What do you do as CFO when your procurement costs suddenly rise 20% due to crop failures or geopolitical tensions? Your margins are under pressure, management expects a solution, and you want to stay ahead of the competition. How do you maintain your company's profitability without losing customers or compromising on quality?
Procurement costs have skyrocketed in recent months. Those who do not take action now risk structurally lower margins and loss of competitive advantage. This article shows how you, as CFO, can keep a strategic grip on fluctuations in raw material prices - and which data and tools are indispensable.
The impact of fluctuating commodity prices
Changes in commodity prices affect the entire value chain. As CFO, you will have to deal with, among other things:
- Cost price increases - An increase in Cost of Goods Sold (COGS) directly reduces gross margin.
- Trade barriers and import tariffs - Higher import tariffs increase the need for a strategic sourcing policy.
- Seasonality and scarcity - Failed harvests and climate change lead to unpredictable price increases.
What does this mean to you?
A reactive approach is not enough. You want to understand the effects of these changes in advance. For example, you want to be able to proactively manage margins and constantly want to calculate scenarios to manage price fluctuations.
Strategic decisions: How do you maintain profitability?
When costs rise, you have 3 main options:
1. Cost savings without loss of quality
Saving smart means more than just cutting expenses. It's about working more efficiently without compromising on quality or customer experience.
A great example of this is optimizing the Cost to Serve (CtS) - A food retailer reduced its transportation costs by 15% by eliminating inefficient delivery routes and unnecessary storage costs.
Another example involves understanding customer behavior and the costs related to it. In this way, together you can influence costs. A large FMCG producer used this type of insight to make the process more efficient and increase EBITDA by 6%.
Controlling waste in the production process is another final example. Insight into the costs of waste in the entire process can lead to interesting savings opportunities. By applying continuous improvement, you can permanently reduce these costs.
For example, by cutting one of its raw materials in a different way, a food manufacturer managed to get more yield from this raw material.
2. Price increases: How do you retain customers?
Passing on cost increases is logical, but risky. Customers do not readily accept price increases, especially in a competitive market. The key? Smart and differentiated price adjustments.
- Understand price elasticity - Products with high elasticity see significant demand changes with small price adjustments, while products with low elasticity barely react to price changes. Understanding price elasticity helps organizations determine optimal pricing strategies, maximizing margins without unnecessary customer loss
- Value-Based Pricing - Customers pay more for products with higher perceived value. Consider meal packages in the supermarket, for example.
- Segment by customer group - A generic price increase is risky, but classifying your customers by common characteristics can lead to customer segmentation. By customer segment, you can better influence margins.
3. Accept temporarily lower margins: Strategic profit loss
Sometimes it is smarter to temporarily sacrifice margin to be stronger in the long run.
Protect market share - In a price-sensitive market, losing customers can be more damaging than a temporary drop in margin.
Long-term scenario analysis - With margin waterfall analysis, CFOs calculate whether a lower margin is acceptable in the short term to maintain competitive advantage.
What information does a CFO need to make smart choices?
A CFO who wants to keep a grip on margins must have real-time data and smart analytics. The crucial elements:
- Understanding Cost Structure - Analyze COGS, Cost-to-Serve and overhead costs to identify savings opportunities.
- Market and competitive analysis - How do competitors move? How do customers react to price changes?
- Customer behavior and price elasticity - Data analytics predict how customers respond to price changes.
- Scenario analysis and forecasting - Smart tools can be used to calculate various pricing scenarios and their impact on margins.
Did you know that companies that use the above strategies smartly retain up to 10% more margin when commodity prices rise!
The CFO as the architect of profitability
Fluctuating commodity prices are forcing CFOs to make sharp choices in pricing policies and cost management. The right balance between cost optimization, strategic pricing and data-driven decision-making is crucial to staying financially healthy.
By understanding cost components, applying pricing tools, using (near) real-time data and scenario analysis, CFOs can make their organizations more resilient to price fluctuations and stay ahead of the competition.
Want to know how pricing strategies can protect your margins?
Let's spar without obligation on how you can get a grip on pricing and costs in an uncertain market.
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