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How Supply Chains Can Hedge Against Inflation

Top supply chain leaders already have plenty of work on their hands—74 percent have altered the size and number of locations in their supply chain network, a recent survey from Gartner said.

But with global inflation continuing to rise and recession concerns still top of mind across industries, expansion and contraction aren’t the only priorities when managing the supply chain.

Gartner said that more than 40 percent of companies are increasing inventory to mitigate the ongoing product scarcity and inflation.

H&M, Inditex, Nike, Adidas and TJX are just some of the companies that have said as much in recent earnings reports as they seek to fulfill demand, even when people aren’t spending as freely as they were a year ago.

But it is going to take a bigger effort than getting more inventory on hand to shield against macroeconomic headwinds, especially if the global economy gets worse and retailers end up with a glut of excess, unsold stock.

In a recent report, Gartner analysts identified four leadership priorities for chief supply chain officers (CSCOs) in manufacturing and retail to respond to high inflation and recession risks.

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These priorities include: positioning flawless execution as the supply chain’s primary mission; letting the planning team rise to the challenge; managing cost reduction carefully; and protecting investment spending.

“While CSCOs primarily focus on developing strategy and enabling organizational capabilities, the economic headwinds they experience these days call for a steadying influence amid reactive stakeholder tendencies, such as defunding strategic investments and slashing overhead costs,” said Paul Lord, senior director analyst with Gartner’s supply chain practice.

Execution is paramount

The study indicates that most supply chain organizations have already developed plans to improve efficiency to offset a normal inflation rate. However, CSCOs are now tasked with going above and beyond to encourage their teams to implement these plans while remaining focused on their critical role in fulfilling demand to capture margin.

While executing flawlessly is itself a tough ask of employees in more strenuous supply chain conditions, proper preparation can put companies ahead of the curve by the holiday season when everyone is struggling to ship massive order volumes.

“Uncertain times require steady leadership from the CSCO, particularly to operating functions that are critical for ensuring product availability and service delivery, such as logistics and customer service,” Lord said.

Let planning teams do the planning

CSCOs have to have a little more faith in their planners and buyers. When an economy goes sour, execs often have to resort to working with less. For example, higher interest rates and material prices should prompt reductions in production sizes, where possible, to rebalance capacity and working capital economics.

This represents a good opportunity for CSCOs to evaluate and develop their planning teams’ capabilities and processes, and determine where their skills fit within the wider goals of the company.

Businesses are responding to high inflation with actions to manage margin and cash within sales and operations planning (S&OP), in particular.

Findings from a Gartner survey conducted in May and June 2022 among 130 business executives indicated that 57 percent of manufacturing and retail companies have been able to maintain margins with pricing actions and are making little or no changes to their spending plans.

Some companies have fared better with this than others, with H&M, Steve Madden, Crocs and Skechers all seeing double-digit sales growth in the quarter despite continued price increases.

Service-centric business models (including health care and information services) are having more difficulty than their retail and manufacturing counterparts in raising prices to maintain margins. As many as 17 percent of these execs have extended longer payment terms to their customers.

Carefully manage cost reductions

While companies must take more initiative to maintain their margins, they still have to be mindful of how they go about cutting costs.

Most supply chains already operate with very few overhead costs, but it’s still a top priority for C-suite execs to establish a periodic checkup to gather reliable information on spending.

Gartner also suggests more companies cut costs and improve efficiency by consolidating roles. CSCOs can, for example, consolidate functions such as site quality, safety, environmental compliance maintenance and continuous improvement into fewer teams with improved focus and alignment.

“It’s important to focus on maximizing the ability of the supply chain to control inventory and optimize the cost of product supply,” Lord said. “The anxiety and fear created by unfocused overhead scrutiny during these times creates the risk of distraction from the primary mission of operating effectively to fulfill demand and serve customers.”

Protect investment spending

The final suggestion may seem contradictory given the focus on company-wide cost reduction, but companies can’t just drop every investment they have and give up on the future, even if funds are tight.

One learning from the last period of economic downturn was that growth leaders reintroduced capital expenditure after a recession much faster than their peers. That’s why CSCOs should be protective about their planned technology investments to not fall behind their competitors.

According to the Gartner survey, manufacturers and retailers are most protective of spending on product innovation, talent development and technology investment for price analytics and operations automation. Service-centric companies are most protective of technology investments such as back-office automation and operational visibility for increased efficiency.