Inflation is here, we need to make decisions now!

Updated: Jun 10

More than half the population has never experienced serious inflation or its consequences. That’s not a question, it's simply a statement of fact! Four decades ago, it was so normal that BB King wrote a hit about it called ‘Inflation Blues’.

Despite the disaster that was COVID-19, many individuals and companies came out of the pandemic better capitalized than when they went in. How is that possible? Well, companies around the world received cash in the form of government subsidies, grants and tax holidays. Many individuals and families also benefited through direct benefits or simply because they couldn’t spend money on travel, holidays and other luxuries, as a result of the lockdowns around the Globe. Now we all, companies and individuals, came out of the pandemic filled with excitement about the future and ready to spend in order to make our dreams come true, but then we saw another consequence of the pandemic, supply chain shortages. Various lockdowns, COVID-19 outbreaks at factories and a pandemic driven reduction in air travel (ergo less cargo space on commercial aircraft) all conspired to disrupt supply chains. Now add in the effects of the Russian invasion of Ukraine and we have pressure on commodities like fuel and grains.

So what does all this mean? We have spenders (commercial and individual) with surplus cash who can’t buy what they want because of the supply chain problems, and you get:

Excess Spending Power (Demand) + Reduced availability (Supply)

= Price Increases (Inflation)

Inflation in the USA is running at almost 8% and at 7% here in Ireland, where I live. These are rates not seen since the start of the 80’S when the boombox was the music player of choice. So if you are one of the minority of people who remembers the actual release of John Mellencamp's famous ditty about Jack & Diane then you may remember that the price of a beer was going up every couple of months to keep track of crazy inflation.

So how does this relate to the manufacture and sale of scientific research equipment, you might ask? After all, this is a blog about the life science research industry and, more specifically, sales within it!

Well it has everything to do with our industry and I fear we are not prepared for it. Supply and Demand can cause inflation but lets reverse the equation and accept that inflation is already here. Let’s see what effect Inflation will have on supply and demand in our industry.

Supply side problems!

Oh and there will be many…… We all try to minimize the stock we hold and run “lean” or “Just in time” manufacturing but already, many manufacturers are seeing a shortage of various microchips needed to go into the machines we make. Some enclosures are now in short supply and the ripple effects of the supply chain disruption will cause what appear to be random shortages and delays of all sorts in the coming months. So the first supply side problem is delays to order fulfillment.

The second related problem is that input prices (COGS) are all going in one direction, UP! Small companies are especially vulnerable and are in many cases being gouged for crazy prices to obtain the supply of crucial components. Basically, margins are being squeezed. Indeed overheads are also under upwards pressure with everything from rent to electricity going up. Now most of us run tight ships and endeavor to offer good value to our scientist customers but in the face of COGS and overhead increases, we will have no choice but to raise prices and incidentally, contribute to this on-going spiral of inflation.

Demand side problems!

The business of scientific research is largely publicly funded through a very slow grants system. People who apply for grants now will typically not hear back for six months or more. So if we raise prices to make production commercially viable again but our customers are awarded grants in six month or a year based on March 2022 prices then there will be a problem. In the past when inflation was running at 1%- 2% manufacturers in our industry would swallow the difference between current pricing and the grant award based on last year's prices. With real inflation at 8% and more, this won’t be possible for many companies.

What is the way forward?

I believe that the way forward for manufacturers in our industry is to look back. Yes, the 80’s had bad haircuts, shoulder pads, flairs, ripped dungarees and glitter but it also had plenty of businesses who had learned to cope with on-going inflation. So look back 40 years and see how these businesses coped in an inflationary economy.

What business did then was to accept what was happening around them and (a) review prices at least twice a year, and (b) ask customers what the review date of their grant is and build an inflation premium into quotations to allow for that.

Basically, we need to get ahead of the problem. The alternative is to look back at another song from 1982, ‘Abracadabra’ by the Steve Miller Band, and hope that the problems of inflation will magically disappear. My strong feeling is that that is probably not a good strategy.

So if we are going to survive and thrive then maybe we need to be a bit more like the Survivor song, also from ‘82, ‘Eye of the Tiger’.

Good hunting!

Rory Geoghegan

April 27th, 2022

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