Richard Randall//August 3, 2022
Richard Randall//August 3, 2022
The inflation we’re seeing hasn’t been seen for decades. For many of you it is unprecedented. I believe it is critically important to concentrate on three things that can help you navigate inflation with the least possible damage to the business. You’re going to need a team including your best people in accounting, sales, purchasing, process improvement and human resources. They will have to share information like never before.
Pricing Strategy – Nothing has a bigger impact on the bottom line than price. It is the longest lever you have in your tool kit. If you compare a price increase and a cost reduction of equal percentages, the price increase will always deliver a greater profit boost.
You may not be able to pass every cost increase on to your customers. More on that in a minute. What you can do is your best possible job of market awareness. What are your competitors doing? Is the general pricing in the market rising and are you keeping pace?
I’ve had clients who thought it was almost immoral to raise their prices. I’m certainly not suggesting price gouging, taking advantage of the inflationary environment. But if you don’t at least keep pace with the market and with a high proportion of your cost increases, you may find your profits disappearing. Price gouging doesn’t help your customers, but you going out of business doesn’t help them either. Find the right balance.
Cost Control – Cost control is always important, but never so much as during a period of high inflation. You are facing potential increases in every cost that isn’t fixed by some kind of long-term contract.
The first step in good cost control is good cost awareness. You’d be surprised how many small businesses have a very weak handle on the costs of their products and services. Cost data in ERP systems is often allowed to age to the point where the data is hardly useful. Make sure whatever system you use to track and report costs, whether a complex ERP system or a set of spreadsheets, reflects current reality. Task your accountants; make sure you have the right numbers.
The next step is prioritizing the items you purchase, your products and services, and your processes for cost improvement. Pareto’s Law, the 80/20 rule is useful. 80 percent of your purchasing expense likely comes from something like 20 percent of the items you buy. 80 percent of your revenue may come from about 20 percent of your products or services, and 20 percent of your customers too. 80 percent of possible process cost improvements will come from about 20 percent of your processes, the ones most ripe for improvement.
As quality guru Joseph Juran said, prioritize to focus on the important few, not the unimportant many. Identify the important few and get to work. Armed with good cost data and prioritization of your cost improvement efforts, you can begin to monitor and improve the cost of those most-important product/service lines, purchased items and internal processes.
I have never worked with a business that couldn’t improve its costs, often significantly. It’s not that the people in the business aren’t capable of doing it. Often, it’s not a high priority when things are going well financially and there are plenty of other problems to solve.
Sometimes it’s simply not seeing the forest for the trees. I’ve had many experiences of analyzing processes and having clients surprised to find the waste that could be eliminated. When we’re around something all the time we stop seeing the details.
Make an action plan to examine every important product, service, process, and supplier. It’s essential.
Wages and Employee Retention – Plan for wages and employee retention too. There’s no avoiding the pressure for wage increases with inflation approaching double digits. Don’t let events get too far ahead of you. Monitor wages in your markets. Factor wage increases into your pricing strategy and your goals for cost reduction in other areas.
Don’t lose good people because you haven’t planned.
Start today. Gather your team. Get help if you need it. Give your business its best shot at navigating inflation, surviving, and perhaps thriving.
Richard Randall is founder and president of management-consulting firm New Level Advisors in Springettsbury Township, York County. Email him at [email protected]