{"id":11055,"date":"2023-03-09T09:08:23","date_gmt":"2023-03-09T17:08:23","guid":{"rendered":"https:\/\/www.qad.com\/blog\/?p=11055"},"modified":"2023-03-09T10:01:30","modified_gmt":"2023-03-09T18:01:30","slug":"how-does-inflation-affect-supply-chain-profitability","status":"publish","type":"post","link":"https:\/\/www.qad.com\/blog\/2023\/03\/how-does-inflation-affect-supply-chain-profitability","title":{"rendered":"How Does Inflation Affect Supply Chain Profitability?"},"content":{"rendered":"

[vc_row][vc_column][vc_single_image image=”11058″ img_size=”full”][vc_column_text]The COVID-19 pandemic exposed vulnerabilities in supply chains around the world and the dust has never settled. Positive cases have been on a downward trend but supply chain disruption shows no sign of slowing down. Instead, geopolitical, inflationary and environmental forces have created new challenges for manufacturers and their supply chain partners.<\/span><\/p>\n

Continual disruption is now the new normal, and it\u2019s weighing on profitability and making it difficult for many companies to maintain lean, agile operations. Supply chain planning is more important today than ever before and there\u2019s good news: Manufacturers have options for mitigating global supply chain risk and keeping costs in check.<\/span><\/p>\n

A recent QAD webinar discusses inflationary pressure on supply chains and scenarios for minimizing the financial impact of supply chain volatility.<\/span><\/p>\n

How Have Global Supply Chains Changed Since the Pandemic?<\/span><\/h2>\n

Before the pandemic, supply chains were predictable. Manufacturers had the flexibility to search for the lowest possible cost unit and could afford to run lean supply chains. Most supply chains ran like well-oiled machines.<\/span><\/p>\n

Everything changed when the pandemic began and virtually no enterprise was left untouched. Only <\/span>2%<\/span><\/a> of companies felt completely prepared for the pandemic and <\/span>57%<\/span><\/a> reported serious disruption in a recent survey. Automotive and industrial product companies were among the hardest hit.<\/span><\/p>\n

Another <\/span>survey<\/span><\/a> found that the pandemic prompted many companies to move up their timelines for adopting digital technologies by three to four years. Companies with a high level of digital maturity were better prepared for pandemic-related disruption and the digitization of supply chain interactions has become a major focus.<\/span><\/p>\n

Continual Supply Chain Disruption is Here to Stay<\/span><\/h2>\n

Who could have imagined that the level of supply chain disruption experienced during the pandemic was just the beginning? Russia\u2019s invasion of Ukraine sparked a major energy crisis in Europe, environmental disasters and pandemic lockdowns have continued to disrupt transport and supply chains, raw material costs and inputs are on the rise in many parts of the world and inflation is creating challenges for end consumers and companies alike.<\/span><\/p>\n

\u201cWhen manufacturers planned for 2022, they did not foresee that energy prices would skyrocket by 40% in Europe and 23% in the US and that inflation would run at 8-10%, depending on the region.\u201d<\/span><\/p>\n

The cost of doing business isn\u2019t what it once was, but companies often feel their hands are tied. Often manufacturers are locked into long-term contracts and working on fixed costs and revenue, yet material, transportation and energy costs continue to climb.<\/span><\/p>\n

How Are Businesses Managing the Effect of High Inflation on Profitability?<\/span><\/h2>\n

For many, the answer is simple: raise prices and pass on some of those cost increases. This approach sounds good, in theory, but it isn\u2019t without drawbacks \u2013 especially if accurate financial data is lacking.<\/span><\/p>\n

Nobody ever wants to raise sales prices arbitrarily and hope for the best, but that\u2019s often what happens when leaders are forced to estimate the financial impact of high inflation and supply chain volatility. Before raising prices, the organization should know just how high they need to go and whether the market can withstand the increase or if demand will suffer.<\/span><\/p>\n

In some cases, companies may try to fight inflationary pressure with a focus on higher-margin products, cutting service levels for lead time or quality or changing suppliers, carriers and outsourced service providers. Some businesses may even be forced to operate at a loss.<\/span><\/p>\n

There\u2019s no one-size-fits-all approach to high inflation and it isn\u2019t uncommon for a company to pull more than one cost-cutting lever. Choosing the right strategy is critical, however, because the wrong choice could cost your business market share, good relationships with consumers and supply partners, and profitability in the long run.\u00a0<\/span><\/p>\n

Why Supply Chain Visibility is Key for Supply Chain Agility<\/span><\/h2>\n

If the pandemic and high-inflation market have taught us anything, it\u2019s the importance of being able to make smart business decisions fast. Agile supply chains enable manufacturers to approach unpredictability with speed and flexibility. They can react to sudden changes in supply and demand, adjust prices and inventory levels in real time and work closely with supply partners throughout the value chain to mitigate risk. None of this is possible without a high level of supply chain visibility.<\/span><\/p>\n

\u201cAs soon as a change in cost, capacity, demand or supply is detected, a planner needs to determine precisely how the disruption will impact the business objectives.\u201d<\/span><\/p>\n

That means looking at the right metrics. Traditionally (pre-pandemic), supply chain decisions were influenced exclusively on volume-driven key performance indicators (KPIs), such as:<\/span><\/p>\n