Inflation Fireworks Affecting Your Bottom Line?

Take Charge of Your Supply Chain Now and Begin Celebrating!

When preparing for July 4th celebrations this year, it was easy to see the impact of supply chain disruptions and inflation on both prices and availability of supplies. Food prices were much higher than last year and have been increasing month over month for most of 2022. On-shelf availability is limited in some areas, and the options for comparable items have diminished. Incidentally, finding desirables that were previously taken for granted made shopping a bit more exciting at times.

Last year, as more people became less leery of COVID-19, distributors and retailers enjoyed big boosts in sales due to pent-up demand across a diverse set of industries. As we moved toward cautious re-openings, retailers also realized they often did not have the proper product mix, which hurt their customer satisfaction and therefore, their earnings. Responding to this strong demand for goods caused bullwhip effects in inventory and overwhelmed supply chains. Since many supply chains are still in “recovery mode”, prolonged supply and demand imbalances combined with commodity-driven cost pressures continue to drive prices higher for many products.

In the U.S., inflation hit nearly 8.5 percent in March 2022, its highest level in 40 years. Commodity prices took an additional jump when Russia invaded Ukraine due to sanctions that pushed costs and lead times even higher for manufacturers, distributors, and retailers. China’s lockdown and the prolonged semiconductor shortages have had broad industry impact, with the automotive, industrial automation, personal electronics, appliance, and toy industries hit hardest, in some cases facing months of backlogged customer orders.

Supply chain leaders should not simply be reactive to price increases and disruptions in an uncertain world with inflationary periods. supply managers need to be more proactive in their decision-making. Because of this, the need for AI-based planning tools has never been greater. AI-based tools enable supplier diversification and internal and external communication, making collaboration an effective weapon in combating disruption and addressing responsiveness.

Of all the hurdles they face, lost purchasing power is a primary concern for supply chain managers during times of high inflation. So, how can a supply chain leader best develop a strong bargaining power position with suppliers?

Take command of procurement. Organizations with multiple business units that independently procure raw materials from the same vendor should establish a central procurement unit, consolidating all orders with one cohesive picture of demand for the business. This centralized view will enable your organization to negotiate favorable prices for its business units and dictate terms for purchase.

Diversify your supply chain team. Aim to reduce your reliance on a single supplier during forecasting and planning. Doing so will allow your organization to develop a long-term competitive advantage and resilience to supply chain disruptions, including social, weather, political, cybersecurity, global health, or even traffic situations.

Explore new points of connection. If you are a manufacturer, look for raw material substitutes with the same fit, form, function, and quality required to meet your product standard. If a proper substitute is available, use it instead of your original raw material for fulfillment flexibility. In doing so, the possibility of your single supplier becoming more dominant is significantly reduced.

Backward integration. Examine your company’s ability to integrate backward. For example, Apple and Rockwell Automation have begun exploring the possibility of developing their own processors to reduce reliance on semiconductor suppliers. Backward integration helps gain control of your supply chain, enhance product quality, and reduce total costs.

Compete with your supplier. This approach is a form of competition in which the organization does not cut ties with the supplier. Instead, larger retail players and food distributors sell their own private label products that compete with the brands of their suppliers, which helps maintain control over price hikes and prevents supply chain manipulation.

Bring value to your supplier team. If your organization has plans to expand into new geographies or markets that your suppliers have previously tried to penetrate, you can offer to help them in exchange for price concessions. This may help your organization gain the upper hand in price negotiations.

Strategic partnership agreement. Depending on the amount of product your organization requires, you can control your suppliers’ bargaining power by negotiating and signing an exclusivity agreement. An exclusivity agreement mitigates the risk of a supplier selling directly to customers and competing with you. It also prevents a supplier from selling to your competitor to reduce your margins.

Strategically implementing one or many of the above-listed practices can greatly impact your business’s ability to serve customers while maintaining cost efficiency. Additionally, proactively analyzing and simulating the impact of supply chain disruptions may reduce your response time when a situation actually arises without your decisions feeling rushed or uncertain.

It is often said that it is all about the experiences you create. Capitalizing on a better buying position with suppliers to protect your customers’ prices is akin to creating a fantastic firework show instead of a disastrous, unexpected explosion. Effective supply chain planning (SCP) keeps your suppliers in mind while balancing your customer’s needs, resulting in a pleasant, profitable, and resilient experience.