High inflation has been one of the top stories of 2022, and its impact has been felt around the world.
Inflation is a measure of how much things cost. Increases in transportation costs, wages, fees, and raw materials drive up supply chain costs, which in turn drives up the cost of consumer goods.
According to insurance company Zurich, many supply chain and logistics professionals believe inflation has negatively affected their business. Impacts have included capacity constraints, rate and price increases, longer lead times and delayed orders, and continued issues with shipping containers.
Forbes identified three major impacts of inflation on the supply chain. Here they are, with some suggestions about how your business can respond to stay resilient in the fact of these challenges.
- Higher prices mean consumers have less disposable income, which shrinks demand for goods
The issue: People are paying more for essentials like rent, mortgage, food, and gas, leaving them less money for non-essentials.
How to respond: Pay close attention to consumer trends and behaviors so that you can forecast demand, which drives manufacturing, transportation, inventory management, and sourcing of raw materials.
- Higher direct costs for materials, labor, fuel, and transportation. More expensive to ship and store goods.
The issue: Materials are more expensive, shipping takes longer and costs more, and labor shortages also drive up costs.
How to respond: Account for variables (such as resources and labor) ahead of time, have alternative scenarios prepared to respond swiftly to trends
- Increased interest rates mean no more “cheap money”
The issue: The Bank of Canada raised interest rates throughout the year to try to curb inflation. From March 2022 to Dec. 2022, the BoC raised interest rates from 2.45% to 6.45%, which affects your ability to borrow and pay back your debts.
How to respond: Closely monitor and manage our working capital so that when your business needs cash you don’t need to borrow at high interest rates while capital is tied up. Manage available resources closely based on the real-time variability of supply and demand.
Here are some more suggestions for how you can increase your business’s resilience against inflation and supply chain issues:
- Digitize your supply chain, which can help with visibility and make it easier to manage all the parameters required to achieve your cost and inventory targets.
- Monitor trends in real-time and develop an agile business model to respond to these trends.
- Develop multiple planning scenarios based on best, worst, and “likely” realities so can respond swiftly.
- Stress test supply chains by mapping critical value chains and then running disruption scenarios so that you are prepared.
- Understand your main cost drivers and where these could lead to considerable losses due to increased costs and supply disruptions. Put strategies in place to mitigate these risks
- Know your cash position in real-time to make informed decisions around budgeting.
- Review the financial health and strategies of your critical partners and suppliers so you can be prepared with contingency plan if one of them has to change strategy.
- Conduct a thorough risk assessment of your critical suppliers and their sub-suppliers to identify potential risks and understand how they could impact your business.
- Revisit your existing contracts and add mechanisms to address inflation during force majeure events such as labor strikes or a pandemic.
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