Inflation in the supply chain impacts logistics and production costs, such as raw materials, energy and transportation. In the scenario of inflation, the operation of the supply chain can be altered and cause delays in shipments, bottlenecks in production lines or stock outs in warehouses, among other impediments. However, there are strategies that can help mitigate some of the effects of inflation.
What is inflation?
Inflation is a phenomenon caused by the imbalance between production and demand, which results in a general increase in the prices of products and services over a period of time. The general increase in prices implies that, with the same amount of money, people see their purchasing power diminished to obtain goods and services.
An inflationary context not only affects the cost of living, but also affects supply chains.
How inflation impacts the supply chain.
The interconnectedness of global supply chains means that when one price rises, others tend to follow. According to Oxford University Economics Professor Michael McMahon, there are three factors that contribute to inflation, which is the increase in prices of:
- Goods and services
- Personnel costs
- Energy costs.
Supplying becomes more complex during inflationary periods. If the increased costs are passed on to the buyer, demand usually falls, so producers may require fewer goods or services. Therefore, sales and operations processes need a more targeted, granular, and agile approach to planning that is supported by all supply chain stakeholders, including sales and marketing, warehousing, and logistics teams.
Tools to alleviate inflation in the supply chain.
Logistics planning is an effective strategy to alleviate the effects of inflation in the supply chain. The lack of foresight and control over the stock forces unplanned purchases that can increase logistics, transport or production costs. The solution? Enhance the resilience and flexibility of the supply chain to be able to face disruptions and continue to respond satisfactorily to customer demand. Here are three actionable ways to alleviate inflation:
Visibility. A supply chain tower makes it easy for executives to have the information they need to make the right decisions at all times. This digital tool promotes end-to-end visibility in the supply chain, which speeds up the detection of errors and inefficiencies before they pose a real threat to the operation of the chain.
Predictability. Supply chains can incorporate digital twins technology to simulate their performance under certain inflation and volatility scenarios. This type of simulation allows companies to be more prepared to anticipate changes and improve their ability to react to uncertain environments.
Flexibility. Flexible logistics facilitates the existence of substitute suppliers, as well as the development of alternative logistics networks to adapt warehouse resources to changes in the environment.
Digitizing logistics with management tools allows you to monitor the performance of the supply chain and identify opportunities for improvement. For example, if a person in charge of the supply chain detects an increase in the costs of raw materials, they can choose to look for closer suppliers ―to reduce the cost of transportation― or implement new production strategies that optimize the performance of supply lines.
By being aware of the potential impacts of inflationary pressure on supply chains, and then assessing methods to mitigate them, professionals can do what they are able to protect their organizations at a time when uncertainty is at its highest.
Sources:
https://www.procurious.com/procurement-news/inflation-killing-supply-chain
https://www.zurich.co.uk/news-and-insight/how-does-inflation-impact-the-supply-chain
