Supply Chain Woes with Inflation Rising … What’s Next?


Companies rely on supply chain management to reduce costs and increase their production cycle. Sadly, with the advent of the Covid-19 pandemic, many global organizations had to rethink their supply chain strategy with inflation rising, especially those who depended solely on China for their requirements of raw or finished materials.

For getting the final product from its original source to the customer, there is an involvement of different persons, resources, and activities to ensure that the link does not break down and companies are able to fulfill their contractual obligations timely.

Unfortunately, the transmission of the virus changed everything.

The disruption was further aggravated by the fact that the majority of the leading Fortune 500 firms had established a significant presence in Wuhan, one of the biggest Chinese industrial provinces which unfortunately was hit hardest by the virus.

These developments, combined with the US-China trade war, found the supply chains experiencing unique hurdles. Customers began stocking up on staples, such as toilet paper, fearing restrictions, in some cases months in advance, all in a single day, thereby spiking an unnecessary and unprecedented demand.

What happens next?

A survey by Ernst & Young LLP (EY US) conducted at the end of 2020 to find out the impact on supply chains post-covid revealed three key things.

First, though there was a temporary disruption in the flow of finished goods because of multinational lockdowns, it had actually helped overall to address and accelerate the issues which were already plaguing the existing supply chains. 

Enterprises, especially in the US, rethought their strategies to increase investment in technologies pertaining to supply chains in order to make them more resilient. Companies in the life science sector reported a 71% increase in customer demand, while 97% of industrial and automotive products said they were affected negatively.

Secondly, the survey revealed that the visibility of supply chains is getting priority over the next three years, using digital technologies and top workforce measures and keeping safety and health in mind at the same time.

Lastly, as highlighted above, the future of supply chains will be all about digital automation and enablement. Driverless forklifts, robots in warehouses, and automated planning will be the rule by the year 2025. Accordingly, a supply chain model will have to be created to fit into this new digital focussed plan.

The global chip shortage is here to stay?

A chip is a tiny translator no bigger than a size of a quarter coin, made from silicon, which is found in many minerals on the surface of the earth. They are extensively used in the automobile industry, smartphones, computers, and other electronic devices.

As a result of the pandemic, the increase in the demand for personal electronic items surged to such an extent that supply has been unable to keep up pace with demand. The latest outbreaks of Covid-19, especially in Asia, have only exacerbated the global chip shortage further.

Global chip production is a monopoly of just a handful of Asian and Pacific suppliers, and the effect of the outbreak is visible in them. Taiwan, which is said to be the hub of the chip industry, has been the worst affected with almost 2000 workers in quarantine at King Yuan Electronics, which has cut the revenue of the company by a third, reported the WSJ.

Paul Jacobson, CFO of General Motors, expects that the rise in inflation due to the shortage of semiconductors could increase its expenses by as much as $3 billion in the second half of 2021. Economists predict that as the shortage worsens, inflation is likely to see a higher bump.

Since chips are the core of the economy in the US, the ongoing supply issues are certain to have a ripple effect in other parts of the world, as debt issues and currency devaluations are largely impacted.

Goldman Sachs says that the shortfall will translate into a sort of inflation tax which could see prices for affected goods rising by 3% which in turn will boost the inflation rate by 0.4 percentage points through the rest of 2021.

Inflation and currency depreciation

For a majority of people, exchange rates hold no meaning as their day-to-day life is always revolving around the local currency. Only during foreign travel or the occasional international remittance do these rates come into focus.

The strength or weakness of the underlying economy is the yardstick to determine the currency exchange rate. Any change in the interest rate will have an underlying effect on the growth of the economy and the operators who run it.

Currency levels, either directly or indirectly, determine the interest rate you may pay on your mortgage, returns on any investment, or even the price at which you buy groceries from your local vendor.

A weak currency, for countries that are dependent on imports, can result in a decline in their purchasing power. A drop of 20% in domestic currency can increase import costs by 25% to get back to the point of original pricing.

Impact of exchange rates on supply chains

There may be many influences that can affect the supply chain but the two most important areas to focus on are economic uncertainty and exchange rate.

Businesses first need to understand that all the supply chains are global.The Brexit decision is one such example that is certain to have an effect on the economy with possibility of higher manufacturing costs which may arise to any additional tariffs on trade between the EU and UK.

A business’s risk assessment plan should keep any exchange rate shift at the forefront in order to stay a step ahead and understand its impact. One of the main issues exporters face when dealing in international payments is the strong changes in the buying and selling the currency which affects profit margins.

Another problem faced is that currency changes are adjusted with inflation and costs of investment in a type of currency and revenues in some other. If you look at each risk individually, you will understand how exchange rates can affect supply chains.

  • Portfolio risks: Currency portfolio risks will affect businesses dealing with international (cross-border) payments. This is because the very nature of a supply chain makes it vulnerable to exchange rate fluctuations.
  • Transaction risks: This type of risk flows from the effect of time differences between cash supply and contractual commitment. These risks are short-term and easy to manage.
  • Structural risks: This risk happens when the cash flow coming in and going out reacts to currency fluctuations. This mismatch is fundamental, and therefore hard to keep control of.

Impact on international payments

The latest rude awakening about the importance of the agility of the supply chain was laid bare in March 2021, and the pandemic had nothing to do with it. The blockage of the Suez Canal caused supply chains to come to a grinding halt. In other words, global traders will have no control on what could happen next.

While digitalization is a key aspect, one factor, often overlooked in cross-border trade, is the flow of funds through international payments. It was not only physical goods which got stuck on the container ship Ever Given, but the working capital which got bottlenecked as well.

Successful shipments and timely deliveries are the keys to unlocking international payments from one business to another. So though the Suez Canal incident was one of a kind, payment delays and supply chain backlogs are nothing new.

Cash flow forms an inherent part of the supply chain, and luckily the pandemic made many suppliers accelerate their digital supply chain network and prompted the clients to do likewise.

Looking beyond the recovery horizon

When the first signs of a dangerous virus surfaced in the fag end of 2019, nobody could foresee the extent of economic devastation it would cause. The hardest hit, in the pandemic, where supply chains, especially those which relied on international trade.

While many of the organizational risks in supply chains were laid bare by Covid-19, in many cases it has made companies take a harder look and opened up opportunities for innovation, growth, and providing competition in the post-pandemic era.

Companies have realized the power of digital supply networks to enable them to anticipate and respond effectively to any future unexpected changes to minimize their impact. In short, it has proved that if companies move forward in the future they can thrive.

But beyond these operational and economic challenges how would the supply chains look like,say, a few years from now? Despite the shifts experienced in 2020, the supply chain future does not look different from what was previously imagined.

The future of supply chains lies in autonomy and digitalization. Executives are hoping that the Covid-19 is a once-in-a-century event. That said, hope is not a strategy and ways to weather the next storm should be planned now if you want future disruptions converted into godsent opportunities.

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