Inflation, tariffs, and supply chain disruptions are having a significant impact on profitability. How quickly are you able to adapt your costing to these changes and safeguard your margins?
The cost of innovation today is high, and strategic decision-making is paramount. Yet, historically, costing has been seen as an accounting function rather than a strategic one. No longer. If your organization is going to thrive in this new ecosystem, you need to maximize agility, decision support, and profitability. Having the right costing model — one that’s adaptive and predictive — is critical to understanding the impacts of changing cost drivers, customer pricing structures, tariffs, inflation, and market and customer demands.
From fixed costs to flexible thinking
To overcome disruptive market forces and truly understand changing cost drivers, CFOs need to look at the story behind the numbers to make informed strategic decisions and effectively manage risk. As your business and operations models shift, so should your costing and estimating approach.
If you’re still pricing off last year’s assumptions, you’re not alone — but you're exposed. Cost structures that once made sense may now be the reason you’re falling out of competitive range, eroding margins, or overlooking key market signals.
Some organizations have learned this the hard way, operating far below capacity while fixed costs stay locked in place. With no flexibility in their cost model and no way to adjust pricing without signaling distress, they’re left reacting instead of steering. The issue isn’t just scale, it’s the inability to model a different path forward.
Without a clear grasp of drivers and how costs flow throughout your business, you won't fully understand the effects of product or service profitability. When your model can’t adapt, growth turns into pressure. Adaptive costing allows you to test, pivot, and reset assumptions before they hit your bottom line.
Staying ahead of market change
Markets don’t signal disruption in advance — and when they shift, they don’t do so gently. Cost models should help connect the dots by giving you the flexibility and insight to handle challenges as they come. These models help you make smart decisions on the fly and adapt to changes like shifts in production or resource use. That could mean things like more frequent machine maintenance, upgrading equipment, or bringing in robotics to streamline operations. While many manufacturers rely on basic methods like cost per labor hour or unit, adaptive models can provide greater flexibility to meet changing operational needs.
To improve how you manage costs and margins, you’ll need a forecasting model that helps you question assumptions, stay flexible, and respond to changes in the market. Updating your cost strategy and model isn’t a one-time task. To guide next steps, start by asking these three questions:
- Are these drivers still appropriate?
- What’s changed in the market and our customers?
- What’s likely to change in the market in the coming years?
Incorporate these new variables into your cost models on an ongoing basis, and certainly no less than annually. Be mindful that poorly designed or implemented costing and estimating processes can do more harm than good, giving you inaccurate information that can lead you down the wrong path.
Spot red flags
To determine whether your cost model is as adaptive and predictive as it could and should be, take a step back and assess.
How well does your costing and estimating approach reflect the cost drivers in your current operating environment? Don’t forget to include below-the-line items, such as customer service, technology, high inventory carrying costs, R&D, and engineering.
A well-defined price strategy is essential to navigating complex value chains and maximizing investment returns.
Now, assess how adaptive your approach is to cost drivers that will come from changes in your industry. Some clues that your costing and estimating approach might not be as adaptive and predictive as it needs to be include:
- Consistent disconnects between expected and actual profit margin performance.
- Difficulty explaining variations in margins as product volumes and mix shift.
- Market feedback or surprises in market response. (Ever think you’re super-competitive on a part you’re quoting and, come to find out, you were 20% too high?)
- Pro forma cost models based entirely on today and historic cost drivers.
Results, and surprises, indicate the need to reassess your costing and estimating models for their adaptability and predictiveness. If recent tariff increases have forced you to pause quoting or scramble for new suppliers, that’s not just a disruption — it’s a signal your model isn’t keeping pace.
Forecasting the impact of tariffs and inflation
Disruptions rarely arrive with notice. A fuel bottleneck tightens freight capacity. A labor strike pauses port operations. A sudden tariff increase spikes your unit costs. These triggers can shift margin overnight, and if your costing models are built on outdated inputs, your model won’t have the response time the market demands.
