Controlling Costs in the Context of Inflation

Controlling Costs in the Context of Inflation

Not so long-ago inflation was thought to be a thing of the past – conjuring images of a bygone age pre-dating the birth (or at least school years) of many members of today’s management teams.    However, anybody watching the news, visiting the supermarket or filling their car at the pump will be acutely aware that it’s back – and it’s biting.

We first started to see the signs at the end of the summer last year (2021) – there were rising concerns as bottlenecks in the global supply chain alongside rising energy costs pushed inflation towards 4%. The subsequent invasion of Ukraine, lockdown in China and labour shortages have fuelled its rise.

Inflation hit 9% in March 2022 and the Bank of England predicts inflation will reach “around 10% this year”.   Whilst it also expects it to fall considerably over the next couple of years, inflation is having a negative impact on the economy, it is creating uncertainty and putting pressure on margins and cash for businesses.

Procurement policy and management has a vital role in mitigating risk and reducing the impact of inflation.   In Rising Energy Costs – What Can You Do?  I highlighted strategies that can be deployed to counter the threat.

But whilst energy costs are a major contributor to current inflationary pressures – the impact is far broader.   Acting and putting strategies in place will ensure supply and price stability in the here and now, provide insulation against volatility in the medium term and embed best practice for the long term.  We discussed the strategies in our  10-Part Focus on Costs Programme which contained the essential steps for cost control. 

As part of our Recalibrating Spend series we covered another valuable approach for dealing with suppliers who are passing on ‘inflation-based’ cost increases is  ‘Should Cost Modelling’.   

Should Cost Modelling is an under-used weapon in the armoury of Procurement professionals.  In our article we break down the technique, using Personal Protective Equipment as an example (which at the time was ballooning in price due to the pandemic).   We show that by looking at the component costs it exposes the elements that are subject to inflation and those that are not – providing the basis for principled negotiation.    

For example, if energy prices have created cost pressure for a supplier, but the energy cost only makes up a small percentage of the total price it should be clear to all that it would be unfair for the supplier to up their total price by the proportion of the energy price increase.

Ultimately, working very closely with those suppliers that are key to your business and operation holds the key to managing rising costs.   The changes that you make in partnership with your suppliers will often not only help you control costs, but we also regularly see such changes lead to new options that drive efficiency and new ways of working.

If you would like any more information on effective Cost Control, mitigating the impact of inflation and how JMCL experience and expertise will help you please contact Jonny Michael, CEO of JMCL Consulting:

E: j.michael@jmclconsulting.com

M: +44 (0) 7831390161