Rising Inflation: Understanding the Supply Chain Impact

For the past two years, companies have had to overcome numerous types of supply chain disruption arising from the pandemic – and the challenges are set to continue, not least because of the threat posed by rising inflation.

This article originally appeared at TreasuryToday.com. 

Today, supply chain disruption and rising inflation are effectively driving each other, says Andrew Burns, SVP EMEA at working capital solutions provider C2FO. “Obviously, supply chain disruption causes restrictions on goods and the timing of goods, and costs go up,” he says. “That fuels inflation, which then itself fuels increased costs and restricted supply.”

As Burns observes, this is a damaging situation for supply chains. “Ultimately, what you’ve got is rising costs going up through the supply chain to the buyers, who then have to consider whether to pass this on to customers – which is the worst thing to do really, because it then makes inflation much more structural.”

For economists, says Burns, a key question is whether or not the inflation arising in today’s market is here to stay. If the current inflation is temporary, the impact on wages, supply chains, organisations and consumers will be less severe. If, however, inflation becomes more ‘sticky’, it will have a lasting impact on core services such as energy and food prices, locking in higher prices and exacerbating supply chain disruption.

Breaking down silos

As companies look for ways to overcome supply chain challenges, internal silos can present a real obstacle. An article published last year by McKinsey cited the example of a company that stockpiled steel from various suppliers, expecting prices to rise further. “However, because procurement did not coordinate with the supply-chain team, the warehouses were inundated with so much steel that it had to be kept outdoors,” notes the article. The result: “a pile of rusty steel – and a bleeding balance sheet.”

During the pandemic, says Burns, many companies have spent time working to remove internal silos so that they can coordinate internally more effectively – an approach that is now helping to offset some of the disruption brought by inflation. He adds, “When you put different people in a room together, it allows for innovative ideas to be nurtured. That’s where I’ve seen companies be the most successful in reacting to these black swan events.”

Also important, says Burns, is that this collaboration should be directed towards helping the company’s suppliers: “A lot of organisations feel they’ve got a good handle on their more strategic suppliers – but when you deal with massive supply chains, with tens of thousands of suppliers, there is so much risk building up in the supply chain that it’s difficult to see and judge the impact of disruption.” Likewise, says Burns, collaborating with suppliers can help to mitigate the impact of inflation and rising costs.

Supply chain sustainability

Inflation is not the only challenge companies are facing in today’s market. As the focus on sustainability continues to grow, Burns notes that in the context of supply chains, this can mean both ensuring the continuity of supply, and building an environmentally friendly sourcing and supply chain. “Increasingly, ESG is a major priority for organisations, and we’re seeing a huge shift towards making sure suppliers have green credibility,” he adds.

Uncertainty about energy supply arising from the Russia-Ukraine war is also prompting companies to review their energy sources, with a focus on making sure future access to energy is environmentally friendly. “I think we’ll see much greater investment in green sources in order to prevent these kinds of shocks and help companies be more sustainable – not just in terms of supply, but also in their green credentials,” Burns notes.

Supporting flexible liquidity

In the current environment, Burns says, liquidity “is absolutely key for suppliers” when it comes to purchasing the goods they need to do business on a timely basis and at an affordable cost. However, he argues that existing tools such as supply chain finance and access to credit lack the flexibility companies need to provide liquidity for all their suppliers.

“In a supply chain finance programme, banks buy receivables from suppliers, which requires a lot of Know Your Customer (KYC) and anti-money laundering documentation,” he explains. “So you can’t suddenly expand your supply chain finance tool to tens of thousands of suppliers. And if you’re looking at debt, there’s a lot of regulation, and a lot of time and costs are involved in the documentation, which means it isn’t flexible enough to react to business needs.”

Offering a different approach, C2FO provides a single platform that suppliers of all sizes – not just the largest or most strategic – can use to accelerate invoices that have been approved by their customers in return for a small discount that is typically cheaper than their alternative cost of funding. As Burns explains, suppliers can access liquidity without having to work through all the documentation required for debt and SCF – “giving everybody the flexibility they need to react in the short term.” Procurement teams also face challenges when rolling out programs due to resource constraints – an issue that Burns says C2FO has addressed by taking ownership of engaging and educating suppliers through hundreds of supplier support representatives.

In today’s environment, says Burns, larger organisations with access to liquidity are increasingly looking to use that liquidity on a short-term basis to support their suppliers. “Suppliers can buy goods quicker and purchase more stock, which then prevents costs from being driven up to the buyer,” he says. “Everybody benefits – you’re strengthening your supply chain by reducing the risk built up in your suppliers, and you’re preventing inflation from seriously impacting the organisation.”

In summary, the prospect of rising inflation poses a significant challenge for companies around the world – but there is much that companies can do to address this issue, from breaking down internal silos to adopting a more flexible approach to liquidity.