Businesses look to cut costs because of inflation threat

Businesses around the globe are likely to look to cut costs because of the rising risk of inflation.

In the eurozone, inflation hit 3 per cent last month, for example. That compares to its annual target of only 2 per cent. And forecasts predict higher levels yet.

ECB Vice President Luis de Guindos warned that temporary price rises caused by the pandemic could become permanent. In addition, commodity prices and production bottlenecks risked creating second round effects in inflation, according to Reuters news agency.

Bank policies

Despite all countries facing the same threat, central bankers may adopt divergent policies to tackle the problem, according to the trading exchange Nasdaq.

“The key challenge is to ensure that we do not overreact to transitory supply shocks,” ECB President Christine Lagarde reportedly told the bank’s premier research conference.” Adding, that policy “must remain focused on steering the economy safely out of the pandemic emergency” rather than squelching any short-term increase in prices.

Across the Atlantic, the US Federal Reserve predicts inflation could hit 4.2 per cent this year.  The UK also faces price increased of around 4 per cent. Both predictions exceed recent expectations.

Business reaction

Not surprisingly, advice on how businesses should deal with inflation risk are multiplying. In fact, the Harvard Business Review published its own take on the problem this week.

Its six tips strongly advise businesses to look to cut costs. In particular, it urges organisations to get a grip on spending visibility.

“High-resolution spending visibility is the foundation of any expense management capability,” wrote the feature authors
Jason Heinrich, Simon Henderson, Tom Holland, and Megan Portanova. “In an inflationary period, it is critical to establish repeatable, end-to-end, actionable visibility of spending by cost category, business process, function, and business unit.”

But while companies have benefited from the upsides of inflation risk by astringent cost management, this time could be different. They wrote that compared with 2008 – the last big inflation wobble – conditions today are different. That means that as well as cutting costs, businesses need to prepare for growth.

“As they prepare for higher inflation in this new environment, companies will need to make moves that not only cut costs but also build more scalable growth platforms, positioning them to strategically reinvest in programs that deliver greater resilience and stronger purchasing and pricing capabilities” they said.

Supply chains – again

As with almost every issue during the pandemic, supply chain risk is a major factor. Why? Because supply shortages can both prevent goods reaching a business – or become permanent as suppliers go out of business.

Some typical mitigation actions, according to CFO Share accountants, include:

  • Establishing alternate supply chains (not just alternate suppliers)
  • Establishing an expedite supply strategy, such as a domestic alternative to a foreign supplier.
  • Considering stockpiling critical supplies with low holding costs
  • Reviewing safety stock levels at all levels of JIT supply chains
  • Engaging in commodity hedging, where appropriate.

 

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