This year has seen a perfect storm for the global economy. The lasting effects of COVID-19 mean global supply chains are still disrupted. The war in Ukraine is causing rapid inflation for gas and oil. Global shortages are seeing food prices soar and have left supermarket shelves empty of essential items. For much of the last two decades the West has benefited from low interest rates and low inflation. But that is already changing rapidly.
Clearly, tougher economic times are ahead, so how can AI help you weather the economic storm?
Deja vu all over again
Older readers might be feeling a sense of deja vu about the current situation. In the 1970s, the oil embargo led to massive surges in global oil prices. This led US inflation to peak at 13.55% in 1980. In that year, interest rates hit an all-time high of 20% to cool down inflation. The following couple of years were tough, with negative growth in both 1980 and 1982. But by the middle of the decade, the US economy was surging. So, what we are seeing now is not new. On the other hand, it is reasonable to suppose that it will trigger another global recession by the end of the year.
How will this play out?
I am no economist, nor do I have a crystal ball. But it seems clear to me that two scenarios are possible in the coming year. In the first, we switch back to a long-term mode of high inflation, rising interest rates, and steady economic growth. Many countries have seen this in the past. For some major economies like China, it’s the normal state of affairs.
The second scenario is the dreaded stagflation, a portmanteau term for stagnation and inflation. During a period of stagflation, wages and inflation remain high, but growth stays low or non-existent. This was seen through much of the 1970s in the US and elsewhere. Just this month, the World Bank warned that this is a very real risk in the current circumstances.
What can you do to help your business survive?
Most businesses are too small to have any direct impact on the global economy. In microeconomic terms they are price-takers rather than price-makers. This is no bad thing, it simply reflects the reality of where overall market control lies. Given this, what can you do to help your business weather the storm?
The first thing most businesses look at is cutting costs. This may mean reducing staff costs by laying people off or reducing their hours. But many businesses did that in the pandemic and actually now need to keep staff numbers growing to meet demand. So, you need to look elsewhere to cut costs. For many businesses, the remaining major costs are related to raw materials, inventory, and energy.
This neatly brings us to the second key thing. One of the best ways to cut costs is to reduce waste. In essence, waste represents money that is being thrown away. Even worse, in many jurisdictions, you are charged for the amount of waste you produce. Cutting waste also implies cutting energy use. Energy prices are soaring right now because of the rising oil and natural gas prices. Many countries rely on these for a significant proportion of their energy production. For instance, in the US they account for a combined 68% of all electricity generation. The more you can cut your electricity bill, the better.
Cutting energy use requires you to improve your overall efficiency. This is true across many sectors, not just manufacturing. For instance, retailers may often leave stores brightly lit 24/7 to deter theft. But modern security cameras can see in the dark. Simply dimming or turning out the lights could save a lot. Equally, a significant part of your cloud computing costs come from the energy costs to power Amazon’s, Google’s, Microsoft’s data centers. Many large data centers need hundreds of MegaWatts of electricity to run all the servers, network racks, and cooling.
The final key to surviving in tough economic times is productivity. That is, getting the most bang for your buck. Overall, the US ranks pretty well for productivity, but some other countries like Norway do better. Moreover, many individual companies are definitely not as productive as they could be. 40 years ago, people would have been advising you to call in the consultants to perform a time and motion study. Nowadays, it’s probably more a question of analyzing your use of internal tools and apps. Either way, very few companies have yet maximized their productivity.
Why is AI (part of) the answer?
So, how can you achieve all these aims? Many company bosses would like to believe they are already doing all they can to cut costs, reduce waste, improve efficiency, and increase productivity. But the chances are they can still do better. The trick is in knowing how. This is where AI can really help you.
Cutting costs and reducing waste both need you to be able to forecast supply and demand. This allows you to balance the amount of stock you hold. Over the pandemic, car rental firms slashed their fleets globally because no one was renting vehicles. It made no sense to hold on to assets that weren’t being used and which were losing value constantly. However, post-pandemic, these companies have been hit with a serious issue. Namely, the global shortage of new vehicles being built. That means they are now facing far higher demand than they can meet.
With inflation heading towards 10% it’s more vital than ever for companies to shift stock quickly. That means ensuring your pricing is competitive to maximize sales and minimize the time stock sits dormant. This is where elastic pricing comes into play. AI-based elastic pricing constantly checks your prices against competitors and also is able to forecast demand. It can achieve a good balance between revenue and profit. This is one of the key ways Amazon became such a dominant force in the retail market.
A key way to cut energy costs and reduce waste is to aim for net-zero carbon and zero waste. However, it is widely accepted that this can only really happen with the assistance of AI. That’s because the amount of data and number of variables involved is so high. Put simply, AI helps because it is so much better than humans at number crunching.
But isn’t there a downside to AI?
AI gets a bad reputation thanks to Terminator and other dystopian films. The average man on the street is at best cautious and at worst fearful of AI.
AI will take my job
Many people fear AI because they believe it will cost them their jobs. But the truth is, for most companies AI cannot replace any human staff. Rather, it allows your staff to do their jobs more effectively and helps the business generate more revenue and profit. In fact, the most successful AI use cases are those that augment things you are already doing. For instance, adding AI to your existing demand forecasting. Or significantly improving your current pricing model. In all cases, you will still need humans in the loop. The difference is, they will be more productive and will earn you more direct and indirect revenues.
AI doesn’t work
Many people dismiss AI as hot air and marketing. That’s because, sadly, all too many AI projects are just that. People are promised that AI will revolutionize their company fortunes, doubling revenues and delivering unbelievable RoI. Then the AI initiative fails thanks to AI debt. The upshot is, people tend to disbelieve any claims made for AI. The key thing here is to be realistic about AI and what it can (or cannot) do for you. That’s why a key part of our process with clients is to fully explore and analyze the business case for any given AI project. If we can’t see a good justification for it, we’ll suggest you don’t proceed.
How can Sonasoft help?
Our mission at Sonasoft is to deliver end-to-end AI transformations that actually work. Over the years, we have developed a modular approach that starts with a simple workshop to understand your problem. Then we do data discovery with your tech team and in-house experts. If there is enough data to make AI workable, we then work on an intense data feasibility study. This will present you with exactly what options you have to leverage AI. If you like what you see, we then build a production ready AI solution for you and prove that it solves the business problem. Finally, we license the resulting AI application to you complete with our AI-driven Smart Monitoring.
Reach out today if you would like to talk about how we can apply AI to help you weather the economic storm.