After my recent heart surgery, it seemed wherever I looked I saw the words “Heart Healthy”. Wouldn’t it be great if there was an “Inflation Heathy” remedy?
Look no further…here it is for your offsite construction business. Check out these 6 things you can begin doing right now to make your company ‘Inflation Healthy”.
Get spending visibility
High-resolution spending visibility is the foundation of any expense management capability. It enables managers to fully understand where money is spent and who spends it. In an inflationary period, it is critical to establish repeatable, end-to-end, actionable visibility of spending by cost category, business process, function, and business unit. This is the foundation for all other productivity efforts. It enables the right level of accountability throughout the organization to ensure that all decisions are made knowing the full impact on the P&L.
Differentiate between strategic and nonstrategic spending
In any disruptive environment, odds are higher that executives will make choices that jeopardize the company’s long-term strategy.
It’s not uncommon to make broad-based cuts that are not aligned with the company’s strategy — and as a result, will not yield an optimal return on investment nor maximize shareholder value in the long run. Instead, clearly distinguish between strategic and nonstrategic cost-cutting, the protecting of the signature customer and employee experiences, and fiduciary requirements, for example. Use consistent, accessible financials to prioritize higher ROI investments. A sustainable cost management system should fuel a company’s strategy and enable the business to out-invest competitors, at scale, on strategic costs in both good and bad times.
Managers must identify where investments should be pulled back and cost savings realized; where you can more selectively trim costs to improve the return on operating expenses; and where you can boost growth through greater investment in the strategic capabilities needed to achieve differential results. This investment posture sets the stage for reshaping the P&L, cost structure, operating model, and capabilities that will enable the chosen strategy. It helps leaders agree on such basic decisions as which capabilities need to be best in class — built to enable and sustain competitive advantage — vs. best in cost. It positions a company to make better decisions about deploying increasingly scarce resources to reinvigorate its strategy and maximize shareholder value in times of economic disruption. That includes investments in people, for example.
Unpack the drivers of spending
With improved visibility and a clear sense of how costs align with strategy, the next step is to develop a more robust understanding of the real drivers of cost in an inflationary environment. Dissect the rate (prices paid) and consumption (quantity or volume), including the underlying drivers, for critical cost categories. This step enables companies to create granular, trackable initiatives linked to a unique driver of a broader cost category. It sets the stage for a host of possible moves.
Among the biggest: establishing a preferred vendor program to increase buying power, reevaluating the right make-vs.-buy mix for core functions like software development, and deploying AI-powered sourcing tools to generate automated insights from spending data, flagging savings and compliance opportunities in real-time.
These steps can deliver real, near-term savings. One energy company conducted a full review of its applications and identified more than 80 that could be eliminated in the short term and save the company an annual $10 million. Getting this sophisticated view of what’s really driving spending is particularly critical in rising inflation because it enables companies to advance to the next three tactics.
Reduce consumption
With increased spending visibility and the ability to isolate drivers, companies can tailor their approach to match the inflationary environment. For example, even if companies aren’t able to buy better due to supply chain and producer pricing pressures, they can make sure that they spend better. One way to do this is to set up a spending czar or spending control towers. When a global healthcare company realized that too many acquisitions left the company with cost inefficiency, it empowered a spending czar to break down silos and make decisions across the organization. It was the first big step in finding more than $300 million in annual cost savings.
A focus on spending better can also lead to cross-functional change. One large technology company determined that many of the costs issues it faced while constructing new facilities were created from groups outside of the decision makers on new build projects. Increasing cross-functional collaboration ultimately allowed the company to cut construction time by six months, saving more than $400 million in the process. Setting up cross-function spending controls helps companies zero in on the costs that can no longer be justified or can be avoided by doing the work differently, allowing the company to continually prioritize spending and make sure that any savings identified don’t creep back in as time goes on.
Eliminate work
With labor shortages and ballooning labor costs, eliminating the work itself has the greatest impact. Companies that do this well use a clean-sheet mindset, or zero-based redesign, which can help reset the way work is done. This approach forces companies to scrutinize both what activities are performed and how those activities are performed, with specific levers to eliminate unnecessary work and automate.
As inflation looms, companies across industries are reexamining their work and determining what adds the most value and is absolutely necessary, providing both cost savings and the opportunity to deploy dollars and scarce labor resources to what will help them grow. Eliminating work can take many forms. Snack maker Mondelez International is well on its way to streamlining manufacturing by eliminating one in every four products in its portfolio, a goal it set in the opening months of the Covid-19 pandemic. Hotels everywhere are limiting housekeeping by making it an opt-in vs. opt-out service.
Automate
After eliminating work, the final tactic is to automate. Technologies like robotic process automation (RPA), workflow, and intelligent document processing can free up workers and make each person much more effective at creating value.
In addition to labor cost savings, automation can promote stability in an organization. Our research found that companies that had invested more in automation before the pandemic have weathered the crisis better than others. Meanwhile, in our experience they’ve generated higher revenues and see fewer disruptions to the supply chain, workforce productivity, and demand. Companies can use the productivity gains and cost savings they accrue from deploying the previous five tools to invest in automation.
Despite the importance of automation, digital transformations often don’t deliver the desired results. A Bain survey found that 76% of digital transformations settled for dilution of value and mediocre performance. Orchestration is the most important transformation element in digital leadership — without the right approach a digital transformation can’t move at the speed or scale needed to deliver the results companies need to see. Companies that are successful don’t just invest in identifying the opportunities and potential solutions; they make sure they have the right plan in place to roll out automation. This will be a critical factor for everyone looking to leverage automation to combat inflationary pressures.
From an article in the Harvard Business Review
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Gary Fleisher is the Editor in Chief of Modular Home Source and Offsite Builder. Email at [email protected]
To learn more about the Offsite Construction Industry, visit: Offsite Builder, the Construction Magazine for Builders and Developers
