Reduce Costs

Inflation induces tougher price negotiations and executive management needs to prepare to support the effort of keeping costs under control. As passing 100% of inflation-driven cost increases onto the market is often not possible, cost controls remain critical. Both employees and suppliers are affected by cost cutting measures. As a rule, management has a stronger position of power vis-à-vis these groups than vis-à-vis customers. In the case of low value added, efforts to reduce costs should be directed at suppliers. In the case of high value added, the potential for cost reduction lies with labor. The war for talent hardly allows wages to be cut, so the amount of work must be reduced. Inflation makes layoffs inevitable. Attention has to be paid to the risk structure arising from the ratio between fixed and variable costs. Inflation swings the pendulum of which ratios are advantageous and many firms today are built for the growth period of the last decade. In growth phases, the combination of low variable and higher fixed costs is advantageous. In times of crisis, however, this combination gives rise to serious risks that can threaten a company’s existence.