Three Big Impacts of Inflation on Global Supply Chains
For many business leaders today, inflation has been more of a theoretical concept than a reality. After all, it’s been 40 years since inflation has reared its ugly head, so it’s just not been part of everyone’s lived experience. But my, how much can change in a matter of months. Inflation is not only driving up the cost of everything, but it is also wreaking havoc with long-established ways that business leaders understand, plan, and forecast their product demand and supply chain resources, inventory, and cash flows. Formerly reliable ways of doing these things just won’t hold up in inflationary environments.
The question everyone needs to ask is, what will? Let’s take a closer look.
- Let’s start with the obvious first: rising prices are leaving consumers with less disposable income, which is shrinking demand for goods and services.
Food, rent or mortgage, and gas prices are hitting consumers hard, leaving them with less wallet share for non-essentials. This means your company needs to get even better at demand planning, forecasting, and sensing consumer behavior, which in turn drives manufacturing, transportation, inventory management, and sourcing of raw materials. You’ll need to include leading market indicators, real-time consumer trends, and other external data signals into demand forecasting to better predict forward-looking product mixes and volumes.
- Inflation is also driving up direct costs for materials, labor, energy, and transportation, making it more costly to manufacture, store, and ship goods.
It feels like a perfect storm on the input cost front, doesn’t it? Materials are scarce and pricy – and getting what’s available shipped to your manufacturing plants and warehouses is taking longer and costing more. At the same time, you’ve got the Great Resignation underway, driving up labor costs.
All this has put significant pressure on margins. Business leaders need to better plan resources and materials. For example, they need to account for variability ahead of time and have scenarios prepared to balance cost with service and alternate use of resources and carry multiple market scenarios into the regular sales and operations meetings so they can respond swiftly as trends solidify.
- To tamp down inflation, the Federal Reserve has increased interest rates, making cheap money a thing of the past.
As a result, now you need to closely monitor and optimize management of working capital and inventory buffers. This is key, because when your business needs cash, the last thing you’ll want to do is borrow at high rates while capital is tied up in unused inventory. You need to know exactly what’s needed and manage available inventory closely and effectively based on real-time variability of demand and supply.
It’s time for real-time, integrated planning tied to finance
Thriving amidst these inflationary impacts will require:
- Closer alignment between departmental disciplines and the finance department
- A digital platform that records all transactions as they happen and interoperates this data for accurate modeling, planning, and forecasting
- Tying in external data sources (such as economic data) and supply chain networks
The real-time, integrated nature of these requirements is crucial, as inflationary dynamics are changing so quickly that your CEO can wake up on Monday morning to dramatic economic changes that can have great bearing on revenue, cost, and margin assumptions. As a result, your finance, demand, and supply chain planning must be closely coordinated on a frequent basis. You also need to know your cash position in real time to make informed planning and budgeting decisions.
A new digital mandate
As you can see, to navigate today’s inflationary environment, you will need to go beyond traditional financial planning and analysis. This work must now extend into all relevant business areas so that plans are based on real-time, contextual information, predictive analytics, and intelligent scenario planning.
This will require real-time digital capabilities enabled by a platform that connects everything from sourcing and materials management to manufacturing, finance, and trading partners and suppliers. Real-time data integration across these silos and ecosystems ensures that financial, demand, and supply chain-related planning, forecasting, and execution are aligned with daily economic realities.
All this will enable your business to be more predictive, prepared, and agile, which is vital to navigating economic ups and downs. I’m already seeing companies engage in probabilistic planning, where they develop multiple planning scenarios based on best, worst, and “middle” or “likely” realities so they can respond swiftly as things change.
To learn more, register for two upcoming Webcasts exploring:
- Outsmarting Inflation: Best-Practice Working Capital Strategies on Tuesday, November 15, 2022, 11:00 a.m. EST
- Outsmarting Inflation: Best-Practice Supply Chain Strategies on Wednesday, November 16, 2022, 11:00 a.m. EST