Companies around the world are reeling under the effects of inflation, especially companies in the United States. Increasing commodity prices, supply constraints, and higher wages due to labor shortages are all piling up and making it difficult for businesses to catch a breather.
As companies are jacking up product prices as their first line of defense against the recession, there’s a considerable increase in the producer price index (PPI). The PPI measures the prices of goods immediately after post-production and serves as a critical indicator of the pressure facing companies.
The last time the world saw a similar bump in PPI was in the first half of 2008, the early months of the Great Recession. Companies that weathered that storm efficiently took decisive steps to counter rising inflation by pushing through price increases consistent with PPI.
But in today’s scenario that alone is not enough. The current inflation environment is unique and handling it can be tricky according to some economists. Companies will need to make moves that not only cut costs but also build more scalable growth platforms, positioning them to strategically reinvest in programs that deliver greater resilience and stronger purchasing and pricing capabilities.
These are 3 tactics that are studied by Harvard Business Review experts that can help you achieve your business goals and survive inflation.
Get Visibility on Spending
High-resolution spending visibility is the foundation of any expense management capability. It enables managers to fully understand where money is being spent and who is spending it. In an inflationary period, it is critical to establish repeatable, end-to-end, actionable visibility of spending by implementing cost categories, business processes, functions, and business units. This should be your foundation for all other productivity efforts. Through this you will be able to view the right level of accountability throughout the organization to ensure that all decisions are made, knowing the full impact on the profits and losses your business incurs.
Determine the Drivers of Cost
With improved visibility and a clear sense of how costs align with strategy, the next step is to develop a more robust understanding of the real drivers of cost in an inflationary environment. Dissect the rate (prices paid) and consumption (quantity or volume), including the underlying drivers, for critical cost categories. This step enables companies to create granular, trackable initiatives linked to a unique driver of a broader cost category. By determining the drivers of cost, you can gain visibility on other aspects of the business. Some of them are establishing a preferred vendor program to increase buying power, reevaluating the right make-vs.-buy mix for core functions like software development, and deploying AI-powered sourcing tools to generate automated insights from spending data, flagging savings, and compliance opportunities in real time.
Eliminate Work
This may sound blunt, but with labor shortages and ballooning labor costs, eliminating the work itself has the greatest impact. Companies that do this well can achieve a clean-sheet mindset, or zero-based redesign, which can help reset the way work is done. This approach forces companies to scrutinize both what activities are performed and how those activities are performed, with specific levers to eliminate unnecessary work and automate.
In Conclusion
Managing inflation effects is added to an already lengthy company leadership to-do list. But by playing both offense and defense in a disruptive environment, you can position yourself to outpace less proactive competitors long after the volatility ends.
