Inflation is a word on everybody’s lips at the moment. Institutions, businesses, and consumers in the UK recently had to absorb the sobering news that inflation is now running at more than 10 percent for the first time in more than four decades – and is set to keep rising.
What does the resulting cost of living crisis and its impact on consumer expenditure, mean for the supply chain? And how should businesses respond to minimise the impact of the current challenges?
Ross Dawson, Operations, Procurement and Supply Chain Practice Lead at Eton Bridge Partners, presents the results of a conversation with Andrea Frino, an independent management consultant specialising in strategy, operations and supply chain with a focus on technology, e-commerce, and business transformation.
RD: Andrea, let’s start by looking at the lasting impact of Covid-19 on supply chain.
AF: The coronavirus (COVID-19) pandemic and the war in Ukraine are having a major impact on international trade flows and causing disruption to global supply chains. These issues have contributed to large increases in commodity prices and a major spike in inflation.
A recent study from McKinsey pointed out that businesses usually experience around two months of disruption every 3.7 years. However, in the past three years, we have been in continuous disruption.
The Global Supply Chain Pressure Index (GSCPI) indicates that global supply chain pressures are at historically high levels. Clogged ports, increased cargo costs and emergency shipments have become the norm during the pandemic.
We have all witnessed labour and product shortages over the past year, and the pandemic has highlighted major points of failure in many businesses’ supply chains. If there is a shortage of anything, customers are very quick to switch from one brand to another and Covid-19 has accelerated the pace of change.
With demand volatility on the rise, supply chain will need to be centered on a continuous integrated planning approach to gain real-time visibility into the disparate data that drive operational efficiency and actionable insight.
The key thing the crisis highlighted was that supply chains need to be more dynamic and agile. Agility is now the number one priority to equip companies with the ability to meet rapidly evolving, and increasingly volatile, customer and consumer needs.
Many companies in manufacturing, for instance, are now revisiting their make versus buy decisions, and are being more agile in the way they manufacture their products. We are seeing businesses bringing back their operation functions, which were previously in places like China, closer to their customers to cope speedily with any disruption. Businesses are now investing more in flexible, core assets and skills, to respond promptly to rapidly changing demand.
This opens opportunities for countries in Europe, North and South America and across the globe to reinvent themselves as co-manufacturing hubs. China is still dealing with Covid-19, and there have been issues there with manufacturing facilities in semiconductors and other tech, which has created shortages and instability.
In downstream logistics, businesses that used to have their own network or fulfillment centres are now more likely to use third-party logistics (3PL) to increase asset flexibility and proximity to customers.
RD: Are you seeing more companies forging more strategic partnerships with 3PLs?
AF: Yes, 3PL providers have a vast resource network available that provides advantages over in-house supply chains. Using a 3PL’s resource network, each step in the supply chain can be executed more efficiently and at a lower cost; therefore, it is critical to consider a 3PL as a core part of the operations, establishing a relationship at a strategic level.
Companies are having to shift their distribution because of unpredictable events – and doing that quickly within their own supply chain takes longer than using 3PLs.
I worked with a biotech company in the UK recently and we launched e-commerce operations within six weeks – that would have been impossible if we were thinking of building the fulfillment processes in-house. If the strategic intent behind any relationship is set from the beginning at the right level, everything else will be aligned.
RD: We’ve seen clients with good relationships with a 3PL, or their supplier base generally, be prioritised over others with less strong relationships. But can the same principle be applied to inflation? Can having strong relationships with your supplier base support how that extra cost is managed?
AF: Yes, it’s important to have a relationship where businesses and suppliers have a full understanding of the supply market dynamics and the risks involved. With regards to inflation, not all industries are affected in the same way, but the impact on price needs to be fully articulated so that businesses can apply any increases to customers in a sensible way. By doing this, customers can view a price increase as a temporary surcharge rather than a new future state.
There should also be a prioritisation of cross-functional initiatives – both with suppliers and internally with other business functions – in terms of waste reduction, optimising logistics as much as possible. There should also be a closer relationship with the sales team to ensure any price increase coming in from input costs (from anything that procurement is purchasing) can be fully passed on so that it is reflected in sales prices. All these activities need to be happening in a much more dynamic way than before.
RD: How does inflation impact the sustainability agenda? So many organisations genuinely want to drive that forward, and customers are interested in environmental, social, and governance (ESG) initiatives, but businesses may be reluctant to prioritise something that is going to be more expensive.
AF: ESG has been pushed down the agenda during Covid-19 because companies have needed to do what they’ve had to do to survive. But ESG initiatives are definitely on the rise again now. Customers’ long-term brand loyalty is gone, and they will now make purchasing decisions partly based on how sustainable a business is.
All the events currently happening – including the shortage of certain raw materials, and high commodity prices – are opportunities to push businesses to look for innovation and maybe replace some of the materials and components they are using to manufacture or distribute their products. It’s time to look at reusing packaging and using alternatives that will help businesses to cope with any shortage or price increase.
This is a time to turn current problems into opportunities and to look for alternatives through the lens of sustainability. I’m a big believer in the thinking that those who search, find – and only in times of need, new ideas will come up and produce new results.
That sustainability agenda should not only be driven by procurement, but it should also be at the core of the business strategy as a whole. As I mentioned before, cross-functional activities are even more fundamental so that each department, and each function is more connected to cope with any disruption ahead.
RD: Are supply chain involved in strategic discussions around the health and future of their businesses in a way that enables them to mitigate the impact of inflation?
AF: This is a golden time for supply chain professionals to take advantage of what is happening in the world. They have the attention of top management and a mandate to make real change to manage unexpected events like the one that has taken place over the last three years.
Supply chain risks manifest at the intersection of vulnerability and exposure to unexpected events. It is a priority today to look beyond the cost-efficient objective of any supply chain and to focus on the agility we talked about earlier and therefore build resilience.
For example, if you look at Nike during the pandemic, they experienced a reduction of only five percent in sales, despite all the stores being closed. That was a big achievement, and they did it by using predictive demand analysis which helped them to re-route inventory from stores to online quickly.
Another example; some businesses are now recruiting pools of people who can be allocated to whatever task is required in warehousing, logistics or in-store. Similarly, there are platforms that allow restaurateurs and retailers to open up shifts to employees to work as much or as little as they want across the shifts available.
It’s all about bringing in new ideas and investing in new technology to cope with adversity and make your business, and your supply chain more resilient. That comes from being aware of what your vulnerabilities are, and where the risks lie – but seeing it as an opportunity.
RD: How do you think inflation will affect the public and businesses moving into next year?
AF: We’re all consumers, and we’re losing purchasing power by the day. Businesses are going to feel the squeeze in 2023, and consumers will be more price conscious and will cut back to focus on essential spending.
I believe that businesses must maintain a strategic priority on customers to help mitigate permanent damage from current supply chain disruptions, – making price increases as temporary as possible – and revert to more affordable prices when inflation comes down and raw material shortages ease.
Thank you for your valuable insights Andrea!
If you’d like to discuss your procurement or supply chain capability, please contact Ross Dawson at [email protected] or call her on +44 (0)7710 884 004.
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