senior client partner
This Week in Leadership
This Week in Leadership (Apr 12 - Apr 18)
How are firms cramming two promotion cycles right now? Plus, how to keep mistakes at work from becoming career killers.
When Mary Elizabeth Sadd checked in on one of her clients, an executive of a packaging manufacturer in Athens, Georgia, earlier this month, she expected the conversation to be mostly about how the company was handling the ongoing pandemic. But the chat quickly turned to another subject: prices.
The price of plastic, one of the manufacturer’s primary components, had increased sevenfold in 2021 alone. The client had never seen price movements like that. “It’s all supply and demand,” Sadd says. “You can’t get plastic unless you pay more.”
Only a few short months ago, most corporate leaders were worried that the pandemic-depressed economy would push down prices on everything from commodities to commercial real estate. Now, as the economy rebounds, prices for many business staples are soaring. In 2021, crude oil has surged more than 30% through St. Patrick’s Day. Corn, soybeans, and copper have reached multiyear highs, and lumber prices skyrocketed. The rising prices are creating cost challenges for corporate leaders just as many were seeing their own business increase. “It’s a hot topic right now for manufacturing, supply chain, logistics, and railroads, especially,” says Melissa Hadhazy, an advisory leader within Korn Ferry’s Industrials team.
Managing inflation isn’t exactly a new phenomenon; it has been a required skill for nearly anyone who wants to be an executive in corporate finance or operations for decades. But commodity inflation broadly hasn’t been much of an issue since 2011. Now, a confluence of events has sent prices soaring in a short period of time. Demand for durable goods—finished products often manufactured using large quantities of plastic, copper, and other basic materials—is rebounding as the economy recovers. That demand is growing faster than commodity producers can mine, extract, or grow new supply. “The companies that were taking advantage of lower commodities pricing are getting hit the hardest, and their customer markets are not willing to absorb the costs,” Hadhazy says.
Compounding matters is that shipping costs have increased, too, as there’s also a backlog of ships laden with commodities that can’t get to various ports due to pandemic restrictions still in place, further depressing usable supplies. “Companies need to innovate across their supply chains to reduce the pressure to raise their prices,” says Alan Guarino, a Korn Ferry vice chair and coleader of the firm’s Board and CEO Services practice.
Whether this is the beginning of a 1970s-era sustained period of inflation or just a bigger-than-usual temporary price swing is up for debate. However, the current surge has leaders once again debating whether to lock in prices using hedging contracts. Whether to hedge is always a contentious topic in corporate finance since it’s often expensive. Plus, locking in prices now, as they are surging, could backfire if prices turn back down again. (Anyone who locked in multiyear contracts for oil in 2011 could have gotten hammered since prices turned south after only a few months.)
Executives at commodities companies are also wary about the rapid increase. Yes, commodity producers are seeing revenue increases now, but Dustin Ogden, a Korn Ferry senior client partner, says one of his lumber clients is worried that investors will have inflated expectations about the company’s future performance. “Their view is that this will not last,” Ogden says.