How companies manage supply chains during inflation

Chaotic supply chains are significantly disrupting America’s midsize businesses, which often are not in a position to fall back on vertical integration or hefty inventories to cushion the impact. The reality of today’s product and component shortages, coupled with steep price increases when materials can be obtained, has been a major challenge as the economy opened up to post-pandemic demand. Companies are looking for stopgap solutions as well as new practices to counter these obstacles.

In a reflection of how serious supply chain problems have become, 84% of CFOs at middle-market companies said in a recent survey that these disruptions are a significant or moderate risk to their business.

"Geopolitical risk, shortages of workers at all levels, increased energy prices, and environmental factors mean that supply chains will likely continue to be disrupted for many more months to come," said Tizu Menelik, a Senior Vice President at Fifth Third Bank and Group Head of Diversified Industries and International Corporate Banking.

Lean middle-market companies, without big capital budgets to spend on capacity enlargement, are seeking ways to keep on top of the changing and stressful environment. Consulting firm McKinsey & Company is advising clients to invest significantly in digital planning to advance what had been quarterly planning to weekly routine and to attain "multitier transparency," the ability to see troubles brewing at a supplier’s supplier. McKinsey encourages the use of artificial intelligence to monitor supply chains.

Smaller companies, which are already pressed to retain staff and cover costs, can try to cover some of this ground by shopping for inventory and demand management software. Digitization can help businesses of all sizes. As the Deloitte Center for Integrated Research said recently, "The key to automated, predictive, and prescriptive operations in the post–COVID-19 world lies in the interconnectivity of digital tools, physical infrastructure, and their underlying data streams."

Armed with good information, middle market firms can seek to locate alternate or backup suppliers and, if necessary, occupy additional warehouse space for redundancy purposes. Specialized situations can offer opportunities for cost savings even as resiliency is bolstered. Firms are adopting "just in case" instead of "just in time" and increasing liquidity management. Going forward, companies will need to become more agile, adapt operational strategies, and model new risks to ensure resilience and sustainability.

Another option for businesses is to outsource logistics to entities that assume much of the sourcing burden. Some, like Asia-based Li & Fung, have grown out of the apparel industry to handle supply arrangements in a variety of markets. The big management consultants not only sell their thinking on these matters but can design custom-made supply chains for individual companies.

Whatever course management takes, firms can hedge their bets with contingent business interruption or supply chain insurance, if the premiums are manageable within remaining profit margins. In a world of more uncertain sourcing, a consumer-facing business that previously has sought to amass more shelf space or perform more tasks could face a hard choice: to simplify or shrink the range of offerings on the product or service end. Performing what’s called a Pareto analysis can help companies determine which products are most used or in demand.

Businesses girding for scarcity problems also face the possibility of an economic downturn. Although consumer spending has remained robust, it has shifted away from goods and back to services that were out of favor during the pandemic. What some analysts call "demand destruction" could leave an enterprise that scrambled to build inventory or capacity in yet another precarious spot.

"This is one of those very challenging times, even for a nimble middle-market business," says Fifth Third’s Menelik. "The best defense is to know your customer base, maintain appropriate credit lines, and secure a reasonably varied choice of trusted suppliers, and constantly evaluate new markets that could provide additional capacity for business activity."