to power cars and trucks and to run houses, but it is required for manufacturing, logistics, and goods movement. In fact, it is essential for almost every product used from medical devices to aerospace and defense to electronics. Artificial intelligence has spurred huge growth and is the future, but it will require even more energy to fuel. Statistics range from double the energy to ten fold the need. For example, according to Vox, training a large language model uses nearly 1,300 megawatt-hours (MWh) of electricity, the annual consumption of about 130 US homes. Thus it is no wonder energy is the topic of geopolitical conflicts.

After the sanctions on Russia’s invasion of Ukraine, Russia simply sold oil at higher prices to China and India. China (68%) is the number one buyer of oil from Venezuela, which is followed by the United States (23%). Given the geopolitical climate and dirty oil produced in Venezuela in comparison to U.S. produced cleaner oil, that statistic is quite alarming. On the Iran front, sanctions don’t appear to be enforced. Iran’s oil exports reached a 5-year high with China as the top buyer, according to Nikkei Asia. For example, according to FOX Business, Iran sold China $6.5 billion worth of oil in 2020, and that number soared to $23 billion in 2021. According to Reuters, in 2023, China purchased 1.05 million barrels per day which was 60% above pre-sanction peaks from 2017.

Stagflation Concerns

There has been rampant concerns about inflation. Consumers are paying 20-50% more for key items such as food, gas, and rent. Businesses are buried in high prices for materials, components, and outsourced products. Thus, clients have absorbed as many price increases as feasible while passing on the rest. As interest rates have risen substantially, it has added to the cost increases impacting businesses. Thus, strategies to free up debt such as inventory reduction have become a top priority.

Inflation and increasing costs are challenging enough to manage; however, it appears as though recessionary trends are starting to emerge. The unemployment rate jumped to 4.3% in July, triggering a recession signal. The signal stipulates that the economy is in the early stages of a recession when the three-month moving average of the jobless rate is at least a half-percentage point higher than the 12-month low. If this recessionary trend. Since clients and contacts are experiencing sluggish backlogs, it seems possible that recessionary trends could arise.

When you have both issues (inflation, recession) at once, you are in a period of stagflation. Emotion can avoid stagflation or it could create stagflation. There is no doubt the economy appears turbulent.

The Talent Conundrum

As companies automate, digitize, and roll out predictive technologies to support profitable growth, fewer and fewer low-skilled resources are required. For example, clients are automating standard processes with artificial intelligence and upgraded technologies such as modern ERP and advanced planning systems. These systems that use advanced AI enabled algorithms will likely replace basic supply chain and planning tasks. Thus, there will be fewer planners and schedulers required to expedite and create schedules. On the other hand, there will be far more high-skilled planners and supply chain leaders required with the skills to oscillate between detail and big picture with complex, down-the-line thinking and what-if scenario planning capabilities. In fact, those skills will increase in demand as advanced technologies are utilized.

There will be a mismatch of talent, providing vast opportunities for those resources interested in continuous education and big picture thinking who are willing and able to jump into details as needed. It will also power forward-thinking organizations to new heights as they will be equipped to move faster while accounting for changing conditions in today’s volatile, uncertain, complex, and ambiguous (VUCA) world. To learn more about the skills gap challenge for manufacturing success, read our recent article.

SIOP: The Solution to Successfully Navigate Turbulent Times

SIOP, (Sales Inventory Operations Planning) is a process that oscillates between the strategic and the detail (execution) that looks forward with future demand and surfaces the appropriate decisions for the best way to fulfill that demand in a profitable, scalable, secure, and customer-friendly manner. Key decisions are highlighted including pricing strategies, capacity allocation, supply diversification, and cost/ productivity enhancement. Most importantly, the SIOP process maintains a weekly, monthly, and quarterly cadence that supports predictive views of changing conditions with informed, rapid responses, proactive pivots, and disruptive strategies.

For example, an industrial and consumer manufacturer rolled out a SIOP process to gain better clarity of customer and product profitability to incorporate into proactive decisions to gain market share while maximizing pricing and profits. By reviewing the true picture of customer profitability inclusive of pricing, rebates, predictive rebates, e-commerce demand patterns, and cost allocations (based on specific value stream capacity and labor considerations), proactive decisions were highlighted. It pointed out pricing adjustments required to ensure reasonable margins and operational strategies required to maximize productivity, level load the schedule, and align supply in a cost efficient manner. By following these strategies, there was also an opportunity to decrease the footprint and condense a second location, thereby increasing profits and minimizing complexity.

As market conditions changed such as changing e-commerce patterns, increasing rebate trends, or customer declines, they were absorbed into the SIOP cadence for rapid review. Similarly, as supply conditions changed such as Asian supplier delays, changing freight rates, and fluctuating supply requirements, the Operations and Supply teams made quick adjustments and reviewed potential strategic shifts required. For example, there was an opportunity to vertically integrate additional steps in the manufacturing process to address turbulent conditions while ensuring high customer service levels / OTIF (on-time-in-full).

SIOP: Taking the Leap

In our book, “SIOP (Sales Inventory Operations Planning): Creating Predictable Revenue and EBITDA Growth“, we discuss how SIOP can support appropriate pivots during turbulent times. We focus most of our commentary on explaining how a SIOP process can fuel a proactive approach to navigating changing demand and supply conditions and discuss strategies for successful rollout and execution.

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Optimizing Business Decision Tradeoffs with SIOP