High inflation is impacting many resources required to deliver products and services. 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. We sat down with Paul Lord, Senior Director Analyst with the Gartner Supply Chain practice, to discuss the best approach to this situation.
Members of the media who would like to speak with Paul further on this issue can contact Sarah Hippold to schedule an interview.
Q: How are companies responding to inflation in these times?
A: Up until now, pricing increases have been the primary lever indicated by 95% 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% 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.
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 recognize 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 emphasize is transparency and forward visibility of projected supply costs for informed business decisions.
If you are a member of the media who would like to speak further on this topic with Paul, please contact Sarah Hippold at sarah.hippold@gartner.com. Members of the media can reference this material in their articles with proper attribution to Gartner.
More information on this topic will be provided in the complimentary webinar “The 3 Performance Lenses for Balancing Supply Chain Cash Flow and Cost”.