“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” —Charles Darwin
Uncertainty seems to be the one constant during today’s COVID-19 crisis. The companies that emerge the strongest from this crisis will be the ones that adapt the fastest to change.
Manufacturing companies must adapt quickly to daily changes in the global supply chain. Many costs that typically have minor monthly fluctuations might now have significant daily fluctuations:
- Raw material costs
- Labor costs (e.g., increasing hourly rates and increasing overtime)
- Burden costs (e.g., safety equipment and safety processes)
- Shipping costs
- Packaging costs (e.g., moving to single-serve packaging)
The speed and accuracy with which your company adjusts current and future costs and, in turn, product pricing could enable your company to continue to thrive in these uncertain times. Our team has been working with manufacturing companies across the globe to help them rapidly adapt to these cost changes by implementing the following business processes:
- Compare Your Standard and Actual Costs: Many manufacturing companies evaluate their business based on standard costs that are adjusted monthly. Monthly changes to standard cost are too slow in today’s rapidly changing environment with daily supply chain volatility – you need to be evaluating your standard costs against your actual costs and selling prices daily. How accurate are your current standard costs? Are your selling prices based on these standard costs?
- Don’t Just Evaluate Sales Margins: Sales margins are an important performance indicator to evaluate, but depending on how they are calculated they may be a lagging indicator. With the speed at which changes are unfolding today, you are not adapting fast enough if you are basing your pricing changes based on what you are seeing in your sales margins. Reviewing your purchasing and production cost variances in real-time can help your business adapt and evolve faster to changes in costs.
- Run Multiple “What-If” Costing Scenarios: Given the current uncertainty, it is important to balance the most-likely cost scenarios with the worst-case cost scenarios. What happens if a particular raw material cost increases by 50%? What happens if you need to pay 25% more in labor costs to keep your product lines running? These worst-case scenarios need to be factored into any mid- or long-term pricing contracts you may make with customers.
- Be Transparent and Work with Customers: Help your customers understand the details behind why your prices are changing. Outline these details in the simplest manner to help them understand and accept the changes. To the extent it is possible, offer customers some short-term pricing contracts with the ability to adapt long-term prices with market changes.
- Analyze Existing Contracts for Re-Pricing Opportunities: When an underlying cost changes, you must be able to understand which customers can absorb those cost changes immediately and which customers need to be phased in as contracts allow. Rapidly understanding how a component cost change rolls all the way through finished goods and selling prices can have a major impact on margin.
There are new opportunities in a turbulent marketplace. The speed in which different companies adapt and respond to this turbulence can very well determine the survivors and future market leaders.
History has proven Darwin right again and again. To help drive your company’s survival during this crisis, you must quickly adapt your prices and strategy based on the rapid changes to your costs.