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Mitigate Effects of Inflation

Updated: Nov 24, 2022

Inflation is currently a concern around the world. Prices are increasing and existing money in business coffers are decreasing in value. Businesses with a significant 'moat' (monopolies with high entry barriers, intellectual property, etc) may be able to raise their prices faster than general price increases but a majority of businesses are not in this position. I won't discuss the fiscal and monetary policies from a macroeconomic level as this is not the topic of the blog and is not likely directly applicable to you. However, supply chain management can be leading your efforts in managing this environment.

Front-load your costs

This may be a little counterintuitive, but investing more in capital assets will reduce future exposure to operating costs. Capital investment include both physical and digital assets. These assets (for example, automation equipment) can reduce labour and materials requirements which are sensitive to inflation. It will also likely make you more efficient/productive, further reducing your variable costs. Make sure you work with finance to ensure that your company can handle the capital investment without excess financial burden or risk.

Stretch Existing Operating Assets

This may sound contrary to the previous strategy but it is not. The main point before was to increase the fixed to variable cost ratio; but here, I am proposing to maximize the use of the fixed costs (aka the assets). Using a consumer example to highlight: upgrade your smartphone every 5 instead of 2 years. You will get a lot more value for your spend and are also more likely to catch bigger technological improvements and leapfrog the small incremental improvement that doesn't add much value.

Go for quality over quantity. Higher quality equipment can give you a bigger bang for your buck. Reliability will be better and also have longer product life cycles. See the post on total cost of ownership for more discussion on this concept.

Aggregate your spend

This is a typical category management/procurement strategy but it is even more relevant in this economic climate. Vendors and service providers are more likely to lower pricing when you can guarantee a higher volume of business because it reduces their risks. Purchasing can be aggregated by different business units (departments, locations); by category, where vendors may provide multiple items in the same or similar category; and also by time, through commitments to longer-term contracts with the same vendors. Vendors may have the same cost concerns you do, so be prepared with a negotiation strategy.

If your businesses deal with commodities, you may use various financial instruments to hedge against price volatility . Sometimes, it may be worthwhile to pay a premium to stabilize costs against price risk. I would refer to finance to weigh available options.

Increase operational efficiency

I touched on efficiency in the first section, but increasing efficiency doesn't necessarily have to involve additional assets. Improving your process through methods like Lean Six Sigma will reduce resource wastage and by extension your exposure to rising prices. It also doesn't need to be any fancy methodology, making small changes will add up to making a difference.

Finally, think about the whole supply chain. Communicate with your supply chain partners. Understand what in your costs may have higher inflation pressure. Can they be substituted with other items or services in your portfolio or are they subject to the strategies proposed above? How about customers? Can they help you better predict requirements to manage your spend or internal processes? Can you manage their expectations and align them with your capacities? All these questions can potentially improve your ability to succeed in an inflationary environment and come out ahead of your competitors.

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