Inflation, disruption & supply chains: Decisions to make now
May 31, 2022
May 31, 2022
In 2022, inflation and other disruptions have continued to challenge supply chains and analysis shows there is an even stronger correlation now between supply chain disruptions and inflation than before the pandemic. This is particularly true in Europe.
We’ve all experienced shortages and soaring prices. Now, beyond the massive human toll of the invasion of Ukraine, we can potentially see even more supply instability, price inflation, logistics disruptions and labor stresses.
It is important to understand the inflation-disruption cycle to help mitigate these effects with a resilient supply chain built on flexible, cloud-based technologies. I’m using Europe as a reference, but these messages are applicable around the globe.
Supply chain drives inflation… inflation drives change in the supply chain
Europe has experienced low inflation for decades. Today’s new inflationary environment is affecting the economic, social and political landscape.
At the time of this publication, European economies have seen inflation rapidly rise from the recent historical norm of around 2% to the highest inflation rates in decades:
Source: European Central Bank data as of end of April 2022
Where is the supply chain in all of this? Let’s look at three examples:
These pressures are combining to further fuel inflation. And inflation is increasingly impacting the supply chain. Companies need to rethink their supply chain strategy. It will enable them to react faster and smarter to this inflation-disruption cycle.
Managers can take quick actions to contain the impact of inflation on their companies’ profitability. These tactics start with a detailed assessment on their contractual exposure. For years, managers have been living in a low inflation environment where price indexation was not a critical topic. Now, many companies have to assess, analyze and target key elements of their sales or external spend which should be indexed or non-indexed.
Identifying alternative, lower-cost suppliers is also a key short-term fix to deal with inflation. Beyond these more immediate measures, organizations can respond to higher inflation by increasing supply chain resilience.
What exactly does this mean? Resilient supply chains provide businesses with three critical capabilities.
Consider the Resilience Test developed by MIT and Accenture. It’s designed to assess the resilience of your company‘s supply chain. And it can help you identify your strategic priorities and where to invest for maximum flexibility.
Companies must enhance their digital capabilities to help enable improved forecasting, enhanced end-to-end supply chain visibility and help unleash the power of people. Enhanced digital tools such as analytics, artificial intelligence and technologies such as control towers and digital twins can also help advance innovative solutions to supply chain challenges.
The pairing of inflation and disruption is driving massive supply chain changes. The cycle of rising inflation requires a response that combines new technologies and the reskilling of people. This combination of human ingenuity and technology underpins a more resilient supply chain. It doesn’t just help companies manage inflation but can flex to support innovations that drive new sources of growth. To beat the inflation-disruption cycle, the time to act is now.