Why Everyone Was Wrong on Inflation: A Closer Look at Supply Chains

There are larger problems with the supply chain than economists initially realized, according to new research. There are current studies suggesting the global supply chain happenings may be misunderstood. Inflation started to rise in 2021 and was largely thought to be temporary. Reopening economies and challenges in supply chains due to the pandemic meant there were more downfalls than initially predicted.

It has been 40 years since we have seen inflation at this rate. The cost of everything is currently rising and affecting everyone’s living situation, causing business leaders to make rapid changes. They are changing the way they forecast demand for products and plan resources such as cash flow and inventory. The ways they used that were once reliable are quickly changing as the rates of inflation rise.

Less Disposable Income

With the rising prices consumers have less money to spend, there is a shrinking demand for services and goods. Mortgages, food, and gas prices leave consumers with no wiggle room in their expenditures. For business, this means there needs to be better forecasting, demand planning, and predicting consumer behaviors. This will be a driving force behind inventory management, transportation, and manufacturing.

Research of external signals for consumer trends and real-time indicators of market leaders needs to be performed on a regular basis.

Inflation Drives Cost of Labor, Materials, and Energy

The length of supply chains and the cost of each part of this chain add to inflation, creating the perfect storm. Materials become hard to get and expensive and shipping times lengthen. With the Great Resignation driving labor costs up there seems to be no end in sight.

Federal Reserve Increases Interest to Combat Inflation

Optimizing working capital through close monitoring to create buffers is key. Businesses need cash flow and borrowing cuts into the bottom line. Because of this, companies need to align financing with department disciplines. They also need to record transactions on digital platforms to facilitate the sharing of data. They will also need to have external networks and data sources.

Rapid Changes

Due to the dynamics of inflation, rapid changes are happening. Companies that are in touch with real-time cash will need to be agile and predictive as the economy goes through rapid changes. The pandemic created a myriad of supply chain disruptions and changes, and it will take some years for the dust to settle around this.

Companies that can plan for the different economic turns will be better able to handle the likely changes that there will be in the future.

Sources:

3 Major Impacts Of Inflation On Global Supply Chains (forbes.com)