Inflation is a persistent problem for business owners, and it’s currently rising at nearly unprecedented levels. The current macroeconomic environment is a perfect storm of high demand, short supply due to chronic supply chain problems, and a major labor shortage. The typical strategy to fight inflation is by cutting unnecessary costs from your budget. However, it’s not that simple this time. Improvements in technology, the more frequent use of AI, and power in the hands of the worker make it difficult to remain competitive.
So what’s the way out of the double bind? Here are some smart ways to cut inflation without hurting your business in the short or long term.
Tip #1: Know What You Spend
If this sounds pedestrian, that’s because it is. It’s also an imperative that is too often ignored by decision-makers. Even the biggest, most successful companies suffer from teams that operate in silos. If information isn’t shared, how can you really know what your costs are? Transparency is paramount. Anyone with a responsibility to manage costs should also have access to financial statements and be expected to know what’s on them. Too often financial statements are closely guarded; not because the information is sensitive, but because the information becomes currency used to establish status. Only when everyone on the team is using the same information to achieve the same goals will you have a team that pulls together and actually makes progress.
Tip #2: Cut Out Unnecessary Spending
Now before you dismiss this tip as too obvious, let’s define “unnecessary”. When you go to tighten the belt on spending, the litmus test should always be, “Is this cost directly related to our overall strategy?”. Most companies can confidently say what their overall strategy is, but most companies also have projects or initiatives that may be divergent from that strategy. When it’s time to get lean, those are the things that need to go. Executive pet projects, unproductive annual performance reviews, and any other spending that doesn’t directly support the top-line strategy should be put on the chopping block first.
Tip #3: Consolidate Vendors
If you haven’t read the news lately, January showed a sharp increase in how much suppliers are charging their customers for goods. Most suppliers are wary of passing along frequent or significant cost increases for fear they will lose the business altogether. January’s stats show that supply chain problems and rising labor costs have left suppliers no choice. As a buyer, you can’t avoid every cost increase from a vendor but you can reduce how many vendors you have and leverage economies of scale to get the lowest possible price. For larger companies, I recommend having one person or small team assigned strictly to finding consolidated buying opportunities. I once worked as a category manager for a Fortune 20 company. I bought products from two suppliers for my department valued at hundreds of millions of dollars annually. After I’d been in the role for a year, I realized another department was buying the EXACT SAME products from the EXACT SAME suppliers valued at billions of dollars annually. The departments had never leveraged their total buying power by negotiating together because they had different bosses with different objectives. And you can bet the suppliers weren’t going to say a thing! You’d be surprised how often these things happen, so dig deep.
Tip #4: Reduce Labor (Not People)
Now is a great time to dust off any Lean and/or Six Sigma training you have. In an environment of severe labor shortages, reducing headcount isn’t an option for most companies. But that doesn’t mean you can’t reduce your labor costs. All you have to do is identify wasted time, duplicated efforts, and unnecessarily complex procedures and eliminate them. Do simple requests require long, multi-step approval processes? Does your team have to cross a large common area to get to the only printer? Do multiple people run the same reports for the same reasons on a regular basis? There is always efficiency to be gained and if you’re short-staffed and paying more for good people than ever, you can’t afford to be wasteful.
While all of these tips may not apply to your organization, it’s worth going through the exercises to be sure you’re operating in the most cost-effective way possible. Runaway inflation can make business leaders feel helpless, so knowing you haven’t left behind any low-hanging fruit will help you feel more at ease and in control.
Need help managing inflation? Contact me now.