Cheap…Cheaper…Cheapest?ByRaymond D. Matkowsky
We are going through a period of inflation. Right? No. Inflation is almost always with us. In the United States inflation has always been with us for at least the last 75 years. Since 1950 the average inflation rate has been 4.1%. We have had some very brief periods of 1.9%. In 1980, the inflation rate was 13.4%.
The facts make me wonder if the United States Federal Reserve’s goal of 2.0% inflation is nothing more than wishful thinking and cannot be maintained for more than short periods. This, however, is a discussion for another time. The point is that as a business owner or manager, you will have to live with inflation.
Inflation-Profits
Inflation squeezes profit margins. This makes it harder to maintain profitability. You must constantly revise your actions when it comes to facing inflation. What you don’t want to do is depreciate your product.
Let me give you an example. In the late 1800s, inflation affected the coffee market. One of the leading brands was advised by accounting to blend in cheaper Robusta coffee beans into their product. They said “no one would notice”. False, someone always notices and as time goes by more and more people notice. This brand is still around but it has fallen from being the top brand to the also run category. You don’t want to do this to your product.
Inflation is always with us. It always raises our costs. How many times do you think you could depreciate your product before you destroy its value? It is a no-win game. Once you lose a customer, chances are very slim that you will ever get the business back. You have to come up with a better way to cut costs.
Cutting Your Costs
Cutting costs may not be as difficult as it seems. One place to start is not the product itself. Leave it alone unless you have exhausted all other options. Your goal is to keep your quality while reducing your costs.
Look at the packaging. Many times the container will cost as much or more than the goods inside. Can you go from paper to plastic or visa versa? Can the packaging take another form?
I recently bought some muffins. I noticed that instead of the usual crinkle cupcake paper holders, they were wrapped in plain confectioner’s paper. The paper didn’t matter to the quality of the muffins.
Ask your engineers if there is anything they could do to speed up production without affecting quality. There probably is. Is there something they could do about inventory control or quality assurance testing? There may be many answers.
Cost Savings are Pure Profit
What is important is that you do absolutely nothing to damage your product’s value unless you absolutely have to. Beware of and accept the consequences if you do. Do not accept “people won’t notice” because someone will and this will lead to trashing of your product. Aim for cost savings in other areas. Remember, that cost savings not only help you fight inflation, but they go right to your bottom line. Cost savings are pure profit.
If you have any comments, let us know. Email me at rdm@datastats.com. We will try to print it in our next newsletter.
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