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.
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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:
- Increase in costs. Higher energy prices are transferring value in the economy from “energy consumers” to “energy producers”. Yara, a Norwegian fertilizer company and industry leader, curtailed operations at two of its facilities due to the price of natural gas. Many food and beverage companies are facing huge increases in their cost of goods sold. These are a result of double digit increases of agricultural commodity prices. The FAO Food Price Index reached an all-time high of 159.3 points in March. The Index tracks monthly changes in the international prices of a basket of commonly traded food commodities. It dropped slightly in April but remained 29.8% higher than in April 2021. Shipping disruptions and labor shortages are also driving up transportation and logistics costs.
- Shortage of materials and services. The combination of a rebound in economic activity, and continued strain from supply chain disruptions, is increasing upward pressure on prices. For almost two years now, more than 150 industries have been impacted by chip shortages. These shortages are affecting the production of a wide range of goods and services including household appliances, smartphones, laptops, printers, gaming consoles, PCs, automobiles, airplanes, and medical devices, among others.
- Greenflation. As the world moves to electrify everything—from heating to driving—the commodities needed to power the green transition are in greater demand and, therefore, getting more expensive. Take lithium, a crucial element of electric car batteries: its price has increased by more than 1000% since January 2020. The same is true of copper, which is needed in every piece of electrical cable. Until new sources of supply can be brought online, greenflation will be a structural constraint in the short and medium term.
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.
What can supply chain leaders do?
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.
- Visibility. Setting up a control tower helps you get the information you need in minutes versus hours and days. A control tower can provide you with end-to-end visibility of your supply chain. This includes tier 1, tier 2 and tier 3 suppliers, so that you can identify and address supply issues before they become shortages.
- Predictability. Set up a digital twin. It’s a virtual supply chain replica of your company’s operational backbone. With a digital twin, you can simulate your supply chain’s performance across various inflation and volatility scenarios.
- Flexibility. Embed flexibility into your supply chain. For example, identify dual suppliers, develop alternative logistical networks and create alternative designs for your products to help you adapt more quickly. As an example, food manufacturers might consider creating flexible recipes that would allow producers to switch from liquid milk to milk powder at the point of need depending on price variation.
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.
Making the right decisions now
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.
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