Shipping costs are increasing. Package costs are increasing. Raw materials cost more. Labor costs are up, and the supply chain is in disarray. Can costs be managed in this market?
Cost Management vs. Inflation
Identifying the things we can control – or at least manage – and those we can’t is the first step. Although none of us likes inflation, the fact is there is nothing we can do to control it. What we can do is carefully identify those costs which we can manage, and apply the necessary resources to ensure that every dollar is spent wisely. Understanding the difference between cost management and inflation prevention is the starting point.
Take Time to Understand the Supplier’s Business
What are the key cost drivers for your suppliers? How do your purchasing practices impact the supplier’s costs?
The customer who knows the factors that impact a supplier’s cost to serve—and works to develop a partnership that takes cost out of the system—will find a supplier willing to provide the best possible service at the lowest possible—and profitable—cost.
The challenge is that most purchasers don’t have adequate knowledge of the suppliers’ side of the buy-sell transaction—and many regrettably don’t care to learn.
Minimize the Impact of Inflation on Your Business
Effective cost management requires extensive knowledge of products, markets, alternate sources – and a detailed action plan that includes:
• A specific methodology to deal with supplier proposed price changes
• A mechanism to manage supplier margins in the context of cost increases
• External resources can be used to ensure that all cost changes are based on documented increases.
Creativity and Agility May Be the Key
• How do your specs/scope impact cost to serve?
• What are the cost drivers that can be modified?
• Define “what we want” and “what we need.”
• How agile is your company? (How quickly can you implement changes when market conditions change?)
Know What You Know — and What You Don’t
It’s not a question of “good” or “bad” employees. Even the most responsible, most loyal, longest-tenured employees may not be prepared for today’s market conditions. Do your people have the skill set required to effectively manage costs in this market? Do they have the necessary knowledge? What are their strengths and weaknesses? Is indexing an option with one or more of the product groups you regularly purchase?
It’s hard to stay ahead of price changes and manage the day-to-day responsibilities. The real question remains – “does the organization have the time, talent, and information required to develop and implement an effective cost management strategy?”
An Independent, Objective Perspective May be the Answer
This is what we do every day – while we haven’t seen inflation of this magnitude in over a decade, ERA Consultants have been managing costs for over 25 years. This is not a new thing – it’s more visible today; however, the fundamentals haven’t changed. We know the market, we know the suppliers, we know what drives costs and how to mitigate the impact of cost increases on our clients’ businesses.
We have the knowledge, integrity, and strategic experience – combined with the ability to listen carefully to your needs, that allows us to evaluate options and assemble a creative solution that addresses the long-term cost management objectives without prejudice or preconception.
Perhaps now is the time to talk to us about how we can help you mitigate cost increases – because inflation is something none of us can prevent.
About the Authors
Together, Mark Rehl, Terry Bitter, and Jim Agnew have nearly 50 years of cost management consulting experience with clients across multiple industries, including manufacturing, education, hospitality, non-profit, transportation, and retail, with in-depth category knowledge in packaging, operations consumables, transportation, office consumables, industrial gases, waste management, and fleet management.