Inflation, Supply Chain Disruption & The Future of Global Business

In this episode we are looking at the issues of Inflation and Supply Chain Disruption and what that means for The Future of Business

Inflation refers to the increases in prices of goods and services, and on the flip side the fall in the purchasing value of money. And it makes sense, the more expensive products are, the more money you are going to have to find to pay for it, or if you have a fixed amount of money, you can only buy less products. And this topic is HOT, its everywhere we turn, today, and is featuring on every business broadcast and bulletin. We are seeing reports of inflation rates of

• US 8.6% in May &
• UK 40 year high of 9.4%;
• in the EU 8.6%,
• China 2.5%,
• India 7%,
• Nigeria 17%,
• Mexico 7.7%,
• Turkey 54.8%.

In fact the, Pew Research reports that for 44 countries it looked at (and for 37 OECD member countries), the average annual inflation rate in the first quarter of this year was at least twice what it was in the first quarter of 2020, as COVID-19 was beginning its spread. In 16 countries, first-quarter inflation was more than four times the level of two years prior.

As it relates to stock outs Datassembly reported stock-outs of grocery items to average 31% in April, as high as 40% in some states of the US. And alongside these were higher prices for available stock: 9% on grocery items in March y.o.y., 18% on baby formula, 56% on eggs, in some instances.

So whats happening there, why, and what can we expect looking ahead?

To understand what is happening with inflation today we have to look at this across 3 time periods – before covid, during the pandemic and coming out of the pandemic. And we have to recognize as well that the issues were different for countries across those time periods.

BEFORE COVID

Before covid, things were pretty calm and manageable. Inflation was low, globalisation was booming, and growth was gradually shifting to online – still only at 15% of total retail trade. Companies were pushing inventory reduction agendas to increase cost efficiencies in their operations – things like just in time and merge in transit arrangements, flexible partnerships and technology integrations across the value ecosystem.

When covid pandemic exploded on the scene, there was initial disruption to Chinese manufacturing, and as Covid spread throughout the world, and with it quarantines and lockdowns, we saw shortages start to emerge. Toilet paper, sanitizers and masks, ventilators at ICU, electronics and computing devices, vaccines at one point and most recently baby formula and fuel.

The reasons for these initial shortages were because of both supply and demand. On the supply side – factories in many countries had to close to comply with covid quarantine restrictions, and shipments experienced delays with cargo and facilities having to be sanitized as well all throughout operations. On the demand side we saw some people begin hoarding produce for their own supply, but generally people were locked at home, spending much of their time shopping online. So less supply and greater demand meant prices of available products started going up, and in other instances people had to go without because product was just not available.

In the middle of all of that, and as if to crystallize these challenges into a physical form everyone can appreciate, the Evergreen’s blockage of the Suez Canal for a whole week (which disrupted global trade for months) impacted 400 ships moving in both directions.

FACTOR MARKET UPHEAVALS

For businesses, this meant not only setting up / developing the online distribution and sales channels on the customer end, but also finding suppliers and securing orders (at volatile costs) – and getting it landed on the procurement side, all of course while having to manage staffing and (in most cases new) work-from-home arrangements. What this translated into was disruptions throughout not only the operating value chain within organisations, but upstream along the entire supply chain as well – a healthy dose of stress for anyone involved.

The labor market faced disruption from a number of factors:

• competition from provision of grants and other government benefits to persons affected by covid in different ways;
• the conveniences of working from home;
• the scare of infection on re-entering the workplace;
• persons pursuing alternative / ancillary revenue sources;
• or persons having to deal with unstable family issues or wading into substance-abuse territory;

to the widespread rejection of hastily developed vaccination mandates, Anti-vaccine rallies and convoys throughout Europe and North America became visible and disruptive, further limiting throughput and increasing lag times.

Add to this the shift in manufacturing to nearshore or onshore destinations, and the labor market shortage is set to perpetuate in major destinations globally. We saw the labor market seethe in manufacturing and supply chain sectors.

Russian Military Actions

To ice the cake, Russia’s military action in Ukraine, regional instability and the resulting imposition of restrictions and sanctions on products meant restricted fuel and wheat supply, and increased costs for available stock. With both being factor inputs into many industries globally, and these happening alongside the resurgence of lockdowns in some countries from the new Omicron variant, meant even more disruption to production and supply.

Overall Effects

The mismatch of soaring consumer demand and reduced supply, constrained capacity in containers and at key points in the supply chain, labor and raw material shortages, fuel price increases and on-again off-again lockdown restrictions in different countries all contributed to increasing costs today.

Generally, price and provision of goods would be a function of raw materials, labor and logistics. And although the supply chain issues are healing – slowly – in today’s context, the increase in costs and shortages across all three components suggests that effects would linger for some time to come – throughout the remainder of the year, according to projections across most economies.

RESPONSE BY BUSINESSES

How do we respond in the face of this plethora of issues? Much of the conversations have focused at the level of the economy or country strategy, with a skew to socio-political and globalization strategy considerations.

At the firm level, we have seen – and are seeing, firms adopt strategies to ensure their logistics remain robust and effective, even at the expense of time and cost efficiencies. These of course would be contingent on the time view of operations.

Stock inventory: Some firms are reversing the minimization of inventory, and building up stocks of inventory to meet demand. Additional warehousing and handling costs would be second priority to having products available to sell.

Diversify suppliers: With the vulnerability to which we were exposed over the past two years, some firms are seeking to diversify their suppliers to mitigate the risk of reliance, and ensure their supply chain can continue to respond to changes in factors.

Expand production locations / Onshoring: a seemingly longer-term trend is the shifting or extension of production capacity to alternative locations – developing economies with low wages or a different risk profile from established players. Tesla for example is exploring Indonesia as one of its production centres. Ford is seeking to shift battery production to USA.

What these mean for the global supply chain in the medium to long terms are difficult to predict. The implications of economic and political jousting, the individual effects and interplay of technology and labor, emergent supply models and methods towards net-zero impacts, all would feature in what the resulting environment would look like.

What we can be sure of is, as Katherine Tai, the U.S. trade representative, said at the Milken Institute Global Conference, “A more resilient, a stronger, more sustainable future is one that is going to look different and feel different.”