Responding to inflationary pressures in the supply chain

With inflation at an all-time high in decades, companies across the world and Europe are struggling to grapple the impact of rising prices on their operations and supply chains. Aykut Cakir and Harry Moore from NMS Consulting outline how leaders can respond to the inflationary pressures and mitigate its key risks.

Fighting inflation is not cheap. Solutions typically require alternative supply channels and larger buffer inventory. However, holding larger inventories also means tying up valuable cash at a higher financing cost due to increased interest rates. There will also be market adjustments on shorter payment terms again due to the high interest rates.

Naturally, all this combined will directly impact the cash conversion cycle and thus, the end user may have to pay more. This may seem like a vicious cycle, but by localizing the supply chain, some of these costs may be eliminated.

In the case of an extended inflationary environment, expectations on the cost benefit ratios may have to be lowered.

Planning for inflation

With the latest data in hand, central banks globally are having to raise interest rates to try to combat inflation. The severity of the issue is evident, as markets now anticipate inflation over the next five years to be 1.5% – 2% percent higher than the 2010 – 2019 average for the United States, the United Kingdom, and Germany.

For company leaders, the looming question is what is the best way to guide teams, stakeholders and shareholders through a challenging period?

To begin with, although profitability is the bottom line, inflation’s impact goes far beyond just income. It is imperative to carefully evaluate the entire business cycle, as any disruptions in the cycle can have catastrophic consequences. The fresh unbiased of eye of an external person can help with the tough decisions, and management should hear out team members at all levels on their insights as well.

To help their team members get on the right path, company leaders should prepare a list of questions to review internally and take into consideration when planning for inflation. Here are a few examples that we ask clients to address right away:

1. How can you create additional value without incurring large costs?
2. How can you efficiently redesign supply chains to limit the impact of inflation and delays?
3. Should you consider repricing products in this inflationary environment?
4. How can I form a through-cycle and strategic mindset for my customer relationships?
5. Who can ensure prioritization and organization of the determined changes?

Supply chain focus

As part of supply chain analysis, we advise company leaders to be cognizant of the product and service design choices they make because of the lack of inventory, the volatility of commodities, and the higher production and servicing costs due to inflation.

Of course, company leaders must still maintain the quality and value that customers require, leading to a delicate balancing act. Some approaches that have shown to be effective to accomplish this task include:

• Quickly redesigning products and services
• Breaking the mold by thinking outside of the box to solve supply chain snafus
• Being prepared to offer substitutes or implement alternative product suppliers

One specific key factor that was on the top of supply chain agenda lists even before Russia’s invasion of Ukraine is cost optimization. Now, with shipping costs rising significantly, companies have been advised to increase inventory sizes, and to identify new suppliers for the raw components they need.

More than ever, C-suite leaders need to be aware of daily developments within their supply chain. Some of the supply chain areas that they should address include:

• Being familiar with supply chain specifics such as the location of your tier-one suppliers and key risks to disruptions
• Being involved in the planning of supply chains from start to finish to be able to pivot quickly
• Proactively preparing emergency plans for the possibility of any supply chain link failure to reduce down time
• Weighing the costs and benefits of vertical integration

With inflation impacting everyone, it is extremely important to take into consideration employee wages and benefits. Although salaries and benefits can be a company’s biggest costs, they ensure that your company is able to recruit and hold on to top talent, while also helping your employees and their families live comfortably in a high inflation environment.

General inflation strategies

In addition to considering the above, C-suite leaders must also take into consideration the following principles:

• Improving and evolving company culture as part of compensating employees
• Make monthly/quarterly reviews more about the employees needs and concerns, rather than just how they can improve.
• Reconsider hiring criteria that may be negatively impacting your ability to reach certain individuals that can make great team members

About the authors: Aykut Cakir and Harry Moore are both leaders in the European business of NMS Consulting, an international management consulting firm with 15+ offices worldwide.