Supply Chain Management Inflation
Paul Trudgian Ltd | Supply Chain & Logistics Consultancy No Comments

Despite the fact that UK inflation continues to creep up, the fact remains that globally, and nationally, inflation is still incredibly low compared with historical records. So, whilst the media gets itself in a frenzy of panic that economic growth will be restricted, those who look more closely at the data will realise that actually, the fears may not match the reality.

There seems to be a large disparity of understanding between the economists, and those ‘on the ground’ of the supply chain industry who do understand how, and why, inflation isn’t causing the huge problems predicted.

The Amount of Goods Versus the Amount of Money

At the most fundamental understanding of inflation, we can interpret it as a result of there being too few goods and products to purchase for the amount of money in the marketplace. This is the basic premise that most school-level economic lessons will teach. This in turn links to governmental and global monetary policy, and most notably, the supply of money in to the economy. The evidence cited for this frequently draws on big historic events which allowed us to quickly tally too much money with hyperinflation, for example in the 1920s in Germany, or more recently in the 1980s in Argentina. Too much money was printed, ergo hyperinflation.

The flip side of the inflation coin is the nature of supply. Over, or under-supply can have a dramatic effect on inflation. This can most easily be seen when OPEC constrains oil supplies, as petroleum is so essential to everything within the supply chain from manufacturing through to logistics. Historically, the increase in costs at the most basic level was simply passed on to the end-user, or customer. Therefore, in real terms, was seen as directly affecting inflation.

Consumers will seek out supply, and therefore when supply is low, their drive can push up prices. In many regards, this becomes an ongoing cycle and can be potentially dangerous to the economy.

However, the converse is also a factor which needs to be considered. This is when we see inflation affected by a case of too much money circulating – combined with an over-supply, or high-supply, of goods. We’ve seen this over the last 15 years as we hit recession and then have gradually recovered. With interest rates bubbling only a little above zero, inflation hasn’t moved much at all. There is a tandem situation of both an abundance of money in the economy and an abundance of consumer goods. This isn’t unique to one sector, but across the entire retail spectrum including food, clothes, and electronics.

We are, increasingly, a consumer-based society. Everyone has more, and does more. Consumer expectations vastly differ from those of previous generations. The make-do-and-mend philosophy of the past has largely been replaced by a time-poor money-rich approach to all retail goods. Inflation now faces the consumer with a tremble in its boots. The consumer is used to having easy supply of goods and, generally, being able to afford them. Inflation, which stopped previous generations spending, isn’t even able to get off the ground.

Supply Chain Management at the Frontline of Fighting Inflation

As consumers we are able to rest assured that we have retailers ready and willing to provide a plethora of goods at a low price. The Amazon revolution has seen a monumental shift in this regard. The consumer, literally, has affordable goods available at their fingertips. Alongside this we have the booming ‘cheap’ retail providers such as Ikea, Lidl, and Aldi – all vying to make, and succeeding at, making ‘selling cheap’ a retail success story.

This doesn’t just happen. What’s happening behind the scenes is that customer expectations for availability of new goods cheaply, affordably, and regularly, is set against a backdrop whereby suppliers now inherently know they can’t just shift increases in costs on to price tags. In fact, their only option is to look upwards within the chain to identify and capitalise on reducing costs elsewhere. The margins get tighter, but the advent of technology is making it more and more possible to take advantage of these narrow margins, as well as to identify and implement cost-savings across the board.

The results if that supply chain management is about feeling and responding to that need to create and maximise upon savings in every link of the chain. This means looking at ways to maximise efficiency and costs from the raw goods, through logistics, and even at the retail outlet. Supply chain management is, at its most basic level, about reducing costs at every turn. Every microcosm of decision needs to be examined in light of what is possible in the most cost-effective way, without ultimately hitting the price tag at the consumer’s end.

This makes for a high-pressure environment for those working in supply chain management. The quest is endless and mostly thankless, and without technology, insight, communication, and collaboration, impossible.

We can see this in quantifiable terms when we look at the price change of something as simple as a loaf of bread and compare it with salaries. In 1971, a loaf of bread would have cost you 10p. Now, it will cost you 104p. In 1971 the average annual salary was around £2000, whilst now it is around £27,000. Whilst that’s not much difference in proportional terms, 0.005% to 0.004%, it’s a downward trend. Other, less essential goods, most notably technology, has vastly reduced in proportional cost.

The reality is, therefore, that it doesn’t actually matter too much what the economists are telling us about inflation. What is more important is how the supply chain responds and handles changes. Supply chain management has more of an effect in real terms, and can either exacerbate or dampen down, the effect of inflation. Whilst the supply chain manager is set the objective to make savings each year, inflation just comes in as another variable no more or less powerful than anything else.

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