Supply Chain Matters provides a perspective on the current historic highs in producer and consumer inflationary rates and their implications on industry supply chain business practices and decision making in the coming months.

 

Background Perspective

One of the noteworthy business headlines in the U.S. this week is that the producer-price-index (PPI), which reflects trending as to what businesses are paying suppliers , rose another one percent in January, from the prior month. On an annualized basis, PPI has now risen 9.7 percent. The Wall Street Journal has noted that this rate is now well above the pre-pandemic rate of 2.9 percent, and further indicated that this is the fastest pace since government began tracking of this index began in 2012.

Similarly, the consumer-price index (CPI) for the U.S., an indicator for what consumer are paying for goods and services rose to a four-decade high of 7.5 percent in January, placing more pressure on the U.S. Federal Reserve to begin a series of multiple interest-rate hikes planned for this year.

While PPI and CPI are two different measures, the former is a good gauge of the pressures that industry supply chains are under to try to either offset such inbound price increases or continue to rise selling prices, which fuels CPI.

Such concerns reside in other major regions as well.

This week provided news that the CPI equivalent of the Eurozone region rose more sharply in 2021 than policy makers had expected, reported as 5 percent, and more than twice the target of policy makers. January’s data indicates that the rate has increased to 5.1 percent leading to growing pressures on the European Central Bank to take some action on interest rates this year.

Inflation in the United Kingdom reportedly rose to its highest annual rate in nearly three decades, rising to a level of 5.5 percent in January, the highest since 1992.  The Bank of England now anticipates that inflation will peak above 7 percent by April of this year, making the case for more tightened monetary policy measures.

 

Implications

The implications of unprecedented high levels of producer and consumer inflation levels vary by specific industry, but taken as a whole, they present a number of complex product management, procurement and supply chain planning challenges that will need to be tackled.

While some corporate CFO’s will not resist the inducement to raise product prices like others, there comes a point where higher prices modify buyer behaviors, either in seeking other choices, cheaper product alternatives or deferring buying decisions. That adds to the uncertainties in product demand planning for the remainder of 2022. Outside-in focused demand sensing has never been so important.

As high PPI and CPI inflation rates prompt financial regulators to increase overall interest rates in the economy, the costs for inventory and working capital correspondingly increase. Intelligence-driven and simulation-based inventory management and deployment practices are now essential.

The sourcing and procurement side presents a set of complex challenges that will not likely be overcome with prior purchasing practices that favored the buyer as the prime influencer of contract terms. Current needs relative to ensuring key supplier financial viability, given the current higher costs for materials, energy and labor, but at the same time seeking ways to offset higher producer prices are the new dynamics that need to be managed. Holding suppliers to existing contracts in this environment is not likely to be productive, given the supply and pandemic risks that continue to exist globally.

Suppliers will seek added guarantees related to volumes and inflation-driven price flexibilities. Added to this in the ongoing needs to ensure overall supply network resiliency by adding potentially new geographical based suppliers to hedge overall supply risk and disruption conditions.

Turning to global and domestic transportation cost factors, indicators from businesses that are now attempting to negotiate new annual contracts are that ocean container carriers and third-party logistics providers sense their current market leverage and are negotiating longer-terms contracts at existing higher rates, locking in the profit gains of 2021. In some cases, carriers are seeking to lock-up three or more years in a services contract with variable price increases pegged to more carrier friendly indexes.

On the overall labor side, the great resignation now leading to high levels of exiting workers compounded with higher levels of core inflation for food, energy and other essentials, are going to invariably drive demands for higher hourly and salary compensation levels, adding more to the cost side. Workers are now keenly aware that they have bargaining power in this environment.

 

Opportunities

While the challenges are significant, they can be addressed with higher levels of cross-functional and cross-business collaboration under the umbrella of a much more active integrated business planning process that spans operational, tactical and strategic dimensions.

Advanced technology is now a much more important enabler in capabilities to synthesize and analyze large volumes of internal and external information with quicker turnaround times and more extensive analysis of various business scenarios and their potential cost and service impacts.

Cloud based B2B supply chain platforms provide the means for deeper supplier intelligence and early warning to supplier financial and operational challenges. They further can provide a more extensive lens to alternative supplier discovery.

Industry supply chains can no longer assume that just-in-time inventory flows are the cure for increased cost efficiencies. Instead, inventory flows have to analyzed and weighted for supply risk, customer service level and transportation variability factors. There will be added opportunities for push / pull inventory deployment that involve either suppliers or distribution services providers.

Finally, this existing environment requires a different lens to outside-in information sources, not only from an external perspective but in enterprise applications. Consider information sources analyzed and generated by human resource HCM, talent management, customer facing relationship and service systems such as CX and CRM, along with today’s Enterprise Performance and Analysis management applications.

As readers can surmise, this environment requires the needs to bring together all likely forms of contextual information augmented with the abilities for more timely and deeper analysis of likely trends and outcomes.

Bob Ferrari

© Copyright 2022, The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

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