| ||||||||||
| ||||||||||
— Industry Insight —
With these inflation signals, management teams, especially of distressed businesses, should begin planning now to reflect increased input costs in their customer prices. But, frankly, given our restructuring experience, don't be surprised if cost increases catch a number of vulnerable companies off-guard. Why? Companies tend to make three common errors when facing increasing commodity costs:
Absorbing input cost increases. First, many companies lack adequate monitoring systems that measure increases in costs. Monthly financial statements provide insufficient detail to separate increases in input costs from other drivers of financial performance, such as changes in product mix, waste or other inefficiencies. Second, company management often figures these input cost increases are temporary and can be managed with changes in product and/or manufacturing processes. Third, companies often are simply slow to understand the implication of rising costs. Despite months of media attention on higher oil prices, for example, many distressed concerns were shocked to discover their fuel surcharges didn't adequately cover their transportation costs any longer. They watched margins continue to erode before considering a price increase. By delaying a price boost, management teams throw the business into crisis. Fearing large customer flight. Companies find it easy to pass price increases to smaller customers. The lower perceived risk of losing them and their small overall sales mitigate any concerns that these customers will bolt. In contrast, management teams are reluctant to pass along even the smallest price increase or surcharge to larger customers. The sales vice president at one distressed company was so afraid to communicate a price increase that he claimed the company had a contract with the customer obligating continued service. No such contract ever existed. When faced with the prospect of losing a large customer, many managers resist increasing prices, even when a large customer is clearly unprofitable. It's these larger customers that drive the majority of a company's profits and that will have the greatest impact on profitability. But in failing to take action with their largest customers, management teams place the future of their business at risk. Failing to act decisively. Once a price increase is set, too few companies have the courage to commit fully to it. In our work with distressed companies, we see this play out on two fronts. The first is timing. Many find it hard to set a definitive date to introduce the increase; or worse, they intentionally delay the price hike announcement, hoping to avoid unpleasant conversations with customers. Decisive companies levy a price increase as soon as it's realistically feasible. Second, many companies fail to exercise any negotiating leverage and simply allow a customer to skip the price increase. This is particularly true of fees and surcharges (handling fees, fuel surcharges, delivery fees, etc.). Many customers simply deduct the charge from the paid invoice amount. When management doesn't respond, the customer continues to deduct surcharges from the invoice. Decisive pricing action requires enforcing a price change with customers. Enforcing it is simple: Refuse to process, or accept, orders from customers that do not reflect the company's established price. The failure to enforce pricing policies drives many companies to the brink of bankruptcy. It's vital that management teams, especially at distressed companies, continually monitor what's happening to their input costs and strive to catch any uptick in costs quickly ... and then act boldly to recoup their costs through pricing actions. Their businesses depend on it. n Daniel Bender is a managing director at AEG Partners LLC, with more than 20 years of experience in the development and execution of operational strategy and financial improvement for a broad range of industries. |
The specter of inflation looms again. Consumer prices have risen for two consecutive months, with June's 0.7% rise the largest jump since July 2008. Moreover, to relieve credit pressures and create liquidity in the credit markets, the Federal Reserve has expanded the money supply by nearly 30%, an increase not seen since the early 1980s. Many economic advisers also wonder whether commodity costs will start climbing as well. 
|
|
|
|
|
