Cost saving opportunities in the Brexit environment
Brexit – the perfect storm...?
In the November 2017 budget, the GDP growth forecast for the UK was downgraded from 2% to 1.5% for the current year, with a challenging economic environment predicted in the run up to Brexit and beyond.
UK based organisations have been feeling the pinch for some time.
Following the Brexit decision in June 2016, the pound hit a 31-year low. Whist recovering some of its initial fall, trading at $1.32 in November 2017, it is still significantly lower than its pre-referendum position of $1.50. This has had a huge impact on costs for organisations based in the UK with almost everything that is brought from abroad costing more. Organisations importing goods and services in Euro’s and Dollars have been hit particularly hard.
After a sustained period of historically low inflation, domestic UK prices are rising again with inflation running at 3% and many analysts pointing to additional prices rises for manufactured products, transportation and food and drink. The Office for National Statistics suggests that the food and drink industry face cost rises of as much as 20% across the next 3 years.
…or not all doom and gloom after all?
‘Brexiteers’ point to stronger than expected economic growth, new jobs being created and predictions of an imminent recession in the UK proving unfounded.
More competitive trade deals with non-EU countries should, theoretically, be possible, with China and Australia already moving to make deals - boosting opportunities to expand the global footprint of UK based organisations. Meanwhile, the 18% fall in the value of sterling to the US dollar has created an immediate benefit for many exporting businesses.
The case is also made that, following the final exit from the EU, the £8.5bn net contribution to Europe will be “freed up for inward investment”.
One thing is certain – margins are being squeezed
Whatever the final outcome of Brexit, the immediate trading environment remains uncertain and cost pressures are being felt across many industries. Whether directly from imported goods and services or indirectly through domestic inflation, rising costs impact margins and profitability and organisations are having to act – with varying levels of success.
Simply passing on costs to customers, whilst almost inevitable, is extremely difficult to do in the current low growth environment.
Focusing on increased sales is another strategic priority. However, increasing sales by an order of magnitude to have the same effect on profitability as rising costs is not an easy thing to do either.
The role of procurement excellence is controlling costs
A growing number of organisations have been utilising smarter and more effective procurement practices to mitigate the issue of rising costs, protecting margins and supporting growth in the process. While costs may be rising, there are excellent opportunities to capitalise on the changing dynamics of supply markets, disruptive innovation (characterised by record numbers of new market entrants) and competition.
Significant impacts can be achieved across two areas:
- Cost containment –underpinned by high-performance procurement functions, organisations can contain and avoid cost increases. While cost containment is only a temporary measure it does ‘buy time’ prior to an effective programme of cost reduction
- Procurement cost reduction – achieving sustainable cost reduction is becoming a high priority for virtually all organisations today. Some of the biggest enhancements are being made where every single element of expenditure is scrutinised at an unprecedented level, better ways of buying implemented and every pound, dollar or Euro saved going directly towards the bottom line.
Cost reduction strategies for the Brexit World
Challenge – utilising negotiation techniques to avoid, delay, or rebase impending cost increases
Delay – particularly relevant for importers of commodities, buying stock prior to anticipated price rises and hedging to offset against losses
Avoid – tapping into the high number of new entrants in UK markets, opportunities to reduce the volume of imported goods and services – and currency related cost increases – are strong. Making time to explore disruptive innovation and research potential new suppliers can pay significant dividends.
Mitigate – although fuel and fleet technology costs have been rising, conducting a ‘deep dive’ analysis into the cost of individual vehicle components and services (e.g. body build or maintenance and repair costs) can yield savings, prolong usage and delay replacement costs.
Offset – while key ‘direct’ costs may be rising, there are always opportunities to identify and deliver cost reduction across the smaller, less targeted, but often significant, indirect spend categories
Offset – working closely with strategic suppliers to help take out costs through Supplier Collaborative Cost Reduction.
Points to consider
- If you are importing and buying in dollars, review the country of origin currency. Whilst sterling may be dramatically down against the $, it may not be so against the origin currency.
- Undertake a programme of procurement cost reduction proactively undertaking strategic sourcing on every category of spend.
- Focus first on indirect spend - this is an area which is often overlooked and can be a good place to make immediate and rapid savings. A leading UK food manufacturer saved over £2m on their indirect spend in less than 7 months - more than offsetting increases elsewhere.
- Explore UK suppliers - for certain commodities it may now be time to “re-shore”. If you don’t understand your supply chain, spend time focussing on it as soon as you can as complete transparency will be vital in the coming years.