The Inflated Supply Chain: How To Navigate The Complexity Of Doing Business During A Period Of Rising Inflation

Supply chain Business During Inflation

A timeless saying is that "life is 10 percent what happens to you, and 90 percent how you react to it."

I was reminded of these words when I recently read the PBS News Hour article How the supply chain caused current inflation, and why it might be here to stay.

According to reports, the 6.2 percent increase in prices over last year was unexpected and, therefore, a shocking turn of events to many experts. Even more troubling is that there is a growing belief that higher consumer prices will become the "new normal." In short, while the rate of inflation may nominally fluctuate over the coming months, its fastest rate of increase in "more than three decades" is a trend that will likely continue in the coming years.

I intend to understand the "why" of what is happening and highlight the consequences of the current crisis - including the means and tools at your disposal to deal with it.

Supply Chain Mess

While there is no single reason for the inflation we are experiencing today, it seems that the catch-all reason given by experts is that our supply chains are a mess.

Starting with the "severe shortages of goods and labor in supply chains," pundits point to a dramatic increase in people buying online due to the pandemic as an exacerbating factor.

For example, industry projections that orders would hit 4.7 million packages a day during this recent holiday go well "beyond what the system can possibly absorb or deliver." However, that is just one part of the story, which brings us back to my opening comments about our reaction.

When The Chips Are Down

The strained relationships between buyers and sellers due to inflation are making headlines around the globe.

For example, one of Canada's "biggest food manufacturers," Frito-Lay, is no longer shipping its products to its largest grocer. Citing it as "an extreme example of how inflation is impacting the food industry," manufacturers' efforts to "recoup higher costs" is driving a wedge between some retailers and suppliers. Such disputes are not limited to a single industry.

Responding to increasing customer complaints, automaker Hyundai has threatened "dealers with punishment over marking up vehicle prices." Warning U.S. dealers that their pricing practices are "damaging our brands' long-term ability to capture new customers and retain loyal ones," Hyundai is looking at "reducing vehicle allocations" or "taking away advertising benefits."

Taking these measures raises the question: is punitive action the only viable option in the buyer-seller relationship during inflationary times?

Transparency, Technology, and Contracts

There are no shortages of options regarding how your procurement department can deal with inflation.

Everything from improving communications and increasing transparency within the enterprise and external suppliers to a proactive increase in strategic sourcing activities is on the table.

Beyond transparency and technology, mechanisms within your contract can also mitigate the impact of inflation on your business.

In the construction industry, where costs for materials and labor have increased from between 15 percent to 50 percent, companies have experienced "huge losses on projects" because of fixed-price contracts.

Many builders incorporate "factoring escalation clauses into their current building contracts to address these risks."

Of course, measures such as factoring do not come without inherent drawbacks. While cost escalation clauses are illegal in some jurisdictions, they can also undermine the ability to get financing.

For this reason, a better option for builders is to focus on their fixed expenses. Considering rising costs on fixed expenses, including delays due to supply chain issues, means shifting financial models to project net versus gross profits.

The above is just one example from one industry addressing inflation through your contracts.

Supplier Relationships

I previously mentioned that communication and transparency are critical to addressing inflationary challenges.

When you consider the examples of Frito-Lay and Hyundai, one of the most significant issues is one of trust or lack thereof between buyer and seller.

With the former, some suggest that the grocery chain is "trying to keep sticker prices low and stop suppliers from using inflation to justify unreasonable price hikes."

Alternatively, some believe the grocer is "using their market strength to bully suppliers and pad their bottom lines."

In such a scenario, no one is a winner.

This impasse suggests that the biggest takeaway from these difficult times is that in addition to the above suggestions, having a good relationship with your supply network is ultimately the best way to combat inflation.

Dawn Tiura, President and CEO, SIG

Dawn Tiura, CEO and President of SIG, SIG University and Future of Sourcing Digital Publication, has over 26 years leadership experience, with the past 22 years focused on the sourcing and outsourcing industry. In 2007, Dawn joined SIG as CEO, but has been active in SIG as a speaker and trusted advisor since 1999, bringing the latest developments in sourcing and outsourcing to SIG members. Prior to joining SIG, Dawn held leadership positions as CEO of Denali Group and before that as a partner in a CPA firm. Dawn is actively involved on a number of boards promoting civic, health and children's issues in the Jacksonville, Florida area. Dawn is a licensed CPA and has a BA from the University of Michigan and an MS in taxation from Golden Gate University. Dawn brings to SIG a culture of brainstorming and internal innovation.