How Supply Chain Planners Can Respond to Inflation and Recession Risk

Gartner shares this Q&A with Paul Lord, Senior Director Analyst with the Gartner Supply Chain practice, on how supply chain planners can deal with the challenges of high inflation and risk of recession.

High inflation is impacting many resources required to deliver products and services, according to research and advisory firm Gartner Inc.

A Gartner survey, conducted in May and June 2022 among 130 business executives, identified direct materials, third-party logistics services, and hourly operating labor as having the largest impact on margins and cashflow.

Rising resource prices pose multiple challenges and add complexity to the role of the supply chain planner. Gartner sat down with Paul Lord, Senior Director Analyst with the Gartner Supply Chain practice, to discuss the best approach to this situation.

Q: How are companies responding to inflation in these times?

A: Up until now, pricing increases have been the primary lever indicated by 95 per cent of manufacturers and retailers. In our May-June survey among CFOs and CEOs, more than half of these respondents reported satisfaction with margins with little or no need to adjust spending plans.

The responses from service-centric businesses are a bit less positive, with just over one-third reporting satisfactory margins, and the remainder preparing to trim overhead costs or discretionary spending. Nearly one-fifth of service-centric businesses have had to extend customer payment terms, and one-third are delaying payments to suppliers.

The signals are mixed regarding inventory plans: while nearly one-quarter of manufacturers and retailers are reducing stocks, over 40 per cent are increasing inventory as a hedge against ongoing scarcity. These are all business and financial decisions that must be enabled by rigorous planning scenario analysis.

In case you missed it: In 2022 retailers must understand the mechanics of inflation to stay viable

Q: How does high inflation impact the role of the supply chain planner, and what are the most important areas to focus?

A: The primary role of supply chain planning is to ensure the ability to supply products and services that fulfill demand. However, high inflation creates questions and uncertainty about margins in addition to the primary focus on demand and supply volume. This adds complexity to the forecasting and planning analysis required to support business decisions. There is greater need to collaborate with sourcing and procurement with regards to resource pricing and availability in addition to demand forecasting.

Q: What can supply chain planners do to offset the impacts of high inflation?

A: High inflation is like severe weather in that it cannot be controlled or reduced. The supply chain planner’s role is to recognise and adjust operating plans to this change in market conditions. For example, higher material prices and interest rates dramatically increase the cost of discretionary inventory. This might result in a change to smaller production quantities for better balance between capacity and working capital economics. If there is concern about a looming recession that would result in significant stock devaluation, the higher cost of faster transportation modes may be justified in some cases. One of the most important attributes for supply chain planning to emphasise is transparency and forward visibility of projected supply costs for informed business decisions.

Source: Gartner