Why inflation is the next pandemic for supply chains

Annette Garcia-Gonzalez ∕ September
From Fast Company:

The world’s perception of the supply chain has changed drastically since the onset of the COVID-19 pandemic brought shortages of everything from toilet paper to ketchup. Now, as the world’s attention has begun shifting away from the pandemic, another global issue has taken hold: inflation. Annual inflation in the U.S. was under 2% in 2020, soared to 7% in 2021, and has reached over 8% so far in 2022. And it’s not going away anytime soon.

Inflation of this level hasn’t been an issue since the early 1980s, but has become a chief focus for Board and C-level executives across industries—and especially for chief financial officers (CFOs) who are increasingly responsible for supply chain performance. Although the consumer effects of inflation are easily understood, the complexities for those in the supply chain industry make it a difficult and far-reaching issue to navigate. Inflation impacts the supply chain at every step—from sourcing commodities, to transporting goods, to packaging—forcing companies to be evaluating and re-evaluating their next move constantly.

It isn’t the first time organizations have had to navigate near-constant flux and it won’t be the last. But this time around, they come to the table with greater experience, more collaborative workflows, and better tools than they had even two years ago.

THE IMPACT OF INFLATION ON SUPPLY CHAINS

While COVID-19 was a significant supply chain challenge for many reasons, the core disruptor was the supply and demand variability. Inflation takes this challenge a step further, adding price variability to the mix and forcing planners not only to navigate getting product from points A to B, but to understand the changes in price on inputs, transportation, and customers that might occur during that journey and how it will affect their bottom line.

As a result, in many ways, the ongoing inflation we’re experiencing today is just as—if not more—disruptive for the supply chain industry as the COVID-19 pandemic was. Even the most basic product has thousands of components to it, and missing just one key item can cause significant delays in product getting to store shelves. Even worse, in industries where product is highly perishable—like life sciences and food and beverage—these delays can cause product to become completely unusable, creating supply chain waste that increases costs at a time when leaders—and especially CFOs—are looking to reduce unnecessary expenses.

There’s no easy solution. To combat these delays, many companies have chosen to carry more inventory, increasing their warehousing and storage costs. But as consumer spending tightens in the face of runaway inflation, many of these companies now have an excess of inventory on hand, causing them to reduce orders and prices in order to clear inventory. This impacts both the business’s bottom line and creates even more significant challenges for planners looking to balance supply and demand.

Historically, supply chain planners have used Excel to manually create dozens of scenarios to try to model the future. But these processes lack the complexity and current data to be usable in today’s digitized and highly disrupted world. To navigate the modern supply chain landscape successfully, planners need the ability to run hundreds of scenarios that span the end-to-end supply chain and leverage real-time data to ensure up-to-the-minute accuracy. Leading companies operate supply chain planning engines that are constantly planning and re-running scenarios based on new assumptions around cost, inventory levels, and expected inflation as changes occur. It’s critical that organizations invest in tools that allow them to be evaluating scenarios constantly and adjusting plans to ensure product gets into the hands of consumers in the fastest, least expensive way possible.

EMPOWERING THE SUPPLY CHAIN PLANNER

According to a recent McKinsey report of senior business leaders, by October 2021, inflation was considered one of the biggest perceived risks to growth, outpacing COVID-19.

As boards and business leaders put pressure on their supply chain planners to navigate a world increasingly impacted by inflation, collaboration and technology will be key. Collaboration among supply chain planners soared throughout the pandemic, with organizations investing in tools that digitized their supply chains, enabling teams to work closely together while in remote locations to react to disruption in real time. A 2021 report from Supply Chain Insights showed that 75% of organizations surveyed reported that throughout the pandemic, collaboration “across roles and functions improved in ways that were not possible before.”

By encouraging collaboration and employing technology that can automate many of the repetitive or mundane tasks required to run a supply chain successfully, planners are able to focus on the more complex tasks at hand and think creatively to leverage both their experience and augmented intelligence to solve these challenges. This combination of machine learning and human knowledge ensures supply chains are powered by humachine intelligence—a powerful mix of data-driven insights and human contextualizing that results in resilient, agile supply chains. With this in place, planners are able to focus on tomorrow’s opportunities versus firefighting yesterday’s challenges.

CREATING A MORE AGILE AND RESILIENT SUPPLY CHAIN

Inflation is a clear example of how ongoing disruptions can create a “perfect storm” for an industry. While more people today understand the importance of the supply chain in their daily life, they still don’t want to deal with the disruptions. It’s on businesses to make up for the lack of visibility into just how disruptive everything from extreme weather events, to port closures and strikes, to geopolitical unrest can be on the supply chain, and how those problems compound on one another.

To successfully navigate these disruptions, leaders must empower their supply chain practitioners by investing in solutions that enable them to focus on what matters most—getting product to consumers profitably—and back their decisions with powerful data-driven insights. Only then will they be able to create a supply chain that is agile and resilient enough to stand up to surging inflation and the next series of disruptions.

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