Supply chains are “the first to feel the impact” of inflation and recessions and procurement managers must act now to protect businesses from oncoming shocks.
The Bank of England has forecasted the UK will fall into a recession by October while inflation hit 10.1% in July – the highest levels of inflation since February 1982, according to the Office for National Statistics.
Supply chains have already been bearing the brunt of cost increases, with supply leaders calling for reconfigurations of the energy market to protect businesses from soaring costs, with potential gas shortages threatening the viability of high energy industries this winter.
Accountancy firm KPMG estimates the UK will see a 5% fall in manufacturing next year due to the economic conditions.
David Jinks, head of consumer research at delivery firm ParcelHero told Supply Management: “The logistics and delivery industry is a key barometer of the nation’s economy. Already reeling from the twin impacts of Covid and Brexit, it will inevitably be hard-hit as consumer demand falls, and the demand for warehousing space and transport services declines.
“Supply chain and logistics operators work in a competitive market, providing high levels of customer service on tight profit margins. As manufacturers and retailers begin to pull in their horns, their supply chain providers are the first to feel the impact.”
However, it might not all be bad news. Ed Winterschladen, executive vice president Europe at Proxima, told SM: “The light in the darkness could well be found in supply chains. Businesses are rightly looking to the future, but this requires investment in talent and technology.
“It is difficult to beat inflation in today’s market, but it is possible to outperform the competition and emerge stronger. By eliminating waste and taking more care when it comes to relationships with suppliers, businesses can become more resilient and productive and look ahead to a better future.”
Here are six points procurement professionals should consider:
1. “Flawless execution” becomes supply chain’s primary mission
Paul Lord, senior director analyst with the Gartner Supply Chain practice, said supply chain officers should encourage their teams to implement efficency plans while remaining “focused on their critical role in fulfilling demand to capture margin”.
“Uncertain times require steady leadership from the chief supply chain officer, particularly to operating functions that are critical for ensuring product availability and service delivery, such as logistics and customer service.”
2. Manage overhead cost reductions
Most supply chains already operate with very little overhead costs. However, “it’s important to focus on maximising the ability of the supply chain to control inventory and optimise the cost of product supply,” Lord said.
“The anxiety and fear created by unfocused overhead scrutiny during these times creates the risk of distraction from the primary mission of operating effectively to fulfil demand and serve customers.”
3. Visibility
Winterschladen said economic downturns can bring opportunities to increase margins and get ahead of competitors, but warned this cannot be achieved without visibility.
“Having visibility over every penny in your budget, and ensuring it is well spent, will increase productivity and resilience and prove vital in weathering inflationary costs. In a volatile supply market, running towards cheaper options won’t necessarily deliver value – identifying waste and spending better will prove more effective than reducing costs in areas of essential spend.”
4. Increase local suppliers
Jinks said procurement teams should look to local suppliers to mitigate rising fuel costs where possible.
“Just as today, the recession of 2008 came on the back of a period of high fuel costs. While the main driver for change was the significantly reduced economic activities over the period, the impact of high fuel costs should not be overlooked. 10% of companies switched to local suppliers when possible, reflecting a desire to shorten product lead-times and reduce transportation costs.”
5. Learn from mistakes made following the 2008 financial crash
Jinks described how “indecision seemed to grip many companies, despite the escalating economic collapse” in 2008, pointing to research from the Chartered Institute of Logistics and Transport and the University of Bedfordshire which found between November 2008 and January 2009 39% of companies were undecided what action to take or whether to do anything at all, and a further 25% had decided to take no major action.
He said many companies – including Tesco and the Coop – are already reducing inventory and product lines, while other companies are streamlining supply chains and reducing waste in anticipation of recession.
6. Protect investment spending
While it might be tempting to make savings on projects which feel less time critical, Lord said chief supply chain officers should be protective about planned technology investments so they don’t fall behind competitors.
According to a survey by Gartner, manufacturers and retailers are most protective of spending on product innovation, talent development and technology investment for price analytics and operations automation. Meanwhile, service-centric companies are most protective of technology investments such as back-office automation and operational visibility for increased efficiency.