Adaptive costing provides the process to absorb change, assess, and move quickly without scrambling to rebuild your process overnight. Consider the impact of tariffs; they shift quickly, with little warning and outsized impact. One day a part is cost neutral. The next, it adds 30% to your unit price. Do you know which products are impacted? How that cost moves through your customer contracts? What that means for margin by region?
Quarterly updates and spreadsheet workarounds won't cut it. If you can’t trace impact quickly— and price accordingly — you risk losing credibility and competitiveness. Adaptive costing allows you to model these scenarios before they hit. It’s not just about managing volatility; it’s preparing for what comes next. So how do you stay ahead when tariff shifts ripple across every corner of your cost structure? It starts with visibility that tracks exposure in real time.
Minimize risk, improve decision support
Today, CFOs re faced with a number of operational and financial decisions — all under tight timelines. Adaptive cost models should be robust enough to model current issues impacting your operations and give the management team actionable intelligence for timely decision making. Are you modeling the right questions? Ask yourself:
- How much of labor cost increases are due to talent retention, labor shortages, and seniority mix versus rate changes? How much is due to lost productivity because of a lack of manufacturing talent and how much of this can be passed on to the client?
- What is the cost of your open capacity? How should you be applying your fixed costs to ensure you’re not pricing yourself out of key business opportunities?
- How are tariffs impacting your cost structure? Are increased duties and trade barriers affecting your ability to stay competitive, and how should they be accounted for in pricing and margin calculations? Are tariffs having you reconsider where you manufacture?
- Do air and sea freight risks justify nearshoring or finding alternative sources in the short and long term?
- Should you invest now to streamline production of a part that’s likely to be obsolete in five to eight years, or put that money into products that will be competitive in the next ten?
- Which products are the most profitable? Are your current labor and overhead rates only valuing inventory or are they able to accurately calculate product margins and measure financial and operational key performance indicators?
- When estimating new business, what’s your walk away price? Are you losing business you think you should be winning?
These aren’t edge cases. They're the new cost environment. Costing isn’t just a finance function anymore, it’s a lever for longevity.
Reframe how you measure risk
How would each of these scenarios affect your business? With supply chain volatility causing shifts in material availability and lead times, how do changes in production mix—like increased reliance on alternative suppliers or adjustments in product outputs—impact risk? How should you adjust your cost and margin expectations based on changing risk profiles, including the growing effects of tariffs on raw materials and finished goods?
Your decisions are only as good as your costing models, and an adaptive costing and estimating approach helps you find your way and strategically identify your value proposition in the market during times of industry transformation and marketplace uncertainty.
Adaptive costing and estimating lets you:
- Increase the speed and accuracy of cost estimating and quoting.
- Make informed make-vs.-buy decisions.
- Test your current core competencies against the industry’s future.
- Interpret your data accurately and use it for strategic decision making.
Take product rationalization, for example. Adaptive costing aids in understanding how each product offering contributes to financial results. And truly understanding the margin impact of what you produce — and service — today helps you know whether to stay the course or invest in future, higher-profit, higher-margin offerings instead.
Tariff volatility, shifting demand, and margin pressure aren’t isolated variables — they ripple. If your model isn’t built to trace those impacts early, you’re forced to react after the fact. An expert partner can guide your costing strategy to map these inputs before they become margin problems. When done right, adaptive costing can help clarify your value proposition during times of market uncertainty.
Where to start
Technology and inflation are changing dramatically, and costing and estimating play a critical role in directing new strategies. To innovate with confidence and improve competitiveness and profitability, you need an adaptive, flexible approach.
The challenge for every CFO is to provide actionable information to the rest of the business, so that leaders can make informed financial decisions about how to respond to the market in the face of disruption — quickly. Adaptive cost strategies help CFOs do just that: quantify key variables, accurately predict likely scenarios, understand impacts on profit margins, and, at the end of the day, make better decisions to maximize ROI for the shareholders.
