Navigating a Monster Year for Inflation: One Lever to Drive Cost Efficiencies
In our January piece on the topic of inflation we wrote, “Inflationary pressures will not let up any time soon”. That was an understatement. The consumer price index (CPI) change over 12 months to June was 9.4% [1]. For context, from 1998-2020 the highest annual change for any month was just 5.2%. Out of 294 months since 1998, the 8 consecutive months from November 2021 to June 2022 account for 8 of the top 10 months that have seen the highest yearly rise in CPI. While overused in recent times, the word "unprecedented” is correct when it comes to this topic.
The construction and infrastructure sector is no exception with the construction material price index for ‘All Work’ increasing by 14% in just the first six months of the year, where it was 9% at the same stage in 2021, a year that experienced extreme inflationary pressures in its own right [2].
2022 is seemingly a perfect storm of soaring inflation. Take oil as an example, the West’s winding down of their refining assets was pushed into overdrive during the initial bout of COVID-19 as demand completely collapsed. Exceptionally volatile refining capacity constraints then turned into a full-blown energy crisis due to the Russia-Ukraine war. The damage? +44% in the 12 months to June for RPI: Petrol and Oil, the highest annual increase in a dataset that starts in 1987 [3]. Or semiconductors, where long-term issues of insufficient capacity at fabrication plants collided with increased demand along with the pandemic-driven demand for electronics. While automakers cut their chip orders in early 2020 as vehicle sales plummeted, tech firms were stockpiling and advance ordering, leaving many struggling to acquire semiconductor components. The damage? +21% year-on-year to June for the average retail price of vehicles, way above the highest pre-pandemic value of only 6% in Autotrader’s index that started in 2011 [4]. Never mind the tight labour market, described by the economics editor of the FT as, “the most urgent problem facing the UK economy” [5].
Supply has been unable to match rising demand in many parts of the economy for over two years since the initial pandemic shock. While business leaders should have an understanding of the macro factors that have got us here, the reality is that geopolitics and supply chain bottlenecks are outside of our control. Where we have seen clients thrive in this environment is through investments in process efficiency to achieve quality increases and cost reductions. Process improvement is always within the control of an organisation, despite external stressors. When it comes to cost efficiency a lesson from Sam Walton, the founder of retail giant Walmart, still rings true, “Control your expenses better than your competition. This is where you can always find the competitive advantage.” [6].
Minimising spend is the name of the game. Regardless of labour, plant, or materials prices; there are levers that we have helped infrastructure companies to pull to run more efficient operations this year. Above all, establishing a digital core for operations:
Data Consolidation, Not Digital Transformation
There is no manager out there that hasn’t been pitched the benefits of a ‘digital transformation’. In reality, these transformations are hard and expensive. Now, more than ever, the prospect of huge capital expenditure on software and long implementation timelines are not attractive to many organisations. Instead, we encourage tools that can help companies become data-driven overnight.
With the right help, a work operating system (Work OS) can be launched in weeks to establish a digital core for operations. What is a Work OS? It is a type of platform, ideally cloud-based, where teams can plan and track projects and processes. Some examples are Monday.com, Asana, Wrike, or ClickUp.
Using project workspaces throughout the value chain, from operational delivery to human resources, a company can quickly begin to standardise the data collected to build the foundations of a longer-term digital journey. For example, by shifting the productivity monitoring of field teams away from excel documents and onto a Work OS you have suddenly consolidated and structured operations data to create a single version of the truth. Quite simply, consolidation leads to analysis and thus efficiency-seeking insights can be uncovered.
Not only that, but data consolidation enables internal collaboration, teams can share and work on data projects together and share with an external network of suppliers/customers. Where this all gets really interesting is when teams start using ready-made technology in the Work OS to quickly launch forms or apps that enable data to be consolidated in real-time. Operational delivery teams can use mobile devices to report productivity metrics, enabling back-office decisions to be made at ever increasing speed. Data-driven infrastructure companies now have a direct line to understanding what their teams are doing, the key is to build a direct relationship with suppliers by gathering data and use that to continue to innovate to solve operational problems.
The Bottom Line: How a Work OS Can Generate Real Cost Savings in Infrastructure
Data Transparency: record materials usage and prices in one central database for real-time spend analysis
Extra Costs: capture out-of-hours work or variations accurately
Productivity: measure value per team and output per day through consolidation of productivity metrics
While this might be a jump too far for some, real-time data gathering and analysis as a result of increased information transparency builds the foundation for artificial intelligence systems that require huge datasets to work effectively. As Jeff Bezos wrote, “You need to be thinking two or three years in advance” [7].
How We Can Help Companies on the Journey to Cost Efficiency:
A Digital Core for Operations: customise a Work OS to fit the specifics needs of the business to implement a new system or increase the value of the existing asset
Operations Management Process Improvement: assess and map the current operations system including processes and behaviours to identify bottlenecks and design a clear step-change transformation
Cashflow Management: all of this activity must deliver cash, only with the right commercial management expertise can this meaningfully shift operating margin positive
Words by James Chisnall
References:
1. https://www.ons.gov.uk/economy/inflationandpriceindices/datasets/consumerpriceinflation
3. https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/chol/mm23
4. https://plc.autotrader.co.uk/press-centre/auto-trader-retail-price-index/
5. https://www.ft.com/content/a91ed719-a95a-45ee-aa5a-db8ecb550561
6. Walton, S., & Huey, J. (1992). Sam Walton, made in America: My story. Doubleday.
7. Bezos, J., & Isaacson, W. (2021). Invent & Wander: The Collected Writings of Jeff Bezos. Harvard Business Review Press & PublicAffairs.