Inflation has become a hot topic. Although the UAE and other GCC countries have not experienced the price spike seen in other parts of the world, this region is not immune to inflationary pressures. Businesses of all sizes are feeling the pressure of rising inflation rates, but how did we get here? And what steps can companies take to mitigate inflationary risks?
According to the International Monetary Fund, inflation in the United Arab Emirates is expected to be 3.7% in 2022 and fall to 2.8% in 2023. Factors contributing to rising inflation in the region include geopolitical tensions , high energy costs, supply chain disruptions and rising consumption taxes in some GCC countries. While the UAE’s inflation rate is one of the lowest in the world, companies operating in the emirates are still feeling the effects of rising costs.
UAE-based and international businesses face supply chain disruptions as energy and raw material prices continue to rise and organizations seek to source materials at lower cost . These supply chain shortages can lead to production and delivery delays, which impact revenue and profitability. For some businesses, lower consumer spending has impacted revenue as fewer products are sold. Higher inflation can also lead to increased competition as companies employ strategies to maintain or increase market share. The effects of inflation on businesses vary by business. However, the need to take steps to mitigate the threat of inflation is common to all organizations.
To provide guidance to middle market businesses, Grant Thornton has released the “Essential Blueprint for Managing in Times of Inflation”. The seven-step plan can be used to assess current priorities and business progress and provides practical advice on how businesses can adapt to mitigate inflationary risks. While this isn’t a list of everything businesses can do, it does provide essential start-up actions that will have the most impact.
Action 1: Identify and mitigate inflation risks for your business
Inflation impacts all parts of a business, so engaging with people at all levels of the organization to create a plan for dealing with high and prolonged inflation will yield the best results. As part of the process, identify risks and develop a plan to mitigate them. Once developed, review this plan regularly to ensure it evolves with the threat. Inflation can erode margins so quickly that it’s also essential to plan more frequently, consider a wider range of outcomes, and develop accurate models.
Action 2: Take action to limit increases in external costs
Businesses in the UAE have a wide range of options to limit external cost increases, including price freezes, buying in bulk, renegotiating terms with suppliers, or switching suppliers. While inflationary pressures have driven up costs, not all suppliers are responding to the same degree. Now is a good time to carefully review vendor contracts and look for opportunities to improve terms or even offer goods and services for bidding.
If businesses choose to hedge against price spikes by buying in bulk or ordering in advance, they need to consider the additional pressure this places on inventory, working capital, and storage space requirements. . Steps should be taken to leverage advanced inventory optimization techniques, industrial engineering, and experienced operations improvement teams to optimize their distribution footprint and inventory ROI.
Action 3: outsource more activities to reduce costs
Outsourcing may seem like an old solution to a new problem, but the benefits it offers are now more compelling than ever for international companies looking to both cut costs and address skills shortages. To complement the benefits of outsourcing, companies need to examine their current process design and explore opportunities for optimization through a range of modern technology tools. A relevant example is a finance function transformation exercise that not only streamlines processes, but also brings accuracy and efficiency.
Action 4: Improve your understanding of the true cost to serve customers
Most mid-sized companies around the world still do not accurately and regularly calculate the costs and benefits of the individual customers they serve. Yet, customer segmentation provides critical insights if businesses are to protect their bottom line by actively managing their customer base during this time. Once the customer segments are clearly defined, the focus should be on understanding the cost to serve each respective segment. It’s important to be clear about the costs included in these calculations – such as supply chain, sales and marketing, and customer success – and allocate them appropriately to different customer segments.
Action 5: Change your pricing strategy to better match cost increases
The majority of UAE businesses surveyed by Grant Thornton raised prices in response to rising costs, with 87% raising prices at or above cost increases. While it can be tempting for companies to think that price hikes are the answer to inflation, they can’t just set a price to solve this problem. Price increases are fraught with risk – including loss of customers and loss of competitiveness. Businesses need to assess customer experiences (and the implied cost of service) as well as profitability. If customers are not profitable, companies may decide to reduce profitability to strengthen profitability.
If prices are to be increased further, several factors should be considered, including existing contract terms, timing of the increase, nature of historical increases, to whom the increases should apply, whether you can link the increases new features and customers’ willingness to pay. Organizations could also try to tie increases to new service levels or product features, or even figure out what customers are already getting for free that companies could potentially expand and charge them for.
Action 6: Take steps to improve the capital structure
Not only are input costs rising, but so are capital costs as interest rates rise to contain inflationary pressures. Businesses should optimize their capital costs and consider increasing or reducing the level of their working capital to meet their needs. Companies should monitor their capital situation more closely. In the short term, if companies are healthy and have plenty of cash, they can consider strategies such as bulk buying to fight inflation. If the opposite applies, they may need to consider finding additional capital and managing debt. Businesses may need to look to other suppliers and sources of capital and shop around. Access to finance will change, as will the importance of different sources, so companies will benefit from getting advice on other products and advice on structure.
Action 7: Take measures to improve efficiency and internal costs and/or reduce waste
Organizations can’t do much to stop rising prices from spreading through their business, and once they do, the next thing to focus on is internal efficiency. If businesses can do more with less and reduce waste, they may be able to offset higher prices and reduce their impact on the environment. What really drives internal efficiency is technology. Technologies such as automation, robotics and machine learning can improve productivity by reducing production costs and allowing companies to deploy human capital more efficiently. Data is also very important for understanding true costs, which play a vital role in informing a company’s decision-making processes.