Business

Best Practices

Share

Best Practices
© 200degrees

Manage Your Margins

The financial community is trying to assess whether the inflation we are seeing is “transitory” or not, and what “transitory” means. According to the notes from July’s Federal Reserve Board meeting, the Fed generally expects elevated inflation for the remainder of 2021 but sees inflation moderating in 2022. The United States Department of Labor reported recently that the consumer price index rose 5.4% in July, compared with the same month in the previous year. The price of West Texas Intermediate crude in August 2021 has been in the range of $62-$70 per barrel, a huge increase compared to early pandemic pricing, and an increase over the 2019 average closing price of $57.

My personal view is that inflation will remain elevated for some time because of several factors, including worker shortages driving higher wages; significant pent-up demand for all kinds of items, like household appliances, cars and furniture; and supply chain problems caused by COVID-induced plant closures, worker shortages, port closures, severe weather and low inventory. Given this backdrop of higher prices for goods and services, businesses need to closely manage their margins during the next six to 12 months.

The first step in managing margins is to ensure you have a good handle on the costs of the products you are selling. Perhaps you have a pretty sophisticated system that will keep you advised of these costs. If not, ensure that you are monitoring not only current costs but also the costs of the products that will be in place when announced price increases from suppliers take effect. Make efforts to pass on these cost increases to your customers to the extent possible and as early as possible. Any lag will reduce your variable margin and your profitability. 

Be sure to include the increased freight costs for your raw materials in your calculations as well. Ensure that you are passing on the real costs of freight from your site to your customer’s facility and not relying on old estimates of these costs. Undoubtedly, they have gone up significantly. If you are selling in drums or packages, be sure to update your drum and package differentials, so they accurately reflect current costs.

Another important step in managing margin is to ensure that your fixed costs remain well under control. You may have reduced staff during the worst of the pandemic, and perhaps you have brought some of or all the staff back. Avoid the temptation to increase staffing at this time, or do so with contract or temporary staff to the extent possible. You don’t want to load up on costs that may be difficult to shed. 

Travel budgets are another area to manage closely. No doubt your travel budget dropped during the worst of the pandemic. You likely have started some travel again, especially to see key customers, to establish important new work relationships or to visit far-flung locations that need urgent attention. Try to incorporate some of the lessons of the pandemic into your planning here. You can certainly get by on significantly lower travel budgets than you may have previously thought.

You may want to consider all the fixed costs you have tied up in facilities. Much has been written about whether companies will bring everyone back to in-person work, or whether people may continue to work remotely for a long time. You will have to determine what is right for your company, but I expect you will end up with some type of “hybrid” model where people do come back to work, but maybe not five days a week. Some jobs may continue to be done remotely due to the needs of the people involved. It would not be surprising if you could do with smaller or fewer work sites, and you may want to explore how much savings you could achieve by shutting a facility. Perhaps start the analysis by looking at facilities where remote work is more easily managed, or your leased or highest-cost facilities, as these are likely to be where your biggest opportunity lies.

Another opportunity to reduce costs may be in simplifying your product slate. I would take a hard look at products fitting into the following categories:

  • Products with low and shrinking sales.
  • Products with very low variable margins.
  • Products that are difficult to pro- duce due to either operational issues or lack of raw materials. 

I suggest you do an analysis of these products and determine whether you may want to work with your customers toward taking one of the following actions for all such products on this list:

  • Raise prices to a level where your minimum margin expectations are reached.
  • Offer another, more profitable or more available product to your customers, and seek their assistance in making the transition.
  • Eliminate the product from your slate if the above options are not possible and the customer impact is judged to be limited.

These actions may lead to significant cost reductions overall because they may improve your production schedule and reduce inventory of raw materials and intermediates.

Consider whether customers may not need or value some of your offerings. Conversely, could any services be turned into a pay-for-service or subscription item? If you do reduce services, be sure to reduce or eliminate the costs that supported these services, too.

You may also want to consider the services you are providing to customers. I have been struck by how restaurants and hotels have reduced services during the pandemic, and I expect that some of these services may not return, or they may return along with surcharges for these services. For example, many restaurants no longer offer paper menus but direct you to their website through your phone to see the menu items. Hotels have reduced room cleaning, and many offer it only for extended stays.

Consider whether customers may not need or value some of your offerings. Conversely, could any services be turned into a pay-for-service or subscription item? If you do reduce services, be sure to reduce or eliminate the costs that supported these services, too.

Manage your margins carefully during these times of higher costs and disrupted supply chains!  


Sara Lefcourt of Lefcourt Consulting LLC specializes in helping companies to improve profits, reduce risk and step up their operations. Her experience includes many years in marketing, sales and procurement, first for Exxon and then at Infineum, where she was vice president, supply. Contact her at saralefcourt@gmail.com or (908) 400-5210.

Related Topics

Best Practices    Business    Management    Market Sectors