As a business owner, inflation and supply chain problems are unavoidable factors that severely impact your business. Business owners must know how inflation and the supply chain interact to prepare for the ongoing challenges. These forces go hand-in-hand and fuel each other’s fire. They are powerful market dynamics that drive inventory purchase decisions and impact cash flow.
This article identifies some key concerns and gives actionable steps businesses should consider to mitigate the risks from inflation and supply chain problems.
The Correlation Between Inflation and the Supply Chain
The Federal Reserve Chairman, Jerome Powell, first called the current inflation “transitory.” Recently, he said it was time to “retire that word.”
Now, the cost of goods is so high that it is difficult for many businesses to purchase inventory. The FED’s quantitative easing drove borrowing to record highs, and this, combined with the stimulus money, led to more money being in circulation, which caused consumers to buy more.
The Impact of Higher Demand on Inflation
PBS reports that supply chain problems came from increased product demand and reduced supply, which drove higher prices. Online sales have increased dramatically. Online retailers cannot keep up. Labor shortages are rampant because many workers do not want to return to work at low-paying jobs.
The amount that businesses can or have to charge went up. The amount consumers are willing to pay increased as well.
Inflation as an Excuse to Gouge Consumers
Some companies, especially those in the categories of consumer goods, pass on the effects of higher costs that the companies experience for materials and labor. If it costs these companies more to produce a product, they raise the product’s prices accordingly.
Inflationary Pressure: However, there is also a hidden problem with price increases. Some companies see a higher inflation rate as an opportunity to charge higher prices even if their costs have not increased as much. Companies in a monopolistic position are the worst offenders with this technique. Evidence shows on their balance sheet as record profits in times of higher inflation.
Action Items: To avoid damages from significant price increases from suppliers, you may be able to negotiate long-term deals that are more favorable with suppliers to keep their profit margins from expanding at your expense.
The Impact of Reduced Supply on Inflation
Any critical component that has no substitute can stop the manufacturing process. Supply shortages are everywhere.
A powerful example is that auto manufacturers could not produce enough new cars in 2020 because the microchips they needed to operate the vehicles’ electronic systems were unavailable.
Inflationary Pressure: According to Fortune, a side effect of this microchip shortage caused the prices of used vehicles since March 2020 to increase by an average of 39.8%. The cost of used cars and trucks is an item in the bundle of private transportation goods used by the Bureau of Labor Statistics (BLS) to create the Consumer Price Index (CPI). This factor is 2.533% of the CPI. The CPI is the inflation index from a consumer’s perspective, which is now 6.8% (CPI, November 2021).
Action Item: Review the supply chain of critical components. Re-design and re-engineer products to avoid having single-source components. Create new sources with an emphasis on American sources. Use predictive analysis with the help of artificial intelligence to identify potential shortages in advance of an emergency need. For example, plan for the next pandemic based on the experiences and lessons learned from the previous one.
Just-in-Time Inventory Systems Create Shortages
Under normal conditions, inventory efficiency improves by replenishing sold items with just-in-time (JIT) inventory systems. These JIT systems eliminate as much warehousing cost as possible. Typically, there is approximately a three-day inventory supply on hand at any location.
Under emergency conditions, when inventory items are not available, these same efficient systems create a disaster of out-of-stock items. Without replenishment, the store shelves become empty quickly.
Inflationary Pressure: One effect of the pandemic was a sudden increased demand for certain consumer goods, such as toilet paper. This sudden spike in demand caused the stores to run out. After the lockdowns ceased, the pent-up desire for consumer purchases was another effect. Add to this the lack of workers willing to fill low-paying positions.
The trucking industry could not keep up with the sudden increased demand. Cargo ships backed up at major ports. The JIT inventory systems failed miserably. Increased demand with the added fuel of monetary stimulus drove prices higher for consumer goods, causing the inflation rate to rise to the highest level since the 1980s.
Action Items: Businesses must maintain greater inventories to have stock on hand for longer periods to avoid running out of stock. Alternative transportation is necessary in many cases. Examples are chartering cargo ships/planes and directing them to less-congested ocean ports or airports. Amazon did this for items with sufficient profit margins to cover the additional expense.
What this Means for the Economy
This cycle will take time to resolve. Things will not change quickly, and negative trends will increase due to holiday spending patterns. Business owners must plan for these problems to continue for quite some time.
Work Through Inflation and Supply Chain Issues with an Experienced Accountant
An accountant at U-nique will help prepare your business for inflation by setting the right prices and providing strategies for lowering costs. An expert accountant will also provide forecasts to help you see different scenarios of how inflation and supply chain problems could affect your business.
If you are concerned about the implications of inflation and the supply chain on your business, contact an expert at U-nique right away to get the help you need.