Six Steps to Keep Ahead of the Inflation & Supply Chain Crises

The golden quarter was somewhat tarnished last year, with high street chains and consumer goods producers hit by a perfect storm of longer lead times, inflationary and demand-linked cost increases, and sustained disruption to labour across the globe. These challenges resulted in a drop in sales volumes in December, down by 3.6% on the previous month, in what should have been the bumper trading period.

As we look ahead to 2022, of the first dozen listed retail brands to report their trading updates, every single one (see table at ENDS) has sounded alarm bells – warning investors of inflationary price rises and risks of lower gross margins and profits over the course of the year. Now Tesco, the UK’s largest supermarket and bellwether for the sector, has warned food costs will rise by 5% in the spring. Even the ONS’ latest figures show the largest upward change to UK inflation came from food and non-alcoholic beverages (+0.14%), restaurants and hotels (+0.07%), furniture and household goods (+0.06%), clothing and footwear (+0.04%).With CPIH 12-month inflation rising by +4.8% in total – see graph.

With the macro root causes for last year’s supply chain disruptions looking decidedly unchanged and the significant rise of global inflation, what steps can consumer goods producers and retailers take to protect their profits and mitigate supply risks in 2022?

Step 1: Reduce Your Costs

Strengthen your supplier partnerships and become a preferred customer to secure better product availability at the best price. Work with your partners to look at each component in isolation and fully understand your cost drivers, then reduce the Total Cost of Ownership (TCO), volume commitments and where applicable, optimise inventory and stocks to create a buffer.
Qualify new suppliers with a global/regional mix to adapt in case of crisis and negotiate those contracts well, for example, index-based prices. Focus on your portfolio, SKU rationalisation, and, where possible, standardise production processes in tandem with suppliers: work in partnership with production lines to optimise the output speed, agility and quality.

Step 2: Mitigate Risk

Now is a great time to look or relook at reshoring and localising your supply chain, which mitigates global risks and also works to improve the sustainability of your supply chain. Reconsider any make vs. buy strategies and also optimise your network by examining route and demand optimisation and asset load utilisation. Where appropriate, establish dual sourcing routes (e.g. nearshore and offshore) to minimise supply risk. Assess your manufacturing productivity and if you are purchasing raw materials, secure your supply to avoid production disruptions. Make decisions ahead of global market: focus on strategic planning and anticipate continued disruptions in the next months and adapt accordingly (e.g. where possible, plan one season in advance to account for delivery lead times).

Step 3: Offsetting Inflation

Inflation is here to stay, but by offsetting the cost businesses can protect their profit margins. Start by increasing the share of spend in contracts that are not index-based for fixed or lower prices. Ensure you are leveraging volumes or signing multi-year contracts when possible to negotiate lower prices with suppliers. Negotiate with existing suppliers, or search for alternatives to source at the best cost. If you are purchasing raw materials, consider whether it is possible to switch materials if a certain index is steeply increasing, or production location if freight costs negatively affect profit. Most of all, be creative on margin improvement, for example by selling additional marketing slots to suppliers to generate more revenue despite increased purchase prices.

Step 4: Accelerate Your Digitalisation Programmes

Undertake a 360º review of your ways of working so you have full visibility of your supply chain at every stage – without clear sight of every link, you will not be able to see where efficiencies could be made, or potential issues could arise. Be more systematic in your data collection and apply smart analytics for better forecasts and increase automation throughout the supply chain. Invest in Industry 4.0.

Step 5: Adapt to the New Labour Market

The Great Resignation is reverberating through labour markets and the CBI has predicted that UK businesses face up to two years of labour shortages, so it’s vital to make staff retention a priority.

Attractive remuneration and benefits packages will help to attract new staff and keep you competitive in the market. Focusing on skills, such as training your workforce on new digital tools to improve efficiency, as well as finding ways to make the actual job more attractive, particularly in sectors that are associated with heavy physical labour or long hours, will also assist in both attracting and retaining employees.

Step 6: Sustainability Matters

Investing in sustainability and making it a key pillar in your business will help to boost performance and improve the quality of your products, whilst also mitigating supply chain risks. Sustainable business practices are important to a range of key stakeholders, from your buyers to your bankers, and over the long term, an intelligent sustainability strategy can unleash a wide range of benefits across product innovation, consumer and employee loyalty and overall business performance.

Once you have defined a bespoke sustainability purpose and list of actions for your business, you will need to start mapping your own supply chain – identifying the drivers and/or inhibitors to sustainability. At this stage, it’s important to examine the standards your suppliers (and their suppliers etc.) are adhering to, as they could undermine your practices and achievements.

INVERTO’s is currently advising some the UK’s largest conglomerate brands in the retail and food distribution sectors. 

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By Marion Betsch and Miguel Mendez Benitez at INVERTO

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