Inflation is not just on the horizon, it’s here. U.S. consumer prices increased 5.4% in July from a year earlier, the biggest monthly gain since August 2008. The IMF Chief Economist warned “inflation is expected to remain elevated into 2022 in some emerging market and developing economies, related in part to continued food price pressures and currency depreciations.” Accenture analysis shows that expected inflation rates have reached a 13-year high and may be a long-term trend (see figure below).
While it remains to be seen whether inflation is transitory or here to stay, it is just one of several factors that signal economic uncertainty for the foreseeable future. Supply chain disruption, shifting consumer demand and the effects of climate change also present significant challenges. For CEOs, the time to act is now to transform costs and improve liquidity and cash flow with a zero-based approach.
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Zero-based cost transformation offers multiple options for increased flexibility, with the entire operating model presenting opportunities for
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The opportunity is in reinvention
The following are five key moves I’m recommending companies make now to help mitigate the effects of inflation and manage through uncertainty.
- Use price increases strategically. While selective price increases can help in the short term, they often have diminishing returns. To be successful in the long term, it’s essential to have a balanced approach to price increase with cost forensic and understand how the cost baseline had changed. For example, my clients are seeing shipping costs triple in a year—going up by five-fold in some cases. The situation requires immediate action, but most importantly, a sustainable long-term strategy.
- Aim for cost visibility and transparency. To transform costs, it’s critical to know what they are, which is more difficult than it sounds on an enterprise basis. Sophisticated analytics provide visibility into costs and support real-time decisions about how people work, how the end-to-end supply chain is flowing, and, critically, about areas of future growth. That is top of mind for CEOs today. In fact, 88% of C-suite respondents to the Accenture Business Futures 2021: Signals of Change survey consider data sets and analytic approaches to better predict and respond to future events critical to their success. Modeling scenarios and use cases can help predict future variability and indicate the right course of action. However, to be effective, you must have clear visibility into how you’re spending money today.
- Reset the baseline. Over the past 18 months, companies have faced major disruption including supply chain issues, halting production, shifting to a remote workforce, and dealing with the global effects of climate change. Companies have been agile in responding to those dynamics but it’s important to recognize that when the operating model changes, so must the baseline. For example, companies that are moving to a hybrid workforce and no longer need office space, can redeploy real estate funds to invest in new talent or other capabilities in strategic areas that help fuel growth and resilience. Analytics can help create “should cost” models for spending based on current and future business needs.
- Make the cost structure more variable. The focus should be on agility and flexibility for the future, based on the new cost baseline and continuing inflationary pressure. Zero-based cost transformation offers multiple options for increased flexibility, with the entire operating model presenting opportunities for re-thinking costs. Throughout the organization, many tactical, repeatable activities can be virtualized, automated or outsourced, freeing up resources for strategic initiatives. For example, in supply chain planning, functions such as demand planning or financial planning that are based on algorithm and repetitive tasks etc. can be outsourced.
- Build operating resilience. Cost transformation aligns the enterprise operating model with future strategy. This means putting the right headcount into the right future roles and determining where to compete, how to grow and how to differentiate. It extends into go-to-market strategies, customer service and company culture. But it also improves preparedness and the ability to bounce back from adverse events. Some retail apparel companies relying heavily upon suppliers in a single country such as Vietnam, for example, have used digital twins to create control towers to predict the arrival of needed products and make rapid adjustments in cost, production and distribution. This helps keep customers informed about realistic delivery schedules.
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By making these moves, CEOs can be in a stronger position to manage through inflation and improve resiliency to withstand future disruption. Building a culture of accountability across the organization at every level is critical to making the change sustainable. By focusing on shared strategies, metrics and outcomes, every employee not only understands their role but is incented to achieve the broader goals as well. The right combination of strategies and analytics with a culture of accountability can help CEOs attain growth even in a highly uncertain business environment.
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