How can inflation impact supply chain resilience?

The pandemic, and its aftermath, have forever changed the supply chain game. In an age where uncertainty is the only certainty, a resilient supply chain plays a crucial role in ensuring there is always a backup plan in the face of unexpected disruptions.

While inflation continues to challenge supply chains, inflation or general increase in prices are not traditionally associated with supply chain disruptions, as the movement of goods are affected gradually, giving businesses the ability to prepare for it. However, all of that changed during the pandemic. Businesses were forced to test new theories on consumers’ purchasing habits.

A rocky road to recovery

Inflation exists when demand exceeds supply. In 2020, the pandemic's quarantine orders, and the temporary shutdown of the global economy led to reduced demand for various goods and services. However, things took a different turn in early 2021. Vaccines were successfully distributed, and the economy began to recover. Inflation has been gradually rising since then, primarily due to supply chain challenges and strong consumer demand. This has resulted in increased prices for a wide range of goods and services, including food, energy, housing costs and transportation.

Although headline inflation has fallen in most economies in recent months, core inflation, which excludes prices of food and energy, remains stubbornly high. The latest World Economic Outlook report signals that policy tightening is “starting to cool activity despite core inflation proving persistent”. In the same report, global inflation is forecast to decline steadily, from “8.7 percent in 2022 to 6.9 percent in 2023 and 5.8 percent in 2024”, due to tighter monetary policy aided by lower international commodity prices.

How does inflation sway trade relations

Moderate inflation is generally considered a sign of a healthy, growing economy. But high inflation can lead to reduced consumer purchasing power, affecting consumer behaviour and demand for certain products or services. However, in practice, all prices do not move in the same direction and by the same percentage. Hence, some classes of people, and thereby markets, are affected by inflation more favourably than others. To better understand the effect of inflation on supply chain resilience, it is important to know how inflation impacts different economies, different socio-income groups and, in effect, business priorities. Moreover, in a largely globalised world, how can businesses adapt to inflation-induced demand-supply fluctuation in their partner countries with optimised sourcing strategies as well as inventory allocation?

Inflation and its impact on consumer behaviour

The most obvious impact of inflation is that it reduces the purchasing power of consumers. It also encourages consumers to spend and stock up on items that are slower to lose value, such as real estate. In nations where consumerism is prominent, like in the United States, individuals often choose to allocate resources to enriching experiences such as travel during periods of prosperity. It is interesting to note, however, that during high inflation, they generally choose to continue spending on these experiences and instead cut down on retail purchases like consumer durables, which are otherwise replaced every 3-4 years. But in less-consumerism-centric economies, consumer durables don’t get impacted as heavily due to their longer product cycle.

Then, there are certain sectors which are largely resistant to inflationary pressure, such as real estate, essential items, healthcare and commodities. Alternatively, during negative inflation or a recession, businesses such as bookstores, PR agencies and interior design services are more likely to succeed.

What’s causing the present round of food inflation?

While general inflation has largely stabilised around the world or at least is showing signs of improvement, food inflation is still soaring globally, with people in low and middle-income countries particularly hard-hit. In October 2023, the annual food and non-alcoholic beverages inflation exceeded overall inflation in 33 out of 37 countries in Europe. Production costs influenced by animal feed and fertilizer, coupled with higher processing and distribution costs, have created an imbalance between demand and supply. But perhaps the greatest contributor is the Russia-Ukraine conflict. The immediate implications of any geopolitical conflict are high inflation and supply chain disruptions caused by the scarcity and rising cost of raw materials, commodities, energy, and transport.

Supply chain optimisation to help stay one step ahead

Inflation and supply chains are closely correlated and can create a vicious cycle of rising costs. It can cause a ripple effect on prices: supply chain costs rise, which causes more inflation and increased prices.

That is why businesses need to incorporate inflation forecasts and risk management strategies into their supply chain planning and decision-making processes to adapt to changing demand patterns quickly. It is also a good time to review how resilient one’s supply chain is, and where the disruption risks may come from next.

What can supply chain teams do to help mitigate inflation

Supply chains are the lifeblood of operations. With consumers prioritising availability over brand loyalty, businesses must strike the right balance between on-shelf availability and optimum inventory.

“Sellers must decide which part of their inventories are discretionary goods and which are non-discretionary,” says Christian Grosse, Chief Product Officer, Maersk E-Delivery.

In an inflationary environment, companies tend to hold more inventory to hedge against future price increases. This ties up working capital and can lead to challenges in managing inventory effectively. It becomes especially challenging during pricing uncertainty and unpredictable consumer preference during any inflationary period. Accurate demand forecasting becomes crucial, and this is where having a resilient supply chain as your strategic partner can be a game-changer. End-to-end supply chain partners have a bird's-eye view of the economic undercurrent as they work with suppliers, producers as well as consumers. And with the right kind of data, digital solutions and flexibility, a resilient supply chain can help drive inventory optimisation and efficient cost management.

How to build resilience in the supply chain?

While anticipating 'everything' may be a challenge, companies can enhance the resilience of their supply chains to better navigate the uncertainties of the global market. Here are 5 key steps to improve the resilience of a supply chain –

1. Contingency and scenario planning: Regularly test and conduct risk assessments to identify vulnerabilities in the supply chain. Evaluate both internal and external factors that could potentially disrupt the flow of goods and develop comprehensive contingency plans for various scenarios, including natural disasters, geopolitical events and market fluctuations.
2. Digitisation and technology implementation: Embracing digital technologies enhances efficiency, transparency, and agility. Automation of processes from order placement to inventory management can help reduce manual errors and accelerate operations.
3. Strategic cost reduction: In a world marked by uncertainties, a lean and efficient supply chain is better equipped to withstand economic downturns, supply disruptions and other unforeseen challenges. By minimising unnecessary expenses, businesses create a buffer that can be strategically deployed to mitigate the impact of external shocks.
4. End-to-end visibility: Transparency across the supply chain not only provides real-time insights into the status of inventory, orders and shipments but also enables accurate forecasting, allowing businesses to respond promptly to disruptions, delays or changes in demand.
5. Invest in partnerships: Partnerships are the foundation of a resilient and efficient supply chain. Collaboration among stakeholders fosters trust, innovation, and adaptability, ultimately contributing to the overall success and sustainability of businesses in an interconnected global economy.

By aligning with a proficient logistics partner and applying these strategies businesses can confidently navigate disruptions and safeguard the seamless continuity of their operations through any market uncertainty.