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Margins: The Pressure is On!

Vendavo< Vendavo April 7, 2022

The beginning of April means the start of Mud Season for those of us who live in Maine. For a lot of the corporate world April 1 marks the beginning of the Q1 earnings season. With all that’s been going on lately it should be an interesting season. Do you play a role in the reporting process? Or, as Ricky Ricardo used to say, will you “have some ‘splaining to do”?

For most of 2021 no one thought inflation was more than a short-term bump in the road.  

In the US, the debate over inflation continues to evolve. Prices were up but it was only a ‘supply chain problem’ that would be quickly solved as the restoration of supply chain efficiency brought things back under control. As we rolled into 2022, expert opinions began to shift to concern that there were some fundamental problems with the global economy that hinted that inflation was more than a short-term economic hiccup.  This was one of the reasons the Experts at the Fed (the real experts, as noted by the capital ‘E’) decided it was finally time to start taking some action on interest rates.  

Things continue to be moving at a rapid pace. The war in Ukraine has put additional pressure on energy and food prices. A renewed outbreak of Covid in China will have an unknown impact on global industrial output. On a more local level, people (and businesses) are beginning to believe that there really is an inflation problem. And, as we learned in the 1970’s when inflation hit double digits, if consumers think prices are going to keep going up, they’ll take actions with their spending that will only make things worse.  

It’s not in our interest, but we upset the demand planning applecart by rushing to buy big ticket items before their prices go up.   

On the other hand, the Institute For Supply Management’s report for February painted a more nuanced picture.  The overall Manufacturing PMI was up a point to 58.6% – meaning the country’s supply executives think the economy is continuing to grow.  However, they also pointed out that while demand and new orders are up, lead times and order backlogs are growing. 

So what impact is all of this having on American businesses?   

According to CNBC, fourth quarter earnings for the S&P 500 were up 22.4% “capping off a remarkable 2021 where overall earnings will be up approximately 49%.”  But the party may be over. 

As publicly traded companies start airing their 2022 Q1 financial laundry we’re going to see that, except for a few industry segments, manufacturing and distribution companies are starting to feel strong and increasing pressure on margins.   

With the large exception of imports, purchasing departments of most non-consumer products businesses haven’t seen large price increases, but the ‘nickel and diming’ toll of things like fuel surcharges is beginning to have an impact on the bottom line. The labor market continues to be challenging from a hiring perspective. Job seekers are clearly in the driver’s seat in all industry sectors when it comes to wages.  It’s basic math: Increased demand for labor + limited labor supply = higher costs and lower margins. 

Many years ago, I was a product manager for a large electronic components distributor and responsible for explaining to upper management what was going on with the profit margins of my vendors.   

When margins were trending up, I tried to take as much credit as I could. When they were trending down, I scrambled to figure out what was going on because I didn’t have tools that provided clear answers. There are dark clouds on the horizon for period over period changes in margin. Will you be able to explain what’s been going on? 

Whether it’s year over year, quarter over quarter, month over month – even week over week – period over period revenue and margin is constantly changing. There are changes in price, volume, mix. There is new business and lost business.   

The key to validating past business decisions and making sound changes to strategies and tactics is to understand how the changing dollars in each of those buckets is impacting overall revenue and margin.   

You can try to sort this challenge out with spreadsheets but you’re going to struggle to try to get the dollars into the right buckets. The pace at which you must analyze to stay agile is increasing. 

With Vendavo Margin Bridge Analyzer, enterprises can explain the variation of period over period revenue and margin by isolating changes in price, sales volume, product & channel mix, cost and other dynamic market factors like currency fluctuations.  This flexible, scalable solution was built with input from some of Vendavo’s largest customers with a key feature being proprietary logic to ensure the dollars end up in the right buckets. 

For Q1 earnings reporting, the horses are out of the barn. The ship has sailed. (Insert your cliché here).  If you start taking action now, you can help provide a clear picture and growth potential in future quarters.