Inflation busting

Is it possible to control inflation?

At the time of writing the headline ONS inflation figure for the UK is running at a cool 9.4%. This takes into account a 'basket of goods', and allows us all to ponder quizzically how they manage to fiddle the figures to appear better than our everyday experience.

In business our everyday experience is focussed upon 3 main categories: labour, materials and energy. Take the rest of the stuff out of the calculation, weighted or otherwise, and we'd be reporting a 'true' inflation figure of closer to 30% or more. So, in a way we can see that inflation is indeed already being 'controlled', or rather the reporting of it; this is important since many businesses operate contracts whose price terms index only by the official cpi rate.

Note also how the Governor of the Bank of England suggests [in support of the decision to raise rates] that 'I've been talking to a lot of businesses...they are finding it [too] easy to raise prices'. That's quite an interesting interpretation of what's going on. Perhaps the Governor hasn't had the opportunity to be a fly on the wall in any Tesco supplier negotiations.

What's driving prices? 1 - ENERGY

Let's take the obvious one first: energy [and fuel]. It's easy to forget that the cost of energy and fuel to business is hurting every bit as much as it is for every domestic user. Electric bills have shot up 3-fold in 12 months. From being a relatively static line on the P&L the costs have accelerated alarmingly. Anyone operating a cold chain, cooking anything, assembling or melting anything...the cogs % is creeping up like an unwanted fungus.

In this environment it can feel like using an umbrella in a tornado, but what can be done? Undertaking analysis of various businesses can be revealing.

Firstly, logistics. With fuel prices through the roof and unlikely to come down any time soon, there are several areas worth scrutiny:

• Routing and route planning. Whilst most (but not all) of the larger 3rd party distribution companies are well versed in maximising backhauling (and pocketing the benefit from those whose goods they transport) and route planning, we find 8 out of 10 primary producers and own fleet operators are not. A typical analysis outcome is to find 12%-18% cost reduction opportunity - in a 20+ van fleet that's starting to make a big dent in costs, often with a concurrent uplift in service levels. We find many rely on historical routes, with assumed customer preferred windows which are incorrect. We find much manual routing, workarounds and overlays (e.g. re-deliveries, returns), and where software packages are used the settings are incorrect, functionality not employed (e.g. optimisation algorithms), and often worse outcomes than when routing is done manually by a time-served transport planner. Not only do we see benefits accruing from fewer assets on the road, we also see reduced fuel bills.
• Driver management. Even when the planning and routing is good, our analysis shows over 50% of companies do not actively manage their drivers. Even where route paperwork is good, even automated, we find drivers divert from the plan - often for very good reasons. We find lack of compliance, from use of pda's to completion of paperwork. Drivers are left to their own devices, often never being debriefed, never having opportunity to revise intelligence on customer drops, never being made to feel part of a wider company. In one 130+ driver OEM distributor we found annual staff turnover above 80%; addressing the management issues identified in a systematic analysis reduced this to 6% within 6 months, proving it wasn't 'our business is just like that', an early quote noted by our analysis team. Add to this improvement initiatives in driver behaviour, and we see improved fuel economy, lower damage rates and reduced insurance costs. It pays to benchmark against this kind of performance.

Secondly, operations. Energy costs often become the poor relation to material, service and productivity concerns yet it is worth considering the impact better operations can have on the energy bill. Analysis of key energy consumption processes within an operation reveals potential energy cost reductions 8% - 15% in a typical manufacturer, from addressing

• Running machinery when not producing
• Rework - e.g. remaking a batch of product, effectively doubling the energy usage
• Running processes at less than optimum - e.g. wrong line speeds, wrong settings on energy intensive assets such as ovens or fridges.

What's driving prices? 2 - MATERIALS

This is often the largest element of COGS for manufacturers, accounting for anywhere between 30% and 60% of a typical P&L. It is all the more wonder therefore that we find so much opportunity for improvement in this area.

• Purchasing - analysis over the last 12 months of a range of companies in fmcg food, where input price inflation has been particularly acute, shows not all increases are entirely justified. In fact, whilst certain commodity items have and are expected to continue to inflate further, we find an average 6% price reduction opportunity exists! Interestingly, inertia in dealing with price inflation is rampant. Partly this is down to certain materials seemingly difficult to source, so buyers are keen to secure supply almost at any cost. However, we also detect a level of defensiveness by buyers, a characteristic trait of those who are more comfortable being in the driving seat, and understandably less comfortable being themselves scrutinised!
• Waste - the classic preserve of those pursuing the lean agenda, even in those more advanced lean organisations analysis reveals an average 9.8% realisable opportunity that is hidden because of how lean is being deployed. For the average business, typical material waste reduction runs at 16.4%. From intake quality measurement (or lack of), through processing control (or lack of), through to inventory optimisation (or lack of), it will be no surprise to learn that 100% of companies surveyed view opportunity in this area. What is more revealing is that subsequent detailed analysis shows that the true opportunity is on average a whopping 250% higher than the company themselves has identified!

What's driving prices? 3 - LABOUR

We all hear that there is a chronic shortage of labour and before everyone shouts "Brexit", it's not just here in the UK. Where did all the people go? Strange to have a shortage in a world where 'people' is the only resource that is increasing. This statement should carry a caveat that 'there is a shortage of manual, low wage labour'.

Cleaners, fruit pickers, bar tenders and barristas, carers, warehouse pickers and line operatives...there's not enough of them to go around. This is driving up hourly rates, of course. Add to that the higher and higher tax burden and the cost of living, and we have our perfect storm for higher labour costs.

What opportunity do we find for reducing the cost of labour? Higher productivity seems an obvious answer, and most companies are trying their best at this. However, of 67 companies surveyed, of which 67 were "actively taking action to improve direct labour productivity"

• 65 were struggling to fill roles and were concurrently running excess hours
• 62 had labour standards that were not fit for purpose; meaning they were incorrect, or not incorporated into workforce planning correctly.
• 57 had targets which could be raised by over 20%
• 28 had ongoing 'lean' initiatives which had not delivered any measurable productivity improvement.

So, coming back to the question regarding inflation - can it be controlled? The answer is an emphatic 'yes' if by 'controlled' we mean 'mitigated through the intelligent application of insight'. The message is clear - get insight.