Thought Leadership

Discovering True Profitability in times of inflation

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Companies have historically reassessed their pricing models annually. But to remain profitable considering today’s constantly and rapidly increasing costs, they need to use a more dynamic pricing concept that measures changes monthly or quarterly.

True Profitability is a heavily data-driven concept that business leaders should use to manage those changing costs. By combining the capacity and capability to collect and analyze real-time cost data and then implement strategies and processes, True Profitability is achieved.

How True Profitability brings clarity to your costs and margin

It’s important to have a dynamic understanding of changes to prices of critical components or raw materials and changes to the cost of transporting these items. Knowing how your costs are changing in real time is key to making agile, impactful decisions.

To understand your True Profitability, focus on the entire channel costs for each customer and product so that you can react appropriately. In an inflationary environment, this is critical because costs for materials and services increase at different rates.

Using the True Profitability concept empowers you to make better-informed decisions while in pressured environments. It also allows you to truly understand the options available to tackle inflation. Such options could include:

  • Passing on higher costs to consumers
  • Absorbing rising prices and accepting reduced profit margins
  • Modifying processes to maintain margins

For example, the third option could involve changin your inventory model from just-in-time to buying products in advance to lock in known costs. If your sales forecasts are accurate, that could hedge against inflation.

Prioritizing customers is another way to manage inflation.

When you realize the True Profitability of each customer, you can better determine who you should serve and your value proposition for each. The same holds true for your vendors and supply chain partners—every factor you control should be analyzed to understand your true cost to serve.

True Profitability can also offer ESG and decarbonization benefits. Digging into your logistics details and reducing the distance goods travel helps minimize your carbon footprint while saving money.

The issue with True Profitability is that it is nearly never truly understood. Typically, companies are filled with a lot of data that is looked at in siloes; and, while in a silo view the data might provide you a positive story, when looked at together and understood holistically that story might change.

Getting the transparency you need to achieve True Profitability is not an easy task, but it is not impossible. It requires you to uncover the data that is holding the keys to the real status of your organization

Related: Develop an Inflation-Driven Risk Management Plan

Uncovering the data and implementing change

Previously, costing could be done in averages, but that tends to hide anomalies and problems. Businesses today need the hyper-specificity of real-time costs—and that requires data.

True Profitability involves analyzing large amounts of data that typically resides in an Enterprise Resource Planning (ERP) system. The gold is in the details, and to uncover it, you need the data.

Merging that data with the right experience and capabilities is what enables business transformation. The data must be viewed from a business operations perspective and with an end-to-end value chain lens to drive change.

The full picture view combined with a laser focus determination and know-how to change is where the rubber hits the road.

Many organizations have the data, but discovering True Profitability requires the capability and capacity to change. Businesses must do an end-to-end assessment of all cost drivers and develop a detailed and agile roadmap to implementation with boots-on-the-ground change management at the core.

That roadmap needs to consider where work gets done, how work gets done, who does the work, and all the change elements to make that transformation successful, in the end driving True Profitability. Importantly, the roadmap needs to have a human element factor within it to ensure that change not only happens and is adhered to but is embedded in the organization for good.

An outside party like Proudfoot helps provide a fresh approach to bringing together all of the data that is required to understand profitability leakages, developing a transformation roadmap that is suited for your business, and making those ground-floor changes with quicker speed to execution—which is essential as inflation accelerates.

With new ideas and the experience of working with similar companies across an array of industries, Proudfoot can help you find new ways to tackle issues to either transfer cost or increase efficiency in other proactive ways.

For instance, to better control labor costs, you can focus on productivity and efficiency with “what-if” scenario modeling analysis on the impact of labor changes.

Proudfoot goes beyond analyzing the data. We work alongside our clients’ people to make pragmatic changes and empower them to improve business operations. That combination of coaching and operating in as near real time as possible allows businesses to better manage costs in an inflationary environment.

Contact Proudfoot today and take a true profitability survey to bring greater clarity to your costs and margins.

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Posted on June 21, 2022

By Proudfoot Team

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