Are you a business manager trying to deal with inflation? Does the thought of inflation keep you up at night?
Companies and consumers are dealing with inflation at levels not seen in more than 40 years. Doing nothing about it is not the answer to business success. Fortunately, there are several strategic tools you can use to insulate your business from the harmful effects of inflation. The key is to understand how a company can strategically manage inflation. Consider these 10 ways to deal with inflation for your business.
See it coming
Your strategy and product management teams should have seen this situation coming for more than a year, if not longer. If your organization did not see this round of inflation building up, ask yourself why not. Who on your strategy or product management team looks at PPI trends and commodity prices in your industry, and what can you do differently to catch changes in these trends early? These are essential questions to answer before you adjust your operation and have better visibility in the future.
Implement price increases
Studies show that humans are more accepting of price increases when they expect inflation. Based on this aspect of human behavior, now is the best time in 40 years to consider a price increase. Your business would be wise to do so. Even modest increases, spread through time, can have a significant impact on your margins and profitability.
Show empathy to your customers
When you implement price increases, be sure you provide your customers with written advanced notice of the change and tell them why you are increasing prices. Some organizations even apologize and say they are sorry in these announcements. As humans, we are much more accepting of change when told why. Sure, it might not be easy for customers to receive a price increase, but it is easier when you tell them why.
Use well-timed blanket purchase orders
As mentioned in point one, your team should have seen this period of inflation coming. At that time, some well-negotiated blanket purchase orders could have locked in pricing for you and minimized your exposure to the rising prices for those items. I have found that suppliers were open to one- and two-year blanket purchase orders, as long as you placed them before this recent inflationary experience.
Consider temporary increases in inventory
While I am a huge advocate and past champion of using lean tools to reduce inventory turns, there might be exceptions to this goal. The magic of improving inventory turns with some training and change to your culture is the extra cash flow this strategy can provide. When executed well, these cash improvements can be substantial. However, at the early signs of an inflationary period such as this one, your team might want to consider taking on more stock to minimize the impact of increased prices. Only you and your team can determine what an optimal balance for your specific situation is.
You don’t pay what you deserve; you pay what you negotiate
Your purchasing and sourcing teams must be trained to negotiate for the best price. It starts with reviewing your company spend to assure you learn to spend and buy better and focus on smart capital allocation. You also want to develop contracts that provide you with the best possible terms and conditions. The return on good negotiations training for your team can be exponential.
Cutting expenses is a vital part of dealing with inflation. Redouble your efforts to cut costs. Organizations that cut costs and improve productivity during inflationary periods show higher shareholder returns. Cutting costs is best implemented with the use of well-trained cross-functional teams. Spending visibility is the foundation of any expense management program. This allows team members to understand where money is spent, who spends it, and to categorize these expenses. Increasing cross-functional collaboration leads to innovative cost savings. It’s also helpful to have a spending czar in charge of these cost reduction teams. The spending czar should have the experience and ability to reach across silos and make decisions that are best for the organization and customers, not a single department.
Increase productivity/reduce labor
One way to help offset cost increases due to inflation is establish continuous improvement as a mindset for your team. When I ran factories, we believed that if we did not change and optimize the production layout every two years, we were not doing our job. There are new ideas to improve productivity. We brought in cellular-based layouts, trained team members in lean manufacturing and invested in new tools each year. Make continuous improvement part of your culture, and you will be rewarded with productivity improvements. Improvements that can help offset other cost increases.
Assure you have optimized your collections process. I’ve walked into companies that had DSOs (day sales outstanding) of 120 days and reduced them to 45 days. This takes effort, a defined process and a team effort. Chose your team and jump on this opportunity to improve cash flow by reducing DSOs. Some customers will try to use the extension of payment terms as a bank. Don’t allow it.
Being successful and achieving your goals requires the proper tools. It is essential to understand project management, time management, negotiations, and how to visualize your goals. All of these are skills that can be learned and sharpened with the proper training and practice. There is one more piece that is essential to drive performance and continuous improvement that is the use of metrics. By selecting the appropriate metrics and making them visible across your teams, you can get everyone onboard with striving to win. As your teams achieve certain performance levels, you can then celebrate and raise the bar, as you continually improve the organization’s performance. Metrics are essential for these improvements to happen.