How to Remain Profitable During Periods of High Inflation with Forward Buying
Dinner Conversations at the Herlitz House
Growing up with a father who developed inventory management software for a living spawned some interesting conversations around the dinner table. I was probably the only seven-year-old who knew what a Lead Time and a Vendor Order Cycle was, even though we called VOC “Review Time” back then.
As a young teenager, I also learned about inflationary profits as the U.S. experienced double-digit annual inflation and the Fed Funds rate hit 18 percent during the last days of the Carter administration. I learned that inflation was terrible for most people. However, it was wonderful for wholesalers, which was the customer base my father, Anders, was primarily working with at IBM.
Anders Herlitz used to lecture on how to buy forward profitably and how to negotiate with vendors for win-win deals. Around 1980, Anders left IBM and started his own company where he introduced the Forward Buying Module, which gave much-needed financial support to his wholesaler customer base.
Forward Buying and Inflation
As the economy reopens post-COVID, there are still supply chain shortages. The law of supply and demand, coupled with other environmental and political factors, have led to two months of inflation that are higher than we have seen in 30 years (see table below).
Have we lost the knowledge of how to be profitable during periods of high inflation? It hasn’t been lost here at Herlitz Inventory Management! Since 2009, when Herlitz Inventory Management was founded, annual inflation has been below 3 percent in the US. Although we have had a Forward Buying module since HIMPACT’s launch, there has not been much interest in it due to these low inflation rates. With the current inflation rates increasing, we are working diligently with our customer base to provide a new generation of Forward Buying KPIs and analyses.
Some wholesalers have the space to house excess inventory, so they can see the benefits of inflation by ordering extra inventory. Others may even have excess inventory left over from promotions, so they are also seeing the benefits of the higher inflation rates today. However, the benefits and profits gained from these situations are coincidental. If you don’t have the luxury of storing a surplus of product and need to be leaner and more strategic, forward buying is the key to unlocking higher profits during periods of high inflation.
We encourage all our customers to schedule a refresher on Forward Buying training, and for anyone else who is interested to give us a call to learn more. We’d love to help your business be more profitable and take advantage of inflation with forward buying. Contact us today to get started!
|Year||Inflation Rate YOY||Events Affecting Inflation|
|1991||3.10%||Fed lowered rates|
|1993||2.70%||Balanced Budget Act|
|1997||1.70%||Fed raised rates|
|2000||3.40%||Tech bubble burst|
|2001||1.60%||Bush tax cut, 9/11 attacks|
|2002||2.40%||War on Terror|
|2005||3.40%||Katrina, Bankruptcy Act|
|2006||2.50%||Bernanke became Fed Chair|
|2010||1.50%||ACA, Dodd-Frank Act|
|2011||3.00%||Debt ceiling crisis|
|2013||1.50%||Government shutdown. Sequestration|
|2015||0.70%||Deflation in oil and gas prices|
|2017||2.10%||Core inflation rate 1.7%|
|2018||1.90%||Core rate 2.2%|
|2019||2.30%||Core rate 2.3%|
|2020||1.20%||Forecast: Core rate 1.4% Impact of COVID|