Fighting inflation-driven supply chain challenges with digital technologies
Inflation and supply chain disruptions are intimately linked: inflation disrupts supply chains, and supply chain disruptions can lead to shortages that drive up prices and cause inflation. However, there is no one-size-fits-all solution to inflation-induced disruption. According to Gartner, while nearly one-quarter of manufacturers and retailers are responding to inflation and recession risk by reducing stocks, over 40 per cent are increasing inventory as a hedge against ongoing scarcity.
Accenture states that “in 2022, inflation and other disruptions have continued to challenge supply chains, and analysis shows there is an even stronger correlation now between supply chain disruptions and inflation than before the pandemic.” This vicious cycle is likely to continue, as the Reserve Bank’s November 2022 Monetary Statement shows headline CPI inflation was 7.3 per cent over the year ending in the September quarter, the highest rate in over three decades. While a slight decline is predicted in 2023, challenging weather conditions caused by the ongoing La Niña are expected to create additional supply disruptions that will affect costs and prices for a range of goods.
Impact of inflation on supply chains
The impact of inflation on supply chains is complex and far-reaching. In the first instance, the cost of all components of supply chains including materials, labour, energy, and transportation all increase. At the same time, rising prices also reduce consumer demand for many products and services, and rising interest rates increase the cost of working capital. In such an environment, “just-in-time” inventory models that rely on stable supply chains are no longer feasible.
To minimise the impact of inflationary pressures, it becomes necessary to carefully plan and optimise all components of a supply chain. By understanding consumer behaviour patterns, organisations can enable better demand planning and forecasting, to improve inventory optimisation and cash flow, and reduce pressure on working capital.
Leveraging technology for supply chain visibility
Critical insights can be gained with the aid of digital technologies, such as Enterprise Resource Planning (ERP) systems. ERP systems create a digital map of all supply chain components to help organisations easily spot vulnerabilities, and potentially reduce the impact of external factors such as transport issues, industrial action, natural disasters or conflict.
Having such end-to-end visibility enables manufacturers to identify issues with the supply chain promptly before it leads to inventory problems in the warehouse. For example, ERPs can pinpoint the location of products in real-time anywhere in the supply chain, which gives customers more accurate information when ordering and helps to reduce overstocking and waste.
ERP systems also enable CFOs to gain clear, real-time insights into key financial data, model future scenarios, control costs and predict revenues.
Optimising any large-scale supply chain is a challenging task. It is important to have detailed information on every component and its costs to determine where efficiencies can be gained. Having a diverse range of suppliers is also crucial, as it minimises the impacts of disruption to any particular component of a supply chain. Having detailed information on hand about product alternatives enables regular cost comparisons to be made, helping to ensure that the best value is obtained for each individual component of a supply chain.
None of these efficiency measures are viable without the detailed, real-time insights provided by an ERP system. When the ERP is integrated with a Product Lifecycle Management (PLM) system, companies will significantly reduce the effort, cost and time needed to take a new product to the market or make revisions to an existing product. PLM systems offer manufacturers full visibility of their product development and supply chain management processes helping drive product innovation.
Synchronised view of demand
Accurate demand forecasting is critical to optimising supply chain efficiencies. Underestimating demand can result in shortages that impact revenue, or higher costs as expedient measures are taken to boost supply. Overestimating can create excessive inventory that incurs storage costs and ties up capital. Good demand forecasting requires detailed real-time access to supply chain data which helps companies monitor production rates and identify bottlenecks. It is also necessary to have access to data on external forces such as weather and seasonality, that can change demand by volume or location, and enable the supply chain to respond optimally to these forces. Aggregating all available datasets across ERP and CRM systems, as well as external sources, gives organisations a more holistic and accurate picture of demand.
To maximise efficiency and guard against disruptions, manufacturers need real-time insights into every stage of a supply chain, from the gathering of raw materials to the packaging of the final product. They must be able to pinpoint the cost of every stage of manufacturing a product, identify any changes in supplier pricing as they happen to ensure the best value, and negotiate if required. They also need to be able to quickly mitigate any emerging shortfalls or bottlenecks that can disrupt manufacturing and create costly delays and unfulfilled orders.
Gaining this insight can be achieved by using a manufacturing execution system (MES), a software that connects and monitors all the machines on the factory floor and documents the process of transforming raw materials into finished goods. By enabling automated data capture from all machines, production lines and ancillary equipment, and by communicating this with ERP systems, MES can provide a real-time view of the state of the factory with visual controls and user-friendly, role-based interfaces that are essential to optimising procurement and mitigating disruptions.
Data and analytics for better pricing strategies
Achieving optimal pricing presents many challenges. Consumer pricing must obviously cover production costs (which requires accurate cost-tracking in the first place), but in most cases, consumer pricing must also be competitive and create a level of demand that makes production sustainable. It’s very difficult to properly understand this and make adjustments accordingly without the help of data analytics.
Data analytics can be used to price products more accurately and, in the case of consumer products, drive innovation in product sizing and packaging based on consumer affordability and intent to pay. Tracking sales metrics, customer reaction, inventory levels and competitors’ pricing can enable a manufacturer to optimise pricing, and identify opportunities for new products or new customer segments.
Automation can unlock productivity and efficiency
Even with the best tools in the world providing end-to-end supply chain visibility and in-depth data on all components of a supply chain, making intelligent sourcing decisions, effectively responding to demand, optimising procurement and setting prices can consume significant human resources.
Many aspects of these processes can be automated instead, freeing up valuable human resources for more strategic activities. Moving towards a digital supply chain can deliver greater predictability, which enables manufacturers to identify opportunities for optimisation with the click of a button. Automation essentially takes the sea of data generated throughout the supply chain and condenses this into clear, actionable insights, taking the heavy lifting out of the equation.
During difficult times, it can be tempting to cut back on as non-essential expenses, but investing in technologies that deliver greater insights into supply chains, enable optimisation, and increase resilience can often lead to positive returns.
The primary investment should be in tools that deliver greater visibility into all aspects of supply chains—you cannot optimise what you cannot measure. Once CEOs have access to in-depth data, they are better placed to understand the challenges in their supply chains; simplify and standardise internal processes; and then intelligently analyse their supply chains to improve, optimise, identify new opportunities and automate where appropriate.
Global Vice President – Pre Sales