S7 E32 Inflation is coming – are you ready? How to cope with rising costs. with Jeremy Gray

Many folks in business today have never had to deal with inflation. In the US and Europe, the last time high inflation was rampant was back in the 1970s. The world today is very different from 1970s and no one is predicting we will see the same levels of inflation we saw back then, but prices will be rising faster than we have been used. The most recent inflation prints have done little to reduce concerns about inflation. The U.S. consumer price index jumped 6.2% in October from a years ago, official figures revealed on Wednesday, the sharpest annual rise for 30 years and vastly outstripping the U.S. Federal Reserve’s target. ​ Chinese producer price index inflation surged 13.5% annually in October, while U.S. PPI grew at 8.6% annually, equaling an all-time record.

That we are seeing inflation is no surprise. Shortages of labor and materials, partially triggered by Covid 19 are pushing up prices. Freight rates have skyrocketed, and oil is trading at near recent highs. Governments have been printing money for fund covid relief initiatives and combined with quantitative easing measures there is a lot of money in the world economies. I have been predicting that inflation was bound to be a consequence of these actions, I am only surprised it has taken this long.

As a SME you may be less able to pass on price increases to your customers, if the major players in your market are only passing on a fraction of the true cost increases you may have to accept lower margins for a time. Some belt tightening may be required.

To maintain profitability all parts of your company need to be ready to respond. Responding to inflation is a change in business practices and like any change initiative it is important to bring your staff along with you. Explain the situation. Instill a cost-conscious culture. Do not create panic – this is not a burning platform. Reinvigorate or set up your sustaining engineering activities. Use sustaining engineering to reduce the cost of the products to improve profitability, match competitors pricings or drive volume. Do further research to identify lower cost sources or alternative materials which are less expensive. Look at all costs – an alternative form of packaging could deliver savings. Look at value engineering – is there an element of your product that is little used that can be eliminated? Reduce portion sizes but be careful look what happened to Nestle when they removed the walnut from their Walnut Whip Never really been a walnut girl but I feel removing them from the walnut whip truly is the beginning of the end for society as we know it But its procurement who have to step up their game in dealing with suppliers Contract Management Procurement organizations must be aware of the risks in their agreements and make plans to mitigate those risks. on in itself. Contract design can be adapted to mitigate the impact of inflation. All contractual levers should be assessed, including duration/term, indexing, periodic limits to price escalations and frequency of price adjustments. Risk potential during inflationary times should be evaluated and contract terms adjusted. It is important to also work closely with the finance, sales and marketing functions to ensure that, where possible, indexes in supplier contracts are symmetrical with those used in commercial contracts. This allows cost inflation to be passed on effectively. Contract negotiations will be needed to enact changes and should be managed carefully. Prioritize negotiation targets by supplier as well as by commodity. For each negotiation, define a customized strategy, objectives and level of aggressiveness. Consider the unique context and leverage position for each negotiation — if there are no alternative suppliers with lower rates, it will impact the approach. Set clear rules, roles and responsibilities for the team ahead of negotiations and ensure compliance.