During times of financial strain, be it from the effects of the pandemic, high inflation rates, or low sales, the top of every CFO’s list is lowering costs. Although that’s an important goal, CFOs should focus on more strategic efforts, especially optimizing their product or service portfolios. Only then can they ensure business sustainability and profitability.
Talk to almost any CFO this year, and you’ll hear that what’s top of mind is containing operational costs. It’s one of the most logical moves for businesses during periods of high inflation, which has been at a record 40-year high. By reducing costs, it’s only natural for a business to increase its profitability — that is, of course, if all else remains constant. Should demand drop and sales slump, it impacts your ability to clear inventory, and you know what that means: increased operating costs and lower profit margins. It can also impact the return on investment for any equipment used for the sourcing, production, storage, and transportation of goods.
Given enough time, such circumstances will have a direct impact on your cash reserves. When the next window of opportunity opens, you’ll then have a much more difficult time capturing market share and sustaining the business in the long term. It can have a ripple effect throughout the entire operation. But here’s the thing: An accounting major fresh out of college can cut costs. CFOs should direct their attention elsewhere, particularly around how to optimize their product or service portfolios to ensure sustainability and profitability.
It takes a true CFO to improve cash flow by getting the inventory balance right across the value chain from an obsolescence risk to a sales reward perspective. Faster sales and operations planning feedback loops are better cures than cutting costs, as they allow you to capture market share. So, the question then remains: How should a CFO approach cost containment when it comes to the supply chain? The following are often the best places to start:
- Focus on your product portfolio.
At the mere mention of the need to contain operational costs, the first inclination is often to take a machete to expenses — that, or commence with layoffs. While either option will certainly do the trick, remember that circumstances change. You might find yourself in a world of hurt down the line. Instead of making drastic changes to operations, the time has come for you to reevaluate your product or service portfolio. Such a tactic offers the opportunity to delve deeper into what you’re carrying or offering and view it from a variety of perspectives.Start off by weighing the strategic value of each product or service in your portfolio. Yes, this will be a time-consuming task. However, consumer demands change, and what you offer should follow suit. You might find that certain products, once top sellers, no longer move. That’s a good indication that they’ve reached the end of their life cycle. Although this should go without saying, cutting underperforming products from the portfolio leaves room to introduce new offerings with a higher likelihood of improving sales.
As you go through this process, also make note of each product’s profit cycle. What is the earning power of that widget? Just because something is selling doesn’t automatically make it profitable. Calculate the cost of production, review the prices of similar products in the market, and then determine whether it is worth keeping in your portfolio — or whether there’s room to make price adjustments to improve its profitability. When in doubt, talk to your customers. You might find that other changes are necessary.
- Leverage supply chain data.
A data-driven approach to supply chain management has become table stakes these days. It allows you to better predict changes in consumer demand, which will inevitably impact production and inventory on hand. Data also allows you to make faster decisions across the entirety of the supply chain, putting your business in a better position to weather those unavoidable market fluctuations.Fortunately, data isn’t hard to come by. It can be found at the point of sale, in production volumes, and in your inventory itself — among a host of other sources — and much of it can be used to identify discrepancies between supply and demand. Just make sure to use this data for more than cutting products. Perhaps it’s time to add new product lines to your portfolio. Maybe price changes are in order or certain products could benefit from a promotion. Analyzing supply chain data can help you make more informed decisions that can drive profits.
Beyond that, data can afford you the opportunity to examine how exactly products move through the supply chain. Are you experiencing any bottlenecks that are leading to a loss in revenue? Are there any redundancies that are adding time and expense to the sourcing, production, or transportation process? Getting a more granular view into the supply chain makes it much easier to manage and refine processes to ensure optimal operations.
- Generate additional output with existing assets.
While it can be tempting to make capital expenditure investments when trying to contain cost, the answer often resides within the company itself. In fact, measuring the current utilization of existing assets can uncover those assets not yet at full capacity. Take something like a plant, for example. Reviewing how the plant operates can tell you only so much. Chances are, however, that plant has a series of production lines. By analyzing each of these lines, you may find that the output of a line is below that of all others. Then, it’s all a matter of exploring new techniques to improve performance.
In recessions or downturns, the business requires intervention by CFOs and supply chain leaders to manage dollars more actively. That much is hard to deny. Where some businesses falter is in how to best manage those dollars. It often starts with your product portfolio and then using the data available to make adjustments to product or service lines and improve the return on existing assets — all the while growing without expanding capacity.
Written by Ali Hasan Raza.
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Have you read?
Three Priorities for Small and Medium Businesses in 2023 by Ben Schreiner.
Equality between men and women in the workplace: will we ever achieve it by Riccardo Pandini.
Should Marketing Get a Free Pass on ROI by Jim Everhart.
Do You Get Triggered in Business by Sarah Cordiner.
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