With global inflation rates increasing each month, it may seem impossible to maintain price stability in the face of rising costs. To stay competitive, businesses can’t just rely on cutting costs and reducing their prices. They must actively manage their finances with strategic business decisions, especially in times of uncertainty. In this article, we’ll show you how to manage rising costs using some lean business tools that you can start using right away.
How is Inflation Measured?
Inflation is defined as a sustained increase in all prices across an economy. The consumer price index (CPI) tracks changes over time in consumer purchases and is often used as an indicator of inflation. An increase in consumer spending on, say, rent or healthcare has ripple effects throughout a local economy, raising business costs for other companies that depend on those services. When that company responds by increasing its prices, it can trigger a chain reaction of higher prices and shrinking profit margins among businesses up and down the supply chain.
Reports about inflation and rising costs have dominated news headlines all over the world. According to the IMF (International Monetary Fund), ongoing supply chain disruptions and high energy prices are set to continue for the remainder of 2022. As a result, it is anticipated that inflation will last longer than predicted in the October 2021 World Economic Outlook fuelled by the effects of the current Ukraine War.
Ireland’s Inflation Rate – Highest Level in 21 Years
Ireland’s annual inflation rate increased to 5.6 percent in February 2022, the highest level since April 2001, up from 5 percent on the previous month. The most significant increases in the year were seen in transportation (15.4%), primarily due to increases in the cost of diesel (32.5%), petrol (30.3%), and airfares (42.3%); housing, water, electricity, gas, and other fuels (12.7%), particularly electricity (22.4%), gas (27.8%), and liquid fuels (53.7%); and alcoholic beverages (53.7%) & tobacco (7.8%). Consumer prices increased 0.9 percent on a monthly basis, with clothing and footwear (6.6 percent) and transportation (6.6 percent) driving the increase (2.3 percent) Source: Trading Economics
If you’re in an industry that’s growing faster than inflation, then your costs are rising at a slower rate. That means you can continue making adjustments to existing processes or invest heavily and still save money. If inflation is eating away at profits, then you should use lean tools to improve efficiency. Lean can help businesses lower costs while increasing profitability by keeping your overheads low.
By focusing on waste reduction and ensuring value creation at every stage of production, businesses can improve processes. A Lean business is one that produces more with less waste. The result is increased efficiency, reduced cost and higher quality products or services and ultimately more profit as a result.
Here are five Lean principles that you can apply today.
Focus on Value
If you want your business to remain profitable and competitive, focus on providing value above all else. This doesn’t mean lowering quality or cutting corners. Actually, it means continually re-evaluating your strategy, eliminating unnecessary costs, and making sure you have competitive pricing. While there are many ways businesses have dealt with rising costs over time, focusing on value is one of the most important.
Value Stream Mapping
Sometimes you need to look beyond bottlenecks and waste when trying to solve problems. This is especially true when it comes to cost-cutting measures. Rising costs mean there’s simply too much inventory for your business at that time—and you need an idea for reducing it, not just cutting back on labour costs. Value stream mapping can help you identify where inventory is piling up and what can be done about it. This would release valuable cash back into the Business’s working capital operating cycle.
This is not really an option. Rather, it is all about recognising where your time and energy are being spent, so you can work on optimising that allocation. In other words, decide what tasks you’re working on or perhaps just thinking about right now and ask yourself if they contribute value to you or others, either directly (e.g., building new features for your business) or indirectly (e.g., reading and responding to e-mails from clients).
A system of supply and demand will only work effectively if suppliers have an accurate, timely understanding of where demand is. If you don’t take any action because no-one pulls your requests for material or components, then your ‘pull’ system won’t work as well as it could. However, too much pull can cause unnecessary waste and bureaucracy. So consider how you can build ‘pull’ signals into your process so you know when to plan ahead or scale up capacity.
Most small businesses fail. Not because they make mistakes or lack resources, but because they settle for mediocre results. You can’t achieve excellence without putting in hard work and learning from your experiences. The pursuit of perfection must be foremost on your agenda every day if you want to succeed. Stop selling yourself short and strive for more than just good enough. If your quality is inconsistent, it will confuse customers (and even drive them away). Improve your processes so that all of your products are always consistently excellent, no matter who makes them or where they come from.
