There is a lot of information out there that speculates that the US economy will experience inflation soon. I don’t know if that will really happen, but any wise leader will want to manage that possible risk to their business. But how can you manage that risk?
Evaluate risk impact
- Understand your cost drivers – Take a look at the materials you buy and evaluate what percentage of total cost each material type represents. That way, you can understand your biggest cost drivers and target your efforts on managing those items that create your biggest risks.
- Talk to your suppliers – Don’t wait to get a price increase before understanding if market changes will impact your materials. Your suppliers are experts in their markets. Ask them what they’re seeing and what they’re expecting. Then you will understand where you need to take action.
- Watch the news – It can be hard to figure out how things like rising oil prices might impact the price of the materials you buy, but having a general awareness of what is happening in the market helps you anticipate potential risks. Studying more market-specific news for the materials you buy will help you zero in on expected pricing changes.
Manage the risk
- Increase stock – Depending on your cash flow situation and your ability to store more inventory, you can stock more inventory at today’s pricing. While eventually, you might experience a price increase, you can delay it while supporting your current pricing and quotes.
- Lock-in pricing – Working with your supplier to create a supply and pricing agreement will allow you to lock in pricing in exchange for a commitment in quantity. Using this method, you can obtain a lower price over time without impacting your cash flow by putting the material in stock. Some suppliers may be willing to commit to lower pricing without making you commit to taking a quantity of material just based on your previous purchases. Ask. You never know.
- Monitor material price changes – Often, businesses notice material price increases when they see their margins erode. Work with your Purchasers to pass price change information along to you proactively to gauge margin impact. Not only can you pass on price changes to customers before your margins suffer, but you can also give them detailed information about why the price is changing.
While overall economic inflation will eventually impact any business, it does not have to impact your margins. Working to understand and manage the potential impact of price increases will shield your business from the negative impact of inflation.
If you need help evaluating and managing the risk of inflation in your business, feel free to contact me at firstname.lastname@example.org.