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Business strategies for getting ahead of inflation
Australian businesses, like many commercial enterprises globally, are experiencing severe multi-year destabilisation on many fronts. Aside from the ‘usual’ competitive dynamics, the broader challenges include Covid (from 2020) with the resulting operational shutdowns, widespread and ongoing supply chain disruptions, intensifying global inflationary pressures and now, to add further severity, the Russia-Ukraine conflict, which has delivered more acute price increases in oil, energy, raw materials and food, to name a few.
So, how can Australian businesses address these issues and move forward quickly and confidently to protect revenues, profits, and the interests of its various stakeholders?
Since business is complex, the answer lies in a range of solutions and management priorities. Whilst the list is not exhaustive, critical actions available to Australian business leaders and managers are highlighted below:
An executive mindset change is needed to drive a new and ‘more agile’ organisational culture
As a starting point, Australian businesses must reflect deeply and swiftly to assess their true level of agility, productivity, and sense of urgency. After decades of economic ‘good times’ in Australia, corporate leaders must gauge if their teams are conditioned to think fast, think smart & act with speed. It is essential that leaders determine if the company culture breeds an economic survival of the fittest mentality. In times of crisis, bureaucracy, and excessive process equal demise. We also suspect bureaucracy is a notorious hiding ground for in-efficient and in-effective resources. Organisations require a substantial mind-shift vis-a-vis the good times since unproductive habits take time to untangle…so this is the starting point. Indeed, boards need to assess if they have the right profile of CEO in these volatile times. Top 10 tips for leading companies out of crisis suggest replacing a top team member – or two!
Immediate and detailed supplier (re)negotiation is necessary
Procurement and sourcing are your new best friend and unfortunately, it’s time for a deep ‘root canal’ on costs! Senior executives need to move quickly to re-negotiate prices with all major suppliers. Time is money and, generally speaking, suppliers will not ‘volunteer’ favourable price adjustments to their partners, therefore it is essential that CEO’s (Yes, CEO’s need to get involved!) and CFO’s engage their suppliers proactively. How to respond to supplier price increases suggests businesses must insist that suppliers provide detailed cost breakdowns for the product/service in response to request for proposals (RFP’s). A detailed analysis of the cost break down is aimed to deliver collaborative outcomes and achieve cost efficient solutions for all parties.
Deep and wide value chain scrutiny is essential to build cost resilience
As mentioned earlier, Australian businesses have generally performed quite well over the last decade or two, which has conditioned corporations, through ‘cost creep’ to ‘normalise’ higher operating costs and continue more traditional business practices. To survive this price crisis, hard decisions need to be made such as: reduction in operating costs, investment in technology, selling off non-core assets, price tiering portfolio’s to more effective target various market segments. Building the business operations cost resilience playbook includes guidance for Australian business on available actions over three horizons (short, medium, and long term).
Portfolio re(prioritisation) and product re-design & substitution
Five ways to Adapt Pricing to Inflation suggest that “companies without the capability to quickly redesign products often rely on category management to reduce costs by adjusting assortments, reducing SKU complexity, sourcing from preferred vendors, and minimizing inventory. From a commercial perspective, we see leading companies identifying product substitutes within their portfolios, often private-label equivalents that can be sold at a lower cost than branded products while maximizing margins and increasing the value delivered to the customer”.
Additional Industry Practices: to manage costs and/or to protect value
- Investing in processes to improve operational efficiency – quick sharp and prioritised reviews can lead to measurable cost savings e.g. can we save time and resources on the recruitment process?
- Digitalisation of B2B purchasing to reduce administration costs. Particularly with labour shortages/high competition in labour market/wage-price spiral
- Activate material surcharge agreements with customers and undertake a full review of customer contracts to dial back on customer discount group structures & increasing rebate thresholds – and there will be a need to walk away from low-value customers when at capacity.
- Additional base price adjustments – how many can the market bare? There may be government rebates available for customers to soften the price impact on operations.
- Change in sales incentives & behaviour – limit discounting and empowering sales reps with data/knowledge to be able to effectively communicate with customers in advance of a price increase. There has also been a larger focus on getting better quality sales forecasting fed back from customers to improve demand planning and reduce expedite freight costs.
- International payments and currency hedging – seek more cost-effective alternatives to transfer funds to overseas suppliers and work harder on hedging processes.
- Move to partner with businesses which are operating in more profitable sectors – e.g. the Australian agriculture sector is doing relatively well. Can the business supply to them?
- Seek higher value channels – where businesses or consumers are willing to pay more for the goods/services, could be local or international.
- Stock piling for profit – buy more raw materials for better prices – stockpile to manage future cost increases.
- Diversification of Export Markets – seek new markets which have a higher purchasing power to drive improved margins.
REFERENCES
https://www.thomasnet.com/insights/how-to-respond-to-supplier-price-increases/
https://hbr.org/2021/07/how-b2b-firms-can-price-with-confidence-as-inflation-rises
Author: Boban Tomic is an Advisory Board member, International FMCG Executive and currently the Managing Partner at Tomic & Company, a consultancy which advises companies and brands on expanding into international markets. Boban has deep in-market experience across Asia, Australia, Europe and Africa. His areas of expertise are Global Brand Building, International Trade, Export Strategy, Business Development, Distribution Expansion, Strategic Partnerships and Commercial Management.