For Alistair Hughes, CEO and co-owner of Savoir Beds, the price of birch plywood has become a hot topic.
June to September 2021 saw the price of the material, which is used to make the firm’s luxury bed headboards, rise from £54.70 a sheet to £98.50, as the economic boom post-lockdown fueled a surge in prices. Now geopolitical tensions are adding to inflation as much of the world’s timber comes from Russia.
Hughes decided to order plywood in bulk to protect his margins from any additional increases. His regular supplier originally quoted the £98.50 figure, then told him he may be looking for a further 40% increase. “They are thinking the price will be at least £137 per sheet. But we don’t have a price, which is a pretty crazy situation.” Fortunately, Hughes decided to increase its prices by 10% at its annual price review last October.
For Savoir Beds, the price increase came with the knowledge that it could affect sales volumes. But there are limited alternatives: Hughes can’t swap hardwood birch for softwood plywood in his headboards any more than he can compromise on the materials for his hand-made box spring mattresses. As a quality manufacturer, it’s not a luxury you can afford.
The dilemmas facing Savoir Beds will be familiar to businesses across the country as CFOs and finance leaders weigh the reality of rising input costs and shrinking margins. Do you swallow the cost increases or do you raise your own prices? If the latter, do you pass on some or all of the additional costs to your customer? Or do you substitute things in your service or product for cheaper alternatives?
CFOs are in the middle of an important conversation, in which price variation is a key topic. “The dialogue between finance, supply chain, marketing and sales is hugely important,” says Michael Haupt, partner at Deloitte Consulting and author of The contemporary CFO.
Many CFOs will be looking to lock in pricing now, as well as examine all aspects of working capital management and what adjustments, if any, can be made to their supply chain. CFOs will also need to make calls about which of their company’s customers or vendors are potential credit risks.
Most importantly, CFOs must recognize that navigating their business through this period of uncertainty is their responsibility. “The days when CFOs only looked at financials are long gone,” Haupt says. “In most companies, CFOs are not only second-strongest in the company, but also a key decision-maker. One of the key roles we see emerging is not just taking responsibility for the entire company, but to be almost the glue of the company: an integrator, an agent of change in these times”.
By virtue of their role, CFOs have “a very strong network across all parts of the business…it’s about the only function that could quickly coordinate the response,” says Haupt. Then there is the issue of data. “Things like analytics – how do you run that pricing model, how do you do things like scenario planning or analytical forecasting. I would expect end-to-end integration, to understand if I change my prices, what will happen to my inventory.”
This is something only the CFO can offer, but then he or she must communicate it, bringing “customers, stakeholders and investors along with you,” says Haupt.
Sir Andrew Likierman is Professor of Management Practice in Accounting at the London Business School and a former Chief Financial Officer and Head of Government Finance. He thinks that good CFOs need to be able to see what’s going on and make a clear assessment of the big picture.
“Where their CFOs really earn their stripes is by being able to differentiate between what’s happening now from the other shocks we’ve had,” he says, pointing to the impact of Covid, Brexit and the global financial crisis. Good CFOs will wonder what’s going on and why it’s different from previous crises, she says.
This approach will help inform the response: for example, whether it is time to increase the price of a product or reduce its size, in the hope that consumers will not howl in protest.
“What sets a quality CFO apart from someone who just crunches numbers is that they can participate in this discussion as part of the team,” says Likierman. Simply producing data is not enough, she says. It is important to understand how decision makers need to look at numbers. “The CFO will need to put those numbers into some kind of context. He is going to move from data to information.”
But it’s more than just being a good communicator: The CFO must have a strategic eye on the business, Likierman says. “Definitely not the accountant. It’s definitely not someone who works out the numbers and sits back and waits for someone else to make a decision.”
So what are CFOs to do? Ultimately, it depends on the needs of your business, the market you operate in, and your view of the current inflationary period: is it permanent, or will things calm down? If so, when? Haupt’s view is that no one really knows, “so the best strategy you can have is to be prepared for various scenarios.”
At Savoir, Hughes has almost made his bed. He won’t wait until the next annual price review in October to make a move. He is potentially looking at another 10% increase from June, although this is not yet final.
“If less than 5% is required, I wouldn’t do it. We can handle it. But as you get past that, it becomes unmanageable, because your net margins aren’t that high. There is one thing that earns a little less money and another that loses money.”