As talks of inflation, recession, and interest rate hikes intensify, it’s worth examining the relationship these economic developments have with the supply chain. How did we get here? What can companies do to protect themselves from inflation when buying and selling? Are rising transportation costs truly the result of inflation, or opportunistic price hikes? There are no easy answers, but there are actions that companies can take to improve their position.
Inflation, Bear Markets and the Threat of Looming Recession
The June 15th announcement of a 75 basis point boost in US interest rates only heightened global speculation that a recession was imminent.1 The move comes as the government looks to tighten monetary policy and tame inflation rates that are the highest in some four decades.2 Canada and other countries have likewise hiked rates, with more increases expected to follow. All of this can wreak havoc on strategic plans and economic modelling developed by companies throughout the supply chain.
A Perfect Storm in the Supply Chain
Importers, exporters, buyers, and sellers may be better able to combat the effects of inflation if it were owed to a single source. Instead a myriad of factors figure in: changing consumer habits, political unrest, government stimulus spending, environmental changes, increased cyber attacks and lockdowns, as well as soaring labour, energy, and transportation costs.
In the case of transportation expenses, many believe that an impending wave of Boomer retirements will put further upward pressure on salaries for those in logistics, driving costs higher throughout the supply chain. While salary increases for truckers and other logistics professionals may be overdue, the resulting cost bumps will still be painful for those who foot the bill.
Shipping Costs: Inflation or Gouging?
It’s only natural that service providers will pass the burden of increased prices along to their customers. As shipping costs have skyrocketed during the pandemic, however, there have been those who allege that price gouging, rather than inflationary pressures, are the dominant factor.
“Every once in a while you learn something that makes you viscerally angry,” said US President Joe Biden earlier this month.3
What got Biden’s blood boiling? Rate increases of up to 1000% from a small number of shippers who control a large portion of supply on key trade routes. The situation has led to the passing of the Ocean Reform Act, which will increase the power of the US’s Federal Maritime Commission to regulate price gouging.4 “If you had the person in front of you, you’d want to pop them,” fumed Biden.3
Surviving Inflation
The far reaching effects of inflation will ultimately be impossible to avoid, but both buyers and sellers should look to protect their interests to the greatest extent possible.
Buyers will want to take a second look at their contracts with suppliers and take advantage of any fixed rate contracts. The pressure on sellers, meanwhile, will be to pass along their cost burdens to customers whenever possible. Sellers locked in at unfavourable terms may have to offer extensions of contract length in return for reasonable price increases. In such situations buyers will want to do their homework and ensure that price increases are tied to inflation and not opportunism.
Other strategic actions can be helpful in shielding organizations from the worst of inflation. Automation and improved software systems, for example, can alleviate some labour costs. Likewise, reducing the amount of links in your supply chain can be beneficial, as each stop along the way presents another opportunity for price hikes. These types of strategic pivots are easier said than done, however, and are probably not feasible in the short term.
Supply Chain Risk Mitigation
Even more daunting than inflation is the prospect of being unable to do business at all.
“With supply chain vulnerabilities aplenty, businesses must also consider risk mitigation, which does not always go hand in hand with favourable terms,” writes Karen Epp for Goldbeck Recruiting. “For this reason, finance and accounting professionals must work closely with others, including operations and procurement specialists, to establish an optimal big-picture plan.”5
Those looking to mitigate costs may be tempted to stick with the long-favoured ‘just-in-time’ inventory strategy, while also striking major agreements with suppliers who offer them the most favourable terms. These tactics may look good on paper, but leave companies vulnerable to supply chain disruption.
If recent years have taught us anything, it’s to expect the unexpected. Storms, pandemics, and other unforeseen circumstances have tested the definition of the term “black swan event”, ushering in a new era of prudence in procurement and inventory management. Inflation throws yet another wrench into economic forecasting, but those who plan in advance will be better positioned to weather this latest storm.
Cited Sources
1 “Stocks around the World Are Tanking Today as Recession Fears Spike …” Accessed June 17, 2022. https://financialpost.com/investing/futures-slide-on-rising-recession-fears.
2 Al Jazeera. “US Targets Inflation with Biggest Rate Hike since 1994.” News | Al Jazeera. Al Jazeera, June 16, 2022. https://www.aljazeera.com/news/2022/6/15/us-targets-inflation-by-issuing-highest-rate-hike-since-1994.
3 Bloomberg.com. Bloomberg. Accessed June 17, 2022. https://www.bloomberg.com/news/newsletters/2022-06-13/supply-chain-latest-biden-warns-shipping-lines-amid-hot-inflation.
4 Smith, Elliot. “An Aggressive Fed Has Global Ramifications. Here Are 3 Ways the World Could Be Hit.” CNBC. CNBC, June 15, 2022. https://www.cnbc.com/2022/06/15/fed-hikes-have-global-ramifications-heres-3-ways-the-world-could-be-hit.html.
5 Epp, Karen. “Inflated Role: Finance Talent Help Businesses Face Inflation.” Goldbeck Recruiting, January 12, 2022. https://www.goldbeck.com/expertise/accounting-finance/inflated-role-finance-talent-help-businesses-face-inflation/.