A short guide to what got us all here, what’s next and what you can do
Inflation has been in the news a lot recently, and the dramatic jumps in CPI rates are impacting economies across the globe. This year in Australia, the inflation rate rose above the target rate of 2 – 3% for the first time since 2011 ((1)), and the Reserve Bank of Australia is predicting an overall inflation rate of around 7.75% for 2022 ((2)) – a significant increase on the 2.86% recorded for the 2021 calendar year ((1)).
An inflation “double whammy”
Our readers will be well aware that one of the primary drivers behind climbing inflation is energy prices, which have exhibited unprecedented volatility in recent times. The fluctuations first caused by the labour shortages and lockdowns associated with the COVID19 pandemic have now been considerably exacerbated by the current conflict in Eastern Europe.
While oil prices peaked in March 2022 ((3)), the monthly fuel energy index published by Statista had, by June 2022 grown sixfold since mid-2020 and continues to rise((4)) .
The spiraling cost of energy – contributing to cost push inflation driven by higher costs of logistics and materials such as copper and steel – inevitably cascades through the entire supply chain. Counterintuitively, the current cost push inflation does not appear to be linked to the cost of raw materials such as base metals. The prices of such commodities peaked in March 2022 and have since been waning((5)). However, that is not good news for industries that rely on lengthy supply chains, as the declining demand for raw materials is the result of factories falling idle or dropping production due to the unavailability or expense of energy.
And that is only half the story. The wave of inflation currently sweeping the world is something of a “double whammy”, as it is also characterised by demand pull inflation caused by the release of pent-up demand over the period of the pandemic. That means that inventories are falling as retailers struggle to meet demand, while supply chain issues and costs are stifling production.
As we noted in our white paper on Sustainable Procurement((6)) , “Energy companies spend a substantial proportion of their total expenditure with supply chains, including construction, services, products, equipment and assets…”. This leaves energy suppliers and procurement specialists particularly susceptible to both the difficulties of supply chain disruptions and the effects of inflation.
Wondering what to do next? Try our 5-point “Plan Be”
From almost any angle, it appears that the world’s economies are heading for even more difficult times. And as manufacturers and retailers dial back on their expectations and reduce their inventories or slow production, their supply chain providers are the first to feel the effects of falling demand. The misery travels in both directions.
So what can businesses do to ensure that they weather the coming storms? There are a number of actions that they can take to, if not thrive, at least survive the tough times, and in some ways emerge stronger. These include:
-Be collaborative – supply chains are mutually dependent, and it is incumbent on every link to do what it can to ensure the endurance of its fellows. This can range from extending credit and being understanding about delays, to more direct forms of assistance. The key is for each business to appreciate the role others play in its success, and work together to safeguard the future of all. Sometimes the smartest things a business operator can do are to talk and listen.
-Be proactive – don’t wait and see what happens, make plans for the most likely scenarios, and put the necessary people and systems in place before the need becomes urgent. This can include planning for slow-downs and shut-downs, supply chain disruptions and price hikes. If staff reduction is on the cards, plan for the least unsettling approach possible.
-Be better – businesses that outperform their competitors will be the ones that survive.
That means:
a. finding new levels of productivity and efficiency
b. working around shortages and disruptions
c. motivating people to put in the extra effort required
d. finding other reward systems.
Working with the supply chain is a key endeavour here.
-Be local – the shorter the supply chain, the less likely it is to be stretched or break. Where possible, sourcing from local suppliers not only reduces transport and other logistical expenses – critical in times of mounting energy costs – it can strengthen local relationships that prosper in better times.
-Be wise – when business is hard, the instinct is to cut spending across the board. Cutting costs can be a valuable tool, but the wise operator knows where not to slash and burn. Sometimes opting for the cheap substitute can be a long-term detriment to the business, making recovery more difficult when the world turns. Examine every cost-cutting proposal carefully and with a view to the long term. Again, it is crucial to work with every link in the supply chain to ensure the levels of understanding and cooperation necessary to this process.
Looking down the track.
Every downturn seems disastrous and every crisis can appear to be terminal. But just as Australian industry and society emerged from the Global Financial Crisis to enjoy over a decade of growth and prosperity, so the current predicament must come to an end.
Indeed, the Reserve Bank of Australia, in its statement regarding the interest rate rise of October 2022, revealed that it expects inflation to ease in the near future: “The expected moderation in inflation next year reflects the ongoing resolution of global supply-side problems, recent declines in some commodity prices and the impact of rising interest rates.”((7)); The RBA suggests that while a projected inflation rate of around 4% in 2023 is still above the target rate, it should fall back within the 2 – 3% range in 2024.
On the plus side, unemployment is at its lowest level in 50 years, wages growth is expected to maintain an acceptable pace, and according to the Governor of the RBA, the most recent rate rise will “help achieve a more sustainable balance of demand and supply in the Australian economy” necessary to bring down inflation.
These are optimistic forecasts, and there are undeniably some difficult days ahead. But those that work hard to make it through will come through the other side with stronger relationships, more efficient supply chains, and a more robust and resilient business.
((1))https://www.macrotrends.net/countries/AUS/australia/inflation-rate-cpi
((2))https://www.rba.gov.au/media-releases/2022/mr-22-33.html
((3))https://www.statista.com/statistics/326017/weekly-crude-oil-prices/
((4))https://www.statista.com/statistics/1302801/monthly-fuel-energy-price-index-worldwide/
((5))https://country.eiu.com/article.aspx?articleid=912413074
((6))https://epsaonline.net/wp-content/uploads/2022/06/EPSA-Sustainable-Procurement-Paper-Mar-18.pdf
((7))https://www.rba.gov.au/media-releases/2022/mr-22-33.html