Benefits of Lean
Lean is all about reducing waste, which can cut costs and increase productivity. The principles of Lean are pretty simple: identify waste, eliminate waste and then constantly work to reduce waste.
Many people think of lean manufacturing when they think of lean, but it’s not just for factories. In fact, Lean is applicable everywhere including hospitals, schools, retail stores, global pharmaceutical organisations and logistics warehouses. By identifying waste (unnecessary steps or inventory), companies can reduce their cost per unit as well as increase their customer satisfaction rate by becoming more efficient and offering faster turnaround times on orders or services.
This strategy also forces companies to focus on what’s most important – efficiency, customer service and quality products – which helps them stay competitive even during turbulent economic periods like we’re currently seeing across Ukraine and climate change.
Here are some practical tips you can use in your business.
Lower your Operating Expenses
If you want to lower your operating expenses while still providing value for your customers, you need to start thinking lean. Lean business refers to methods of production that reduce excess cost and waste. That can mean anything from reducing transportation costs by decreasing product weight or size (like digital vs. print media) to using fewer materials per unit (for example packaging). But when you think about it, one thing stays constant – in order to deliver more with less, you have to do things differently. In simple terms, cut out everything that doesn’t make money.
Look at every aspect of your supply chain and decide what is essential: what supplies do you need? what goods do you need? which services are necessary? Can fixed or semi-fixed costs be made variable?
Streamline your Supply Chain
Lean businesses are characterised by efficiency. One way to streamline processes and reduce costs is through supply chain management. By tracking inventory, managing shipping schedules, and cutting unnecessary expenditures, you can be assured that your business will stay lean.
Your supplier’s input costs can have a big impact on your cost of goods sold, so keep an eye on them and make any necessary adjustments. Rising costs may also be due to bad inventory management; you should regularly go through and check that you have enough of all products and services.
Focus on your Cash Flow
When times are tough, focus on your cash flow. An efficient supply chain could help keep your cash flowing even when sales are lagging or when demand increases unexpectedly. And it doesn’t just have to be about finances—working efficiently helps ensure everything from better client relationships to streamlined operations. Lean companies grow while their non-lean counterparts fail, so always make efficiency a top priority.
Pass Savings along to your Customers
Whether it’s one of your biggest expenses, or an expenditure you don’t even think about, there are ways you can cut costs. But that doesn’t mean giving your customers less. Rather, it means passing along savings. Think of value-added services that help reduce your expense while providing new revenue streams or a better customer experience. In any case, try something new to make sure your business is sustainable. It may not be easy, but if you don’t figure out how to control rising costs and maintain steady profits now, it could ultimately put you out of business later.
We live in an era of fiercely intense global competition, political upheaval and rapid change. Although they seem abstract, these two factors often take centre stage for small business owners as they come up against challenges that can push them out of markets altogether or require them to transform radically how they work to survive. The key question then becomes how successful leaders navigate those changes: recognising market shifts early; understanding what forces are driving change; working quickly with agility to exploit new opportunities; executing strategically; communicating effectively with employees, partners, suppliers, customers and investors; adapting capabilities; being visionary yet pragmatic — all within tight time frame.
The most important thing you can do as a business owner is remain flexible. Your business will inevitably face unanticipated challenges, and it’s your job to roll with them. The more you practice tackling problems head-on and pivoting away from those that don’t work, and toward those that do, the smoother your journey will be. If you want your company to succeed amid shifting industry trends or new market opportunities, learn how to manage rising costs by getting creative with your expenses and looking for new revenue streams—and do it quickly. With each passing day, your window of opportunity gets smaller. If you wait too long, things might go bust before they get better.
If you need help managing your rising costs or would like an in-depth analysis of Lean in your organisation, contact us for a free consultation.
You may also be interested in reading about How to foster innovation in a Lean Organisation and Why Companies are turning to Online Experiential Learning for Training & Development. All our blogs are available to read here. Please connect with us on Linkedin and Twitter.