Protecting your margins: How to avoid the year-end cost-cutting trap
25 Mar 2025
Blog
This article covers:
- How unmanaged changes in short-term planning create chaos and hidden costs
- The specific margin pressures facing FMCG companies supplying retailers
- Practical approaches to reduce margin leakage through better planning and process management
The economic headlines make grim reading for business leaders. Raw material costs are rising due to global instability. Inflationary pressures are driving up wages and energy prices. Consumers are making difficult choices about spending.
Protecting margins becomes increasingly challenging with these external pressures beyond a business leader's control. It's a familiar scenario in boardrooms nationwide, especially as year-end approaches and financial targets loom.
Look around many businesses in the final quarter of their financial year, and you'll likely witness the same pattern. As targets start slipping out of reach, leadership hits the panic button: overtime banned, travel restricted, recruitment frozen, and expenses slashed.
These measures might help deliver the year-end numbers, but at what cost? This short-term, myopic thinking is remarkably counterproductive. If you need people to travel to grow the business, restricting movement sabotages opportunity. If you pause improvement projects or investments to cut costs, you sacrifice future benefits for temporary relief. You're turning away revenue if you need overtime to meet additional opportunistic demand.
This approach simply delays addressing the real issue: why are margins being eroded in the first place?
The hidden costs of constant change
For most manufacturing businesses, particularly in the fast-moving consumer goods (FMCG) sector, significant margin leakage occurs through the costs of managing short-term changes and disruptions.
A typical day might involve multiple manufacturing plan adjustments to respond to perceived demand changes, material shortages, or resource issues. Each change creates a cascade of additional costs that rarely get made visible to the business.
One client we worked with faced this exact challenge. After implementing a process to track and analyse these changes, they discovered something remarkable – most changes weren't actually demand-driven at all, but mainly supply-driven.
The real culprits were plant reliability issues, material shortages, data errors in bills of materials, incorrect timings in production plans, and quality problems in manufacturing.
The financial impact was substantial. Beyond the obvious loss of throughput from constant stopping and starting, these disruptions triggered emergency transportation costs to meet customer deadlines to avoid penalty clauses. The environmental impact of expedited shipping only compounded the problem.
Behind each disruption lay countless emails, meetings, plant clean-downs, customer conversations, and transport rearrangements – all adding invisible costs that steadily eroded productivity and subsequently margin.
Breaking the cycle
The solution begins with creating stability where chaos currently reigns. Most traditionally managed businesses have what I charitably call a "free-for-all change" approach – reacting to problems as they arise without understanding the systemic impacts.
Implementing a process to manage the short term (typically one to three months ahead) allows businesses to assess both demand signals and supply capabilities properly, make informed decisions about necessary changes within agreed thresholds, understand the full implications of these changes, identify root causes of disruptions, and implement fixes to prevent recurring issues. At Oliver Wight we call this Integrated Tactical Planning.
By analysing why changes occur, patterns quickly emerge. Plant reliability issues, raw material shortages, poor planning, incorrect capacity assumptions, and mismanaged abnormal demands typically top the list. Focusing on addressing these core issues that drive most frequent causes of change helps create progressive stability and efficiency, reducing the noise in your system and the constant firefighting that ultimately erodes margins.
This stability is particularly crucial for FMCG manufacturers, where retailer pressure constantly squeezes margins. With inflationary costs rising and retailers reluctant to pass increases to consumers, manufacturing efficiency becomes the critical buffer protecting profitability.
Looking further ahead
While short-term management is essential, looking further into the future provides even greater benefits. Integrated Business Planning (IBP) allows companies to spot potential vulnerabilities to their plans such as material availability, energy price increases, and demand/supply imbalances whilst there's still time to consider and develop measured responses
Addressing problems in the medium term provides options. Wait until issues drop into the immediate horizon, and the only solution becomes throwing money at the problem – expediting shipments, paying overtime premiums, or accepting missing critical customer orders.
Complementing this with Integrated Tactical Planning on a weekly cadence provides the structure to drive stability through the business, limit surprises and protect margins.
The path to stability
The key benefit? Stability. With less firefighting comes greater efficiency and less margin leakage. Every unexpected order or supply disruption doesn't need to trigger chaos if you have Class A processes to evaluate whether an immediate reaction is necessary or whether a more measured response would better serve both customer needs and your bottom line.
By understanding why unexpected demand occurs – seasonality, pricing policy changes, or stocking parameter adjustments in the distribution network – you can collaborate with customers to manage these fluctuations without incurring unnecessary costs.
As external pressures on margins continue to mount, the businesses that thrive won't be those making desperate year-end cuts. They'll be the ones that have systematically eliminated the internal inefficiencies that silently devour profitability day after day, all year round.
Author(s)
-
