Inflation: It’s not just Oil

March 02, 2011  |   Posted by :  

Inflation is on its way up.  It’s not just the oil price or trouble in the Gulf.  Companies are passing on the results of failed cost savings programs during the economic crisis.

Ninety-two percent of cost savings programs fail to achieve their targets.  Cost, a group of consultants stemming from the Automotive Industry believe it has the solution to this age-old problem.

“Most cost savings programs are shot from the hip or a knee jerk reaction to either business pressure or market conditions” – says Maurice Neligan, Partner at Cost-Improvement.Com – Businesses realize the need to take action – establish a corporate target and start running – with only some vague ideas on what to do.  Other companies do the absolute opposite – they navel-gaze and contemplate until it’s too late – with equally devastating results.

During the Finance Crisis most companies retrenched and began cutting costs – usually they hit the low hanging fruit – temporary workers – travel costs – short working week – free coffee etc. etc. This is okay for getting you over the hump, short-term – however, with the upswing in the market, all of these “savings” have evaporated.  Workers are back; travel is a must and so on. These savings did not impact the cost structure of the organization – the companies are not more productive or efficient then before – the inevitable was postponed.

They now face a problem – the market is back or coming back – profits look good, at least for a while, but the costs are increasing- employees who took pay cuts or pay freezes are now demanding their “rightful “ increases – after all they supported during the difficult times – now they should be entitled to their share in the rewards. More alarming than salary and wage costs are the costs of raw material – since this time last year the price of oil alone has risen by around 50% to over $110 per barrel. This means; logistics, plastics, travel, power and a whole range of other basic necessities, will begin to creep.

No problem to companies with captive markets, but most companies are not so protected and are exposed, through fixed contracts and competition to the rigors of the marketplace.

Neligan’s answer is to tackle the whole cost base, to establish a plan of attack – not just a generally defined budget – but a full project managed approach – setting long-term targets for improving the underlying cost structure, implementing step-by-step actions, which will bring the company to a sustainable position over a few years.

He believes that any manager with the stomach can introduce blunt cost cutting, but only strategically focused managers see the need to develop medium and long term cost improvement as an installed discipline within the organization.

Neligan knows what he’s talking about – having worked in the Automotive industry, he tells that some companies anticipated the economic downturn already in early 2006 and began the long-term activities, which allowed them to catapult out of the economic recession and deliver immediate results.

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