An improving economy means increased revenues. That's the good news.
The bad news is that suppliers will start to increase prices. Severe recessions cause supply contractions as businesses reduce their workforce and slash capacity.
As demand increases, companies seize the opportunity to recapture lost profits by raising prices. Given the slim profit margins under which many businesses operate, small cost changes can decimate the bottom line. It's an endless cycle that requires vigilant monitoring.
Businesses have several options to mitigate the impact of price increases. Their success will, most likely, depend on not just one tactic but a combination of several actions. The most common techniques are:
• Pass on the cost increases incrementally via smaller, more frequent adjustments.
• Announce broad-based surcharges that can be linked directly to one cost driver. This technique is common in manufacturing entities that purchase commodities such as agricultural products or precious metals.
• Negotiate a smaller price increase by committing to a longer contract term or increased base volume.
• Offer to increase a supplier's share of your projected demand .
• Bring on a new supplier who is willing to offer better pricing to gain access to your business.
• Investigate commodity or financial hedging, such as locking in future prices through contracts or currency hedging. Conventional hedging (not speculating) limits and delays exposure to rising prices and currency fluctuations.
• Provided there is no decline in quality, consider substitution of less expensive inputs.
• Refuse to pay the increase. This tactic is used in tandem with one of the other options (you should have another supplier option in place).
• Each of these options requires research, development or testing before it can be activated.
Product and supplier changes are always risky, and the downside can be worse than the cost increase.
It's not too late to develop these contingency plans. Even if they're not used this time around, they'll be available for the next cycle.
Ralph Hershberger is president of SCORE Southern Arizona, a nonprofit group that offers free small-business counseling and mentoring by appointment at several locations. For more information, go to www.southernarizona.score.org, send email to firstname.lastname@example.org or call 505-3636.