Strategies to address inflation in the supply chain
The pandemic has placed immense stress on supply chains, and the current war in Ukraine has set commodities prices soaring globally. From wheat to sunflower oil, natural gas, and crude oil, every commodity is experiencing shortages and high prices. To add to this, the blockade of the Black Sea temporarily caused distress to shipping traffic. This shows the vulnerability of our shipping and overland trade routes, which demands robust mechanisms to address the resulting inflation. While the eurozone has seen inflation rate of over 9% as of August 2022, the worst hit countries are Spain (~10%), Germany (~9%), and Estonia (~24%).
Impact on supply chains
The major events mentioned above have disrupted supply chains and created double-digit inflation in those European nations that never witnessed more than 2% inflation in decades.
- Higher costs: Shipping disruptions and labour shortages have raised transportation and logistics costs. The war has shifted value in the economy from energy consumers to energy producers, and the power to control prices has changed hands.
- Shortage of services and materials: Post-pandemic, there is a surge in economic activity and an increase in demand for goods and services. But continued disruption in supply chains is placing more pressure on prices, which continue to rise. The well-known semiconductor chip shortage has affected many industries, including automobiles, computers, appliances, medical devices, and more.
- Greenflation: Because of the continued push toward environment-friendly technologies, prices of commodities such as lithium, cobalt, and copper have increased. These are the basic building blocks for battery packs in appliances and electric vehicles (EVs).
- Digital supply chain: A digital supply chain provides real-time visibility into supply chain health. Digitisation helps you in managing all the parameters and achieving sales, costs, inventory, and customer service targets with a focus on innovation. A cost-competitive digital supply chain helps businesses in mitigating the impact of shocks caused by inflation.
- Revisit and reuse provisions in existing contracts: Review your existing agreements and implement mechanisms to address inflation, lower costs with the suppliers, and pass on extra profits to the customers. The contract could have index-based pricing such as that based on the producer price index. The contracts should have provisions for handling inflation during force majeure events, such as labour strikes or a pandemic.
- Negotiate amendments to existing contracts: Sellers should renegotiate the contracts to adjust prices according to their input costs. To do this, businesses must incentivise their customers. Buyers should carefully study the reason for the renegotiation and consider which items they would request in exchange for a price adjustment. This could include timing of delivery or quantity of goods.
- Strategic cost reduction: Other than using contract review and amendment methods, devise alternative strategies. Streamline the processes and review inventory management and labour inputs to cut costs without sacrificing product quality. Diversify the supply chain to ensure that you have the flexibility and sustainability to handle headwinds during inflation.
- End-to-end visibility: By setting up a control tower, you can get end-to-end supply chain visibility and get any information in minutes. You can divide the tier 1, tier 2, and tier 3 suppliers and identify any issues with the supply chain before it impacts your warehouse inventory and business.
- Predictability: Technology can help you set up a parallel supply chain that mimics the backbone of your company’s business. You can simulate different scenarios on this supply chain and monitor its performance across these scenarios of volatility and inflation.
- Flexibility: Build flexibility into your supply chain by identifying dual suppliers, developing alternative logistical networks, and creating new designs for your products. This will help you adapt quickly in case of supply chain disruptions and resulting inflation.
Handling inflation in supply chains
Decision makers in a company can take proactive actions to curtail the impact of inflation on their supply chains. From a detailed assessment of existing contracts to full-scale digitalisation, the solutions to make the supply chains resilient are plenty.
For organisations on the digital transformation journey, agility is key in responding to a rapidly changing technology and business landscape. Now more than ever, it is crucial to deliver and exceed organisational expectations with a robust digital mindset backed by innovation. Enabling businesses to sense, learn, respond, and evolve like living organisms will be imperative for business excellence. A comprehensive yet modular suite of services is doing precisely that. Equipping organisations with intuitive decision-making automatically at scale, actionable insights based on real-time solutions, anytime/anywhere experience, and in-depth data visibility across functions leading to hyper-productivity, Live Enterprise is building connected organisations that are innovating collaboratively for the future.
How can Infosys BPM help?
Infosys BPM leverages AI, ML, and RPA technologies and years of domain expertise to enable an agile and responsive supply chain for your business. Read more about improving the health of your supply chain.