In the current crisis, inflation is being led by factors such as staff shortages, implications of the Ukraine-Russia war and price of fuel which is flowing through into many areas of the economy.
This, in turn puts a squeeze on margins, with some suppliers passing costs on through the chain rising prices. In uncertain conditions, companies must build balanced resilience and transparency into their supply chains and be braced for shortages, price rises, issues with service levels and lead times, and even the potential for supply chain failure.
What is Inflation?
When supply exceeds demand, prices should fall. However, when demand exceeds supply, prices rise. Inflation occurs when prices are forced upwards and purchasing power is diminished. Inflation is measured against the cost of specific goods and services to gauge growth.
The flow of goods has been hindered worldwide by the Covid-19 pandemic and regional challenges such as Brexit in the UK and the war in Ukraine. These – among other factors – have contributed to a rise in prices, which hits consumers. UK consumer confidence hit record lows in the summer of 2022, and US consumers displayed signs that the cost of living was starting to bite.
How do you define a recession?
Different markets identify recessions in different ways. In the UK, the economy must experience two consecutive quarters of negative growth for the situation to be classed as a recession. The government tracks the value of the country’s goods and services in gross domestic product (GDP), and if it shrinks for two consecutive quarters, the economy is in recessionary territory.
In the US, the National Bureau of Economic Research (NBER) looks at performance spread across the economy over several months before defining a downturn as a recession. In July 2022, the International Monetary Fund (IMF) warned that a global recession was possible as growth in the three key markets of China, US, and Europe stalled.
How do recessions impact supply chains?
Companies can see revenues hit and the chances of industrial action causing delays in the movement of goods is higher. Cashflow may be affected, too, as customers may be slower to pay and, in turn, companies may need more time to pay their suppliers. Payment pressures can filter through the entire supply chain, highlighting the importance of businesses building and nurturing close working relationships with suppliers throughout the chain.
What can businesses do to tackle inflation across the supply chain?
Given that inflation and recessions are features of the economic landscape and have emerged at various points over the years, how can businesses prepare so they are best placed to weather the severe global headwinds we face?
At Proxima, we believe there are five key steps companies should take:
1. Work Together Across the Value Chain
The current economic challenges are everyone’s problem.
Set up a cross-business team to communicate, collaborate and coordinate business efforts and decisions.
Price savings may be hard to come by, so value must be framed differently. Senior buy-in is essential here.
2. Understand How Suppliers Enable Your Business
It’s critical to know exactly where your money is being spent – and in real-time – so get to grips with your data.
It’s time to assess why you are spending on certain things and cut out waste while focusing investment on areas that drive value.
3. Get the
Basics Right
What would you do if you were spending your own money?
Bring that mentality into your work budgeting. Challenge procurement and budget holders to develop a plan on how to create more value from each dollar, pound, or euro spent on supplier relationships.
Is it time to review your existing contracts and renegotiate and compete harder for what you buy to get market pricing?
4. Join Up Internally
to React to Change Faster
What can you do now to stabilize, reduce or eliminate demand, and manage risk?
Planning is essential to identify risks and mitigate against them.
Key stakeholders – such as like R&D, Finance, Operations, Production, Logistics and Sales – should work closely together to assess the impact of shortages and price changes on the wider business.
5. Create and Profit from the Right Supplier Relationship
Despite rising prices, you can still create value by working closely with suppliers, especially when you think beyond price.
Think about how you can work with each supplier innovatively and creatively on a case-by-case basis that works well for both parties.
In conclusion, inflation and recessions are part of the long-term economic cycle. The challenge is how to use data, resources, and relationships to understand and anticipate how this will impact the supply chain. It is essential to create measures to adapt to manage the pressure and come out of the other side of the cycle in good shape to take advantage of the economic upswing.
Are you trying to understand more on inflation’s role in the supply chain? Get in touch to discuss how to battle inflation.
