The Impact of Inflation (& how supply chains can handle it)

According to the Office of National Statistics, the inflation rate year over year is 9.0%, (compared to 7.0% for the previous month) and most workers have suffered a fifth consecutive month of falling living standards. The Bank of England expects the rate of inflation to keep rising this year. But they expect it to go down next year, and be close to 2% in around two years.


How did we get here?

It’s easy to pin the reasons on events in Ukraine, but the real source of the problem stretches back far before the Russian invasion. With interest rates being held incredibly low for many years, the economy has been flooded with “easy” money.

This, when mixed with absurdly high government spending in response to the COVID-19 pandemic and massive supply chain disruption due to lockdowns across the world, has created a perfect storm and inflation rates not witnessed for decades.

What can we learn?

We’re not suggesting that any single business can “fix” inflation, but we believe that supply chain leaders can focus on three areas of their operations to help ameliorate the impact we’re experiencing.


1. Detecting Demand

A major role of the supply chain team is to forecast demand and to work with sales to ensure they’re meeting customer needs. However, we appreciate that this isn’t quite as simple when dealing with a once in a generation public health response like COVID-19.

The difficulty is that consumers with money were forced to be idle, not travel and were looking for ways of spending their money and saving more than before due to lack of “experience” spending. This meant that demand for goods was and is still strong in the economy and continues to bounce back and normalise after the pandemic. Unemployment is low and wages have stabilised too – creating even more demand.

This has produced a real headache for supply chain leaders and is one of the many reasons that implementing supply chain technology platforms like SourceDogg can be transformational.

This demand forecasting is essential to consider capacities, risk and resilience across your supplier base and make data-driven modelled decisions that put you in the driving seat to capitalise on the demand rather than be caught short and lose market share.


2. Inventory & Infrastructure

We’ve discussed the benefits of using technology to forecast demand and evaluate and analyse supply chains above, and it’s easy to apply this solely to inventory decisions.

However, the current levels of inflation aren’t solely being driven by stock levels and the just-in-time inventory approach favoured by so many businesses but this is a massive factor. What was once an operational panacea has been exposed as a huge vulnerability and many supply chain teams are rightly reviewing their KPIs and culture alike.

Beyond the inventory issues, some of which have even made mainstream news (such as semiconductor and chip shortages,) the inflation issue has been exacerbated by import infrastructure challenges too.

Whether it is closed factories, clogged ports and disrupted shipping routes or a lack of HGV drivers and myriad other reasons, the spotlight has to shine on approaching the supply chain from a holistic point of view. Much like a game of chess, supply chain managers are being forced to look many moves ahead to become a grandmaster. This is where ambitious and forward-thinking supply chain teams look at the whole picture, collecting data on their supply chains that they perhaps didn’t consider important before. This could mean raw materials assessments, shipping route analysis and more to evaluate how resilient their fundamental supply infrastructure is.

Perhaps we’re biased, but we still believe the best way to do this is in a supplier master data solution like SourceDogg, where you can then use any and all data points to enable and empower your team to make the best decision based on the evidence and insight.


3. Prepare Your People Strategy

It would be an oversight to not consider both people and processes as key learnings from the current state of inflation in the UK.

Great businesses are built on productivity power and a huge part of this productivity lies in the people at the heart of the supply chain teams.

The pandemic forced global economic activity to take a pause, now dubbed ‘The Great Reflection’ which was followed by other phenomenons such as the ‘Great Resignation’ and the ‘Great Retirement.’ In fact, analysts say the UK is suffering a chronic shortage of workers after about 500,000 quit the labour market during the Covid-19 pandemic and many continental European workers left Britain following Brexit.

The scale of this disruption emphasises the importance of attracting, motivating and empowering great people to do their best work. Furthermore, it exhibits the need to centralise your supply chain data, standardise your processes and bring together relationship management and not rely upon individuals to manage these vital processes themselves.

Recent events may have been an anomaly, but often it takes such a “black swan” event to highlight the fissures and fractures that are waiting to destabilise any organisation.

Senior managers and directors should be looking at the roles and responsibilities of their people alongside HR to ensure employee satisfaction and motivation to enhance retention. We feel there is a need to review and reflect upon their internal processes too, where they could be updated and fundamental platforms upgraded to reduce the risk of holes being left in the workforce.


In Summary

We appreciate that no single supply chain solution can “fix” inflation – but we can reflect on the causes of the current economic position we find ourselves in and suggest practical solutions that truly deliver better business continuity in challenging times.

Inflation affects almost every aspect of the supply/demand dynamic. Putting in guardrails across the disciplines of:

  • demand modelling based on wider economic considerations
  • detailed and reframed inventory planning
  • deeper infrastructure analysis
  • and a proactive people strategy

would all help lessen the effects of inflation felt by many businesses.

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