RISING COSTS: PLUGGING THE LEAKS AND FINDING THE OPPORTUNITIES
Released On 24th Aug 2022
Guest blog by David Kendall.
Milsted Langdon provides an outsourced procurement offering to its clients, providing full scope procurement services to medium and large sized businesses and most categories of indirect and overhead costs.
Here, David Kendall, who heads up this outsourced procurement team, provides his thoughts on the marketplace, supply chain and areas of risk and opportunity.
It would be fair to say that we are in unchartered waters at the moment from a supply chain perspective, driven in the main by economic and political uncertainty.
For areas such as commodity-based products (such as plastics, metals, paper, food, chemicals etc.) the pricing has increased exponentially this year, and for utilities costs (electricity, gas, LPG, and oil) we are experiencing some of the highest costs on record. Coupled with the extreme cost levels, there are supply issues in most cases which makes obtaining tender pricing a struggle in itself.
The impact of commodity product and utility cost increases can have a devasting effect on the financial health of many businesses, particularly in instances where they are limited or have no scope to pass these increases onto their customer base.
Margins are squeezed, and in many cases we are seeing traditionally strong businesses being forced into loss making, and essentially being propped up via reserved profits or refinancing and restructuring.
In addition to the above we are in the midst of a major warehousing shortage right now. We have many clients looking to expand their warehousing facilities, either internally or via 3PL external offerings, and this is a challenge in itself. There is some availability out there, but much of it will be well into 2023 now or perhaps in geographical locations that are not ideally based to your head office or your supplier / customer base.
In the vast majority of these cases the effect of increases in these cannot be avoided, but there are measures and strategies that can be taken to limit the impact:
- Reducing consumption and frequency, and improving wastage is an obvious first step. This will improve your costs, but also your carbon footprint – something that is becoming so important now, and indeed your carbon neutrality statement will likely form a requirement for all key tenders and opportunities that your business applies for in the future.
- Redesign of products in instances where the changes will not have a negative effect on customer experience.
- Seeking CPI or RPI caps in contract negotiations where possible
- Ensure that we build flexibility into all key contracts going forward, we saw so much wastage during covid and the pandemic. Lease and hire purchase assets sitting dormant in workspaces and factories that were absorbing costs over 3-5 year contract terms. We even saw fleets of HGV lorries in yards parked up for months during the peak of driver shortage, all absorbing huge costs for leasing, insurance, maintenance plans, safety checks and so on.
- Improving payment terms to optimise cashflow, it sounds obvious but when was the last time you reviewed and renegotiated with all of your supplier base? Do you maintain a contract log that defines when every contract in your business is due to end, and the termination window to avoid auto-renewal on unfavourable terms?
- Passing costs to our customer base where we can, for example, we offer free returns for delivery services etc.
- Often looking at your competitors and what they are doing can result in some useful insight
- Can we switch from branded products to unbranded products for non-customer facing spend categories. Catering is the perfect spend category to deploy this strategy.
- Are we sure that products that we are using have the most endurance and coverage? Chemicals and dilution are a good example of where improvements can be made here.
- Instead of replacing assets, can we refurbish or renovate existing assets. We had the perfect example of this lately for a national supermarket chain that had budgeted to replace much of its shopping trolley fleet, instead we deployed a project to refurbish the existing fleet and the savings exceeded £1m.
- “Plug the leaks” in your business, tighten up your travel expense policy, do as many of your employees need company cars now that we live in a more “virtual world”. Review the need for company credit cards (most companies don’t have them anymore), review the hours and shift patterns for your employees (internal and contracted). Zone off your heating system, switch all of your lighting to LED.
- Investing in a procurement review, not necessarily via ourselves, but internally yourselves if you have some commercially minded employees with a finger on the pulse as to what is happening in the supply chain.
The above is just a short summary of some of obvious steps that you can take to help mitigate the impact of rising base costs in your supply chain, and whilst individually the impact might be nominal – when combined across a range of improvements – the difference could be significant.
We have focused of course on the challenges that supply chain is seeing today, but equally there are some cost categories that are experiencing some well needed softening out there right now too.
One of the main areas that we are seeing opportunity and cost savings is in carriage and logistics space. Ocean freight and air freight is generally softening, as can be seen in the trend for the SCFI index. Furthermore we are now once again being offered long term 6m and 12m rate cards for high volume accounts, which will provide well needed security around costs – and banked/budgetary savings going forward.
We would encourage you to look at long term rate cards if international freight is a significant cost to your business, particularly whilst they are being offered, and as the unrest between China and Taiwan is reported in the media – as this could well impact supply and costs if it escalates going forward.
Domestic couriers remain buoyant and the likes of DPD and DHL are all expanding their UK business by investing in new hubs, which can often mean very aggressive pricing to try and ramp volumes up as soon as possible. Generally speaking, the courier space was too badly affected by the HGV driver shortage issue last year, and if anything this marketplace can be one of the most lucrative for savings opportunities right now.
And then we move onto “the rest” of the cost base:
- Merchant cards and banking costs, often quite considerable for e-commerce based companies, are all areas of opportunity.
- Engage a business rates review if you haven’t already done so.
- Review your insurance policies. Your business will have likely made some significant changes following the pandemic, is your cover still appropriate?
- Waste and recycling based services saw a peak in costs last year but generally are softening now, if not the core lift rates, the impact of improved recycling ratios and the rebates/incentives that are available right now.
- Consumables, PPE, workwear, we are seeing that all of the spends are generally softening.
- Communications and IT based costs are often all combined a material cost, and there can be some significant savings concealed in the detail here. Indeed some of our best percentage results have come via these categories, some as much as +50% savings.
In summary, it is not an ideal environment in the supply chain and cost space, but ask yourself if your business could do more to soften the blow. The answer will likely be yes, and the solutions can often be creative and focused around efficiency improvements and changing the way we do things, as opposed to core rates and tariffs themselves. Take this opportunity to improve your procurement processes and safeguard your business as much as possible for years to come.
For more information about our cost-saving procurement service, contact advice@milstedlangdon.co.uk
