Inflation in the supply chain has an impact on logistics and production costs, such as raw materials, energy, or transportation costs. In an inflationary scenario, the supply chain’s functioning can be disrupted, causing delays in shipments, bottlenecks in production lines, or stock-outs in warehouses, among other impediments. However, there are strategies that can help mitigate some of the effects of inflation. Companies tend to rely on technology solutions that allow them to improve planning to anticipate possible disruptions or to have real-time visibility of stock to ensure product demand.
What is supply chain inflation?
Inflation is a phenomenon caused by an imbalance between production and demand, resulting in a generalized increase in product and service prices over a period of time. The general price increase means that people’s purchasing power to obtain goods and services is reduced with the same amount of money.
An inflationary context not only affects the cost of living but also has an impact on supply chains as a result of the global increase in raw materials and energy prices for the production of goods.
BlackRock, the US multinational investment management company, reflects in its analysis “The new inflation regime” the impact of supply chain disruptions on inflation: “The pickup in inflation over the past year has been caused by supply constraints across the economy and in specific sectors. This is a profound shift from the dominance of factors that have driven demand for decades.”
According to the BlackRock Investment Institute’s “A world shaped by supply,” inflation has a direct link to the coronavirus pandemic: “This new era of supply-generated inflation began with the COVID-19 pandemic production shutdowns and the subsequent economic revival.” Changes in consumer habits, which resulted in an unstoppable rise in online shopping, led to bottlenecks in some sectors and overcapacity in others. “Prices tend to rise faster as a result of bottlenecks than they tend to fall in response to spare capacity, which raises inflation levels”, the authors state.
How inflation affects the supply chain
Inflation presents a challenge for global supply chains. To remain competitive, supply chains must boost their visibility over stock, improve their logistics planning, and reduce production costs.
“The interconnectedness of global supply chains means that when one price goes up, other prices tend to follow”, says Michael McMahon, Oxford University Professor of Economics, in his article “What is supply chain inflation and why is it driving up consumer prices now?” According to the expert, three factors contribute to inflation: price increases in goods and services, personnel costs, and energy costs. “Although consumer price inflation has been relatively low and stable over the past 20 years, the past few months have seen a big jump in price growth along with much debate about the role of supply chain disruptions”, McMahon notes.
Increased logistics and production costs are not the only consequence of inflation. Disruptions in demand, which have led to bottlenecks and stock-outs – as in the case of microchips at technology companies – have led to shortages of raw materials and semi-finished products that have challenged global supply chains.
In its analysis “How does inflation impact the supply chain?” the Swiss insurer Zurich outlines the inflationary effects on the supply chain: “Procurement becomes more complex during inflationary periods. If cost increases are passed on to the buyer, demand may decrease, so producers may require fewer goods or services. Sales and operations processes need a more focused, detailed, and agile approach to planning. This approach should be supported by all supply chain stakeholders, including sales and marketing, warehousing, and logistics teams”.
Tools for mitigating supply chain inflation
Mitigating supply chain inflation requires effective logistics planning. Without foresight and stock control, unplanned purchases can increase logistics, transportation, and production costs. To address this issue, it is essential to enhance the resilience and flexibility of the supply chain to cope with disruptions and remain responsive to customer demand.
In its publication “Inflation, disruption and supply chains: decisions to make now,” the consulting firm Accenture recommends three ways to mitigate inflation:
- Visibility. Supply chain executives can benefit from a supply chain tower, a digital tool that provides end-to-end visibility in the supply chain. This tool allows for the quick detection of errors and inefficiencies before they become significant problems in the chain’s operation.
- Predictability. Supply chains can incorporate digital twin technology to simulate their performance in certain inflation and volatility scenarios. This simulation enables companies to prepare for disruptions and improve their ability to react to uncertain environments.
- Flexibility. Flexible logistics allows for the existence of substitute suppliers and the development of alternative logistics networks to adapt warehouse resources to changes in the environment.
Boost your Supply Chain Resilience: Xborder’s Logistic Solutions for Inflationary Environments
In conclusion, it’s crucial for companies to implement strategies that mitigate the effects of inflation on their supply chain. Failure to plan and control inventory can lead to increased logistics, transportation, and production costs, which can have a detrimental impact on business. To help companies address these challenges, comprehensive logistics solutions such as those provided by Xborder can be of immense value.
Xborder specializes in logistics solutions for foreign companies looking to enter the Latin American market. The company offers advisory and consulting services to assist companies in comprehending the complexities of the market and adapting to local requirements and regulations. Furthermore, Xborder provides customized solutions for each client, including supply chain design, inventory management, and optimization of logistics and transportation processes.
In an increasingly competitive and evolving market, having a dependable partner like Xborder can be critical to the success of your business in Latin America. With their expertise and local knowledge, Xborder can assist companies in overcoming challenges and taking advantage of opportunities in the region. Contact them today for more information about their services and how they can help your company expand in Latin America. For further information, please visit www.xborder.co.