Value chain

Mitigate the impact of inflation across your entire value chain



By ·

Inflation awoke from its slumber in 2021, as the US producer price index quadrupled from the previous decade. Inflation takes two forms: cost inflation, driven by higher input prices; and inflation which occurs when demand consistently exceeds supply. Cost inflation is currently evident in global supply chains in the rising cost of everything from raw materials (e.g. metals +26%, wheat +50%), to energy (+ 110%), through transportation (transpacific container +300%, air freight +50%, OTR freight +20%) and down to labor, where companies must compete even for labor. “unqualified” work in many markets.

Unabated, inflation could depreciate currencies and further erode international purchasing power. Even if overall costs stabilize, unexpected price spikes look set to persist for some essential items, particularly if supply is disrupted by unforeseen events.

There’s no magic wand to make inflation go away, but you can take decisive action to protect your company’s operating margins. In fact, if you know where to look, you can find opportunities for profit protection throughout your supply chain.

A classic example is to “cut the tail” of your product portfolio by eliminating SKUs that don’t weigh heavily in terms of P&L, volume contribution, and customer impact. You can then use your streamlined portfolio and consolidated entry volumes to gain traction with suppliers (for example, reducing the number of beverage flavors within a brand allows a company to place larger orders on volumes for the remaining SKUs). You can develop this approach by systematically focusing your capital, labor and technology resources on high-margin, high-velocity products and brands with differentiated value propositions in proven growth markets.

Flexibility in product specifications and formulations is an often overlooked opportunity to preserve profits. You may be able to reduce the rather significant costs of your operations by simplifying product design, such as reducing the number of parts, or by replacing materials that have little or no impact on consumers, such as the use of less expensive frying oil in potato chips. production.

Finally, inflation is a strong incentive to actively experiment with pricing. Companies often have a lot more latitude than they realize in certain parts of their product portfolios, and you can generally pass on rising costs to some customers more easily than others. Analyze your portfolio and customer base for instances where you have the relative leverage to strategically raise prices.

More generally, the current environment is the perfect time to redefine external relationships through strategic sourcing and explore joint venture or co-investment partnerships with your suppliers.

Cooperation versus competition

External approaches can go against first instincts. As costs rise, you might fall into a law of the jungle mindset where you find yourself pitted against suppliers and customers in a fight for survival. But some of the most effective cost containment strategies are achieved through cooperation rather than competition. For obvious reasons, value chain coordination is an area where supply chain leaders can make particularly important contributions.

By ·

Inflation awoke from its slumber in 2021, as the US producer price index quadrupled from the previous decade. Inflation takes two forms: cost inflation, driven by higher input prices; and inflation which occurs when demand consistently exceeds supply. Cost inflation is currently evident in global supply chains in the rising cost of everything from raw materials (e.g. metals +26%, wheat +50%), to energy (+ 110%), through transportation (transpacific container +300%, air freight +50%, OTR freight +20%) and down to labor, where companies must compete even for labor. “unqualified” work in many markets.

Unabated, inflation could depreciate currencies and further erode international purchasing power. Even if overall costs stabilize, unexpected price spikes look set to persist for some essential items, particularly if supply is disrupted by unforeseen events.

There’s no magic wand to make inflation go away, but you can take decisive action to protect your company’s operating margins. In fact, if you know where to look, you can find opportunities for profit protection throughout your supply chain.

A classic example is to “cut the tail” of your product portfolio by eliminating SKUs that don’t weigh heavily in terms of P&L, volume contribution, and customer impact. You can then use your streamlined portfolio and consolidated entry volumes to gain traction with suppliers (for example, reducing the number of beverage flavors within a brand allows a company to place larger orders on volumes for the remaining SKUs). You can develop this approach by systematically focusing your capital, labor and technology resources on high-margin, high-velocity products and brands with differentiated value propositions in proven growth markets.

Flexibility in product specifications and formulations is an often overlooked opportunity to preserve profits. You may be able to reduce the rather significant costs of your operations by simplifying product design, such as reducing the number of parts, or by replacing materials that have little or no impact on consumers, such as the use of less expensive frying oil in potato chips. production.

Finally, inflation is a strong incentive to actively experiment with pricing. Companies often have a lot more latitude than they realize in certain parts of their product portfolios, and you can generally pass on rising costs to some customers more easily than others. Analyze your portfolio and customer base for instances where you have the relative leverage to strategically raise prices.

More generally, the current environment is the perfect time to redefine external relationships through strategic sourcing and explore joint venture or co-investment partnerships with your suppliers.

Cooperation versus competition

External approaches can go against first instincts. As costs rise, you might fall into a law of the jungle mindset where you find yourself pitted against suppliers and customers in a fight for survival. But some of the most effective cost containment strategies are achieved through cooperation rather than competition. For obvious reasons, value chain coordination is an area where supply chain leaders can make particularly important contributions.







February 24, 2022


Subscribe to the Supply Chain Management Review magazine!

Subscribe today. Don’t miss!
Get in-depth coverage from industry experts with proven techniques for reducing supply chain costs and case studies of supply chain best practices.
Start your subscription today!