Mitigating inflation’s impact across your value chain

This is an excerpt of the original article. It was written for the March-April 2022 edition of Supply Chain Management Review. The full article is available to current subscribers.

March-April 2022

Yesterday, I hosted a webinar on the steps supply chain leaders are taking to redesign their supply chains to cope with this period of unprecedented demand. Earlier last month, I attended the Manifest conference in Las Vegas. The exhibitors featured a lineup of supply chain startups while the attendee list was dominated by venture capital firms looking to get in on the action in our booming industry. This morning, one of the lead news stories is about another disruption threatening to bring global supply chains to a halt:

Browse this issue archive.

Already a subscriber? Access full edition now.

Need Help?

Contact customer service

847-559-7581   More options

Not a subscriber? Start your magazine subscription.

Inflation awoke from its slumber in 2021, as the US Producer Price Index quadrupled relative to the preceding decade. Inflation takes two forms: cost-pull inflation, driven by higher input prices; and inflation that occurs when demand persistently outpaces supply. Cost-pull inflation is currently evident across global supply chains in the rising cost of everything from raw materials (e.g., metals +26%, wheat +50%), to energy (+110%), to transportation (transpacific container +300%, air freight +50%, OTR freight +20%) and on through to labor, where companies must compete even for “unskilled” labor in many markets.

Unabated, inflation could depreciate currencies to further erode international purchasing power. Even if overall costs level off, unexpected price spikes seem likely to persist for certain essential items, particularly if supply is disrupted by unanticipated events.

There is no magic wand to make inflation disappear, but you can take decisive steps to safeguard your company’s operating margins. In fact, if you know where to look you can find profit-protection opportunities across your supply chain.

A classic example is “trimming the tail” on your product portfolio by eliminating SKUs that are not pulling their weight in terms of P&L, volume contribution and customer impacts. You can then use your streamlined portfolio and consolidated input volumes to gain traction with suppliers (e.g., reducing the number of beverage flavors within a brand allows a company to place larger orders on volumes for the remaining SKUs). You can expand on that approach by systematically focusing your capital, workforce and technology resources on high-margin, high-velocity products and brands with differentiated value propositions in proven growth markets.

Flexibility in product specifications and formulations is an oft-overlooked opportunity to preserve profits. You may be able to strip fairly significant costs out of your operations by simplifying product designs, such as reducing the number of parts, or by substituting materials that have little or no impact to consumers, such as using lower-cost frying oil in potato chip production.

Finally, inflation is a sharp prompt to actively experiment with pricing. Companies often enjoy far more latitude than they realize in certain parts of their product portfolios, and as a rule you can more easily pass rising costs along to some customers than to others. Scan your portfolio and customer base for instances where you have the relative leverage to strategically raise prices.

Thinking more broadly, the current environment is a perfect time to redefine external relationships via strategic sourcing and exploring joint venture or co-investment partnerships with your suppliers.

Cooperation versus competition

External approaches may run counter to first instincts. As costs rise, you could slip into a law of the jungle mindset where you see yourself pitted against suppliers and customers alike in a fight for survival. But some of the most impactful cost-containment strategies are achieved via cooperation rather than competition. For obvious reasons, value chain coordination is an arena where supply chain leaders can make particularly significant contributions.

SC
MR