Market Perspective

Inflation, Shortages and How Supply Chain Transformation Could Help

June 24, 2021
The C2FO Team

The economic ripple effects of the pandemic are far-reaching. As the prices and production of products change, plans are in place to replenish supplies, eliminate shortages and ease inflationary spikes.

Businesses and supply chains emerging from the pandemic are still experiencing the steep price of last year’s upheaval to economies and supply chains. 

What began in 2020 as hyperlocal shortages of ventilators, N95 masks and other PPE (not to mention household necessities) has now expanded globally to impact the availability of products that many of us rely on daily. And what we’re learning now is that corrective supply chain solutions will likely not only require more time to implement than the pandemic’s duration, they’ll also change how business gets done indefinitely.

With supplies low and demand high, prices can only rise — and faster than one might expect.

According to the US Bureau of Labor Statistics’ June 2021 mid-month report and the US Inflation Calculator, the year-over-year inflation rate was 5%, the highest since 2006. For comparison, the annual June year-over-year inflation rate was 2% or less for most of the past 15 years. On June 16, the US Federal Reserve raised its inflation rate forecast for 2021 to 3.4% and indicated there could be two interest rate hikes in 2023. While officials for the Fed have said that the effect of inflation on the economy should dissipate over time, the full, long-term impact remains to be seen.

So, if you’re feeling the pinch at home or work, you’re not alone. Rising prices for gas, groceries, building materials and cars, especially, reflect the emergence from the lengthy pandemic period when consumption was low and production stalled. For instance, 2020 US auto production was down by as much as 19%, according to Industry Week. And now automakers’ production remains sluggish due to shortages of critical parts like semiconductors and batteries, and dealers have scant inventory to satisfy consumers’ pent-up demand.

President Biden’s proposal for transforming global supply chains

To jumpstart a supply chain correction, the Biden Administration recently announced initiatives backed by spending, with an additional purpose of decreasing US dependence on critical, foreign-made products. In addition to the batteries and semiconductors that enable everything from phones to airplanes, the White House also cited prescription drug ingredients and Earth’s highly sought minerals as materials that could run the risk of being in short supply.

Here’s what the Biden Administration recently proposed:

Partner with allies and industry players to address semiconductor shortages.

Semiconductor shortages are perhaps the supply chain issue that’s most consequential for consumers; they’ve wreaked havoc on the automotive and aerospace industries, among others.

Following a down 2020 production year, many automakers have shuttered plants this year due to scarce supplies of chips and the ever-increasing reliance on them for braking, navigation and safety features. To alleviate the broader shortage issue, which also affects the production of computers, cameras and appliances, the Biden Administration proposes increasing engagement with allies — notably Japan and the Republic of Korea — to promote greater production and fair chip allocations. Ramping up communications and data sharing among chip developers, producers and end-users is also expected to help.

Serve an end-to-end domestic supply chain for advanced batteries.

Aimed at supporting the production of high-use, daily products like phones, computers and cars, this effort would range from increased production of the lithium batteries that power our devices (and strike fear in us when charging levels are low) to rethinking how energy is stored and stockpiled. With an environmentally friendly focus, the federal Department of Energy would create a national battery blueprint by collaborating with industry experts through roundtable sessions, and later deploy loans and investments to spur battery production and storage facility build-outs. 

Support domestic production of critical medicines.

This would involve a public-private partnership aimed at “bringing back home” the manufacture of essential medications, starting with between 50 to 100 products identified as essential

Many prescription drugs or their ingredients are produced in China and India. The Washington Post reported in 2019 that 80% of drugs’ active ingredients and 40% of finished generic drugs used in the US are manufactured overseas. While those practices enable cheaper generic drug pricing, they also fuel a dependency of sorts as consumers contend with inflationary prices of other goods. This significantly impacts fixed-income households and the elderly, who often earn minuscule returns on their savings. Recent proposals suggest that an initial $60 million allocation from the American Rescue Plan can increase domestic production, reducing reliance on overseas producers, providing better access to critical medications and mitigating risks to national security.

Invest in sustainable domestic and international production and processing of critical minerals.

Working collaboratively, a mix of private firms and governmental agencies would safely, responsibly and expeditiously mine natural resources while respecting their origins and surroundings for the near and long term. Grants, loans and a $3 billion loan guarantee pool would help scale proven R&D projects, and increase production at known sites.

Reality and the silver lining

While these plans bode well for today’s challenges, the solutions may be years in the making.

Consider:

  • China’s dominance in manufacturing has occurred over 40 years and is largely due to other countries’ push to outsource their own production in favor of savings.
  • Automakers don’t expect to reach a level of normal supply and demand until at least 2022.
  • New chip-making plants take years to develop. For example, an Arizona facility announced in 2020 won’t begin production until 2024.
  • Battery production can take a similar amount of time and minerals requiring excavation have their own complexities.

On the bright side, though, all of the investment in research and production creates job opportunities for direct and indirect suppliers, too. For example, Tesla’s under-construction Gigafactory near Austin, Texas, will measure up to five million square feet and create an estimated 5,000 new jobs. Not only will that mean batteries for millions of automobiles, but also for the affiliated parts suppliers and the contractors who build the facility.

What companies can do now

If your business serves one of the industries affected by inflation and supply chain shortages, you may be in a position to benefit if you can access the working capital you’ll need. Getting a grip on your cash conversion cycle with cash flow-enhancing tools like early payments through C2FO can help. Fast, low-cost capital can enable your company to lock in additional inventory and materials before prices climb even higher.

A good first step is to assess your capacity, financial or otherwise, to grow your business during a year of shortages and rising prices. 

Consider:

  • Can you currently serve customer needs as a manufacturer, distributor, subcontractor or other supply chain partner?
  • Will the effort require additional hiring or training, and is that already a challenge?
  • Will there be capital expenditures, ranging from new production equipment to increased inventory to delivery vehicles?
  • Will these investments have an ongoing return for your company beyond 24 months from now, when the situation is expected to have improved?

If the answers are yes, determine how you’ll source the working capital to secure raw materials — from components to packaging — before those prices rise and potentially negate some of the anticipated benefits. As a recent example, when COVID-19 vaccine production ramped up early this year, the providers of vials made similar assessments. 

In conclusion

Though immeasurably painful, the pandemic has inspired new supply chain thinking and actions designed to address the economic effects and mitigate a recurrence. 

To that end, working capital can be a major force that enables an economic cycle of research, discovery and production, and C2FO can serve as a connector. 

Want to take control of your cash flow?

Early payment through C2FO can help.

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