Inflation & Supply Chain: A balancing act

Prices around the world are rising at a pace that hasn’t been seen in decades, and the Ukraine war, the pandemic, and overall supply chain stress are all adding to it. Once at its peak, this rise in prices will further strain the supply chain and logistics industry. To well understand and curtail the impact of inflation on supply chains, decision-makers in a company need to be proactive. In this feature, we try and understand the correlation between the supply chain and inflation, the impact it might have, and the solution to make the supply chains resilient.

In the past six months, we have seen the word ‘inflation’ become a part of every supply chain leader’s dictionary.

More of a theoretical concept than reality for most of them, inflation has reared itself after almost 4 decades. Inflation, which is the rate of rising prices in the economy, is causing a havoc with long-established ways in which business leaders understand, plan and forecast product demand, supply chain resources, inventory and cash flow. In context with supply chain, inflation can result in a ripple effect on prices, causing supply chain costs to rise, which causes more inflation and increased prices.

It can result in a severe loss of consumer or organisational purchasing power.

The current inflationary pressure is caused by increases in production costs, such as wages, raw materials, energy, and transportation.

THE SUPPLY CHAIN DRIVES INFLATION

Supply chain issues affecting a wide range of products are becoming a big contributor to inflation. As per experts, higher inflation today reflects restricted goods supply, and at the same time there’s strong demand for many of those goods. In the last few years, multiple factors have been fueling supply chain shortages.

Deepak Goel, Head of Supply Chain, Shadowfax says, “It’s a chicken and egg situation. The change in consumer behavior and the advent of technology have increased economic activities propelling demand for logistics.”

Acknowledging the correlations between supply chain challenges and inflation, Vishwachetan Nadamani, COO, Ecom Express reflects on the relationship between supply chain and inflation while mentioning the factors that are contributing to it.

He says, “We can refer to the correlation between supply chain and inflation as a cause-and-effect relationship. We are still reeling under the ripple effects of the global supply chain disruption caused by the recent pandemic. A few of the largest producers of key raw materials, like China, remain majorly out of bounds for sourcing. The recent Ukraine– Russia conflict has further made raw material sourcing a challenge. Higher energy prices are transferring value from ‘energy consumers’ to ‘energy producers’. Many food and beverage companies are facing a huge rise in the cost of goods sold. Shipping disruptions and labour shortages are also driving up transportation and logistics costs.”

Supply chain disruptions are increasing the upward pressure on prices, he added. This is a result of a rebound in economic activity plus a continued strain from supply chain disruptions.

Nadamani said, “As per records, 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 fuel, household appliances, smartphones, laptops, printers, packaging, PCs, automobiles, etc.”

Furthermore, since 2021, supply chain disruptions at ports and warehouses caused by bottlenecks and labour shortages contributed to shipping delays. These blockages left companies with reduced inventory. Simultaneously, consumer spending exploded past pre-pandemic trends. That means, companies had to expand costs at the warehousing and manufacturing level by hiring more people, procuring raw material at higher price, and even stock up with inventory to meet up the demand in the future.

Commenting on the same Nadamani said, “Holding inventory also leads to high inventory turnover ratio, which adversely impacts the organisation, hence, leads to cash flow crunch which hampers their ability to source raw material for further production. If there is no toand-fro of the product i.e. raw material to the
production and finished product from factories to warehouse and end consumer, then it will slow down the logistic sector as well.”

These pressures are combined to further fuel inflation. And inflation is increasingly impacting as well as changing the supply chain.

IMPACT ON SUPPLY CHAIN

Inflation is hitting consumers, leaving them with less wallet share for non-essentials. Which is severally impacting the logistics and supply chain industry.

“Like most industries, inflation has also severely affected the supply chain sector. The surging price of crude oil has increased transportation and logistics costs pushing the supply chain under tremendous pressure driving companies to identify more cost-saving measures. Moreover, the surge in economic activities in India and the disruption in the supply chains are creating pressure on the logistics companies,” Goel said.


This is an abridged version of the original story published in the January edition of the magazine. To read the full coverage, Click here.

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