Supply Chain Trouble With Rising Inflation… What’s Next?

Businesses rely on supply chain management to reduce costs and extend their production cycle. Unfortunately, with the advent of the Covid-19 pandemic, many global companies have had to reconsider their supply chain strategy in the face of rising inflation, particularly those that depended solely on China for their raw or finished material needs.

Getting the end product from its original source to the customer involves a variety of people, resources and activities to ensure that the connection is maintained and companies can meet their contractual obligations in a timely manner.

Unfortunately, the transmission of the virus changed everything.

Compounding the disruption was that the majority of top Fortune 500 companies had established a significant presence in Wuhan, one of China’s largest industrial provinces that has unfortunately been hardest hit by the virus.

These developments, combined with the US-China trade war, presented unique hurdles to supply chains. Fearing restrictions, customers began stocking up on staples like toilet paper, in some cases months in advance, all in a single day, creating unnecessary and unprecedented demand.

What happens next?

A survey conducted by Ernst & Young LLP (EY US) in late 2020 on the impact on supply chains following the Corona crisis revealed three important things.

First, while there was a temporary disruption in the flow of finished goods due to multinational lockdowns, overall this had helped address and accelerate the issues already plaguing existing supply chains.

Businesses, particularly in the US, have reconsidered their strategies for increasing investment in supply chain-related technologies to make them more resilient. Companies in the life sciences sector reported a 71% increase in customer demand, while 97% of industrial and automotive products said they were negatively impacted.

Second, the survey found that supply chain visibility will be prioritized over the next three years by leveraging digital technologies and best-in-class human resource practices while keeping safety and health in mind.

Finally, as mentioned above, the future of supply chains will be all about digital automation and empowerment. Driverless forklifts, robots in warehouses and automated scheduling will be the norm by 2025. Accordingly, a supply chain model must be created that fits into this new digitally-centric plan.

The global chip shortage will remain?

A chip is a tiny translator, no larger than a quarter coin, made of silicon, which is found in many minerals on the earth’s surface. They are widely used in the automotive industry, in smartphones, computers and other electronic devices.

As a result of the pandemic, the demand for personal electronic items increased so much that the supply could not keep up with the demand. Recent outbreaks of Covid-19, particularly in Asia, have only exacerbated the global chip shortage.

Global chip production is a monopoly of just a handful of Asian and Pacific suppliers, and the impact of the outbreak is visible on them. Taiwan, said to be the center of the chip industry, was hit the hardest with nearly 2,000 workers in quarantine at King Yuan Electronics, cutting the company’s revenue by a third, the reported WSJ.

General Motors CFO Paul Jacobson expects that the rise in inflation due to the semiconductor shortage could add up to $3 billion to the company’s spending in the second half of 2021. Economists predict that inflation will become more likely as the shortage worsens a higher bulge.

With chips being the core of the US economy, the ongoing supply problems are sure to have repercussions in other parts of the world as debt issues and currency devaluations are badly affected.

Goldman Sachs says the shortfall will result in a kind of inflation tax that could cause prices of affected goods to rise by 3%, which in turn will increase the inflation rate by 0.4 percentage points by the end of 2021.

inflation and currency devaluation

For the majority of people, exchange rates do not matter as their daily life always revolves around the local currency. Only for trips abroad or occasional international transfers do these tariffs come into focus.

The strength or weakness of the underlying economy is the yardstick for determining the exchange rate. Any change in the interest rate has an underlying impact on the growth of the economy and the operators that run it.

Currency levels directly or indirectly determine the interest rate you can pay on your mortgage, the rate of return on an investment, or even the price at which you buy groceries from your local vendor.

A weak currency can lead to a loss of purchasing power in import-dependent countries. A 20% decline in the local currency can increase the import cost by 25% to return to the original price.

Effects of exchange rates on supply chains

There may be many influences that can affect the supply chain, but the two main areas to focus on are economic uncertainty and exchange rates.

Businesses must first understand that all supply chains are global. The Brexit decision is one such example that is sure to have an impact on the economy, with the possibility of higher manufacturing costs that may result from additional tariffs on EU-UK trade.

A company’s risk assessment plan should keep any exchange rate change at the forefront in order to stay one step ahead and understand its implications. One of the main problems exporters face when trading international payments is the sharp fluctuations in how the currency is bought and sold, which affect profit margins.

Another problem is that currency changes are adjusted for inflation and investment costs in one currency and earnings in another currency. By looking at each risk individually, you will understand how exchange rates can affect supply chains.

  • Portfolio Risks: Currency portfolio risks affect companies involved in international (cross-border) payments. This is because, by its very nature, a supply chain is vulnerable to exchange rate fluctuations.
  • Transaction Risks: This type of risk arises from the effect of time differences between the delivery of money and the contractual obligation. These risks are short term and easy to manage.
  • Structural Risk: This risk arises when incoming and outgoing cash flow reacts to currency fluctuations. This discrepancy is fundamental and therefore difficult to control.

Effects on international payments

The latest rude awakening about the importance of supply chain agility was revealed in March 2021, and the pandemic had nothing to do with it. The blockade of the Suez Canal brought supply chains to a standstill. In other words, global traders will have no control over what might happen next.

While digitization is a key aspect, one factor that is often overlooked in cross-border trade is the flow of money through international payments. Not only material goods got stuck on the container ship Ever Given, but also the working capital got into bottlenecks.

Successful shipments and on-time deliveries are key to unlocking international payments from one company to another. Although the Suez Canal incident was unique, payment delays and supply chain backlogs are nothing new.

Cash flow is an integral part of the supply chain and fortunately the pandemic has prompted many suppliers to accelerate their digital supply chain network and prompted customers to do the same.

View beyond the recreation horizon

When the first signs of a dangerous virus began to appear in late 2019, no one could have predicted the extent of economic devastation it would wreak. Supply chains, particularly those that relied on international trade, were hardest hit by the pandemic.

While many of the organizational risks in supply chains have been exposed by Covid-19, in many cases it has prompted companies to take a closer look and open up opportunities for innovation, growth and competition in the post-pandemic era.

Businesses have recognized the power of digital utility networks, enabling them to anticipate future unexpected changes and respond effectively to minimize their impact. In short, it has been shown that companies can be successful if they continue to develop in the future.

But aside from those operational and economic challenges, what would supply chains look like in a few years, for example? Despite the changes in 2020, the future of the supply chain looks no different than previously thought.

The future of supply chains lies in autonomy and digitization. Executives hope Covid-19 is a once-in-a-century event. However, hope is not a strategy, and ways to weather the next storm should be planned now if you want future disruptions to be turned into God-given opportunities.

Inflation article and permission to publish here provided by Olivia Alex. Originally written for Supply Chain Game Changer and published on June 24th, 2021.

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