Strategic Initiatives To Mitigate Inflation Risk

Companies are struggling to deal with rising commodity prices, supply shortages, and increased salaries brought on by labour shortages as the economic recovery gathers momentum following the epidemic. The producer pricing index (PPI) increased 10% in the G7 states during the first half of 2021. The PPI is a crucial measure of the strain on businesses since it gauges the prices of goods right after production.

The current inflationary phase is exceptional because supply chains are more constricted, consumer demand has not decreased as much as it did in 2008 in the early months of the Great Recession and labour markets are unstable. Companies will need to take action that not only reduces costs but also builds more scalable growth platforms, positioning them to strategically reinvest in programs that deliver greater resilience and stronger purchasing and pricing capabilities as they get ready for higher inflation in this new environment. They require cost-controlling measures that will increase top-line income, lessen their reliance on unreliable labour markets, and boost staff retention. Successful businesses use different strategies to accomplish these objectives. Here we would like to?examine each one separately.

The basis of every cost management capability is high-resolution spending visibility. It lets managers comprehend where and by whom money is spent. Establishing repeatable, end-to-end, actionable visibility of expenditure by cost category, business process, function, and business unit is crucial during an inflationary period.

Establishing a distinction between strategic and nonstrategic spending means that in a disruptive environment, executives are more inclined to take actions that undermine a company's long-term goals. It is common to adopt broad-based cuts that conflict with the company's strategy and, as a result, won't ultimately result in the highest rate of return on investment or an increase in shareholder value, especially where compensation is tied to financial results. Make a distinction between strategic and nonstrategic cost reduction, the preservation of unique employee and customer experiences, and fiduciary requirements, for example, rather than combining them. Use consistent, transparent financials to prioritise investments with a higher return on investment. A company's strategy should be supported by a long-term cost control system that enables it to consistently outspend competitors on strategic costs in both prosperous and unprofitable economic conditions.

The next step is to build a more thorough grasp of the true drivers of cost in an inflationary environment with enhanced visibility and a clear awareness of how expenses match with strategy. Analyse crucial cost categories' rate (price paid) and consumption (quantity or volume), considering the underlying causes. With the help of this phase, businesses can develop specific, traceable initiatives related to a certain cost category driver. It prepares the ground for a variety of potential actions. The three biggest are implementing AI-powered sourcing technologies to automatically create insights from expenditure data, identifying savings and compliance opportunities, and developing a preferred vendor program to improve purchasing power.

Consumption reduction can be explained as when businesses adjust their strategies to the inflationary environment by increasing expenditure visibility and isolating factors. For instance, organisations can ensure that they spend more wisely even if they are unable to buy better due to supply chain and producer pricing pressures. One way to do this is to set up expenditure control towers or a spending czar. A multinational healthcare corporation gave a spending czar the power to breach organisational boundaries and make decisions for the entire company after realising that too many acquisitions had led to cost inefficiencies. It was a significant first step toward generating yearly cost savings of more than $300Mn.

The ultimate strategy is automatisation. Workflow, intelligent document processing, and robotic process automation (RPA) are just a few examples of the technologies that may free up employees and increase their productivity. Employees at retailers, for instance, frequently waste too much time?manually entering item and product data (such as case size, pack size, dimensions, and website photos) when they should be concentrating on more strategic tasks like data analysis and insight generation.