5 Ways Logistics Managers Can Battle Inflation in 2023
With inflation at 40-year highs and a challenging macroeconomic situation, here’s how you can find stability in your operation.
Anybody hoping the world would return to “normal” as COVID receded in 2022 received a rude awakening. After the pandemic placed global supply chains under unprecedented stress, their patchy recovery and the energy shock caused by Russia’s invasion of Ukraine in 2022 created a foreboding macroeconomic picture.
In the United States, inflation is at a 40-year high; the Federal Reserve has hiked its base rate five times this year and is set to continue doing so. On top of it all, there is consensus among analysts the United States is likely set to move into a recession.
2023 will test the mettle of even the most seasoned finance and logistics professionals. Logistics managers will need to respond quickly to changes in sourcing strategies made to mitigate fulfillment risk to ensure supply. Procurement professionals will be asked to deliver lower unit costs when pricing power has shifted to suppliers, and to extend payment terms to meet critical working capital/DPO targets when suppliers are demanding exactly the opposite.
Treasury and finance executives will need to balance what the spreadsheets clearly point to as the optimal solution with the real-world constraints and dynamics outlined above. In other words, threading the needle to find credible win-wins has just gotten a lot harder.
Managing this will take empathy, creativity, and a level of coordination between treasury, procurement, and AP department heads that is often hard to find. The magic will happen when companies get these three functions into a room and write down the specific actions that can achieve results both in the spreadsheet calculations and in real life.
Here are a few suggestions for how companies can capitalize on what is happening in a challenging macroeconomic backdrop.
1. Attain Transparency
It’s tough to know where you’re going without knowing where you are. In tough times, it’s wise to align across teams on the as-is and to-be state and the WHY of needing to move from one place to another. Get in a room and write it down. Identify and mitigate the risks you can. While much is in fact beyond our control, there are specific moves that can and will mitigate risk.
When thinking about the future of supply chains, whether you are looking to nearsource to minimize lead times and risk, or offshore to diversify supply and reduce unit costs, with either option visibility is everything. Fortunately, modern technology has made end-to-end visibility and inventory management a reality. Companies should be looking to track inventory both at rest and in motion as it passes through each stage of the supply chain. This means knowing where each SKU is (whether owned by you or your suppliers) and, for extra credit, being able to dynamically reroute inventory in transit to adjust to changes in demand.
This “control tower” type of technology requires integration, data, and coordination. And once the pipes are connected and data is flowing what is immediately evident is that the quality of the data needs to be improved. But those who whine less and get to the business of cleaning it up will win.
Smart enterprises will seize the opportunity during the next 12-24 months to get systems and processes in place to better meet customer demands, over-communicate, and over-deliver in a challenging environment. The companies who do this now will win customers from the competition and end up with a larger share of the competitive pie when the dust settles.
2. Manage your inventory effectively
Inventory management is not just about minimal reorder quantities and minimizing buffer stock. The insights from those watching the inventory can help companies tune their operations and predict problems before they become an issue.
Longer lead times make it challenging to manage future inventory levels against forecasted demand – especially in a radically uncertain economic environment. Companies that get the systems and processes in place to excel in this area will have a competitive advantage. For example, in an environment where companies are having to squeeze suppliers on price, delivery schedules, and payment terms, forcing them to hold inventory longer (VMI initiatives) can be the proverbial straw that breaks the camel’s back. Creative solutions that move inventory off of both the buyer and seller’s books (inventory financing) can offer some critical relief if done correctly.
These solutions are rare, primarily because they require individuals to look beyond their comfort zone. Warehouse folks need to meet the finance team to look at financing opportunities, finance folks need to meet procurement and listen to why procurement thinks their ideas are not grounded in reality. All three need to go out together, have a drink, and seek out common ground.
3. Harness the power of data
Recommending the use of data as the bedrock of sensible strategic decision-making is not a novel concept. But it has never been so important at a time of great uncertainty. You can trust your gut when the environment is constant. But in the coming months, this could be disastrous.
The speed with which AI tools are being operationalized has never been faster, and the results are no longer hypothetical. So the burden is not on those who argue they are smarter than the data versus vice versa.
Improved cash flow forecasting solutions allow companies to guess less and predict more. In today’s market, simply extrapolating a trend line from the last six months or comparing year-over-year numbers will not be enough.
Being able to leverage data, AI, and insight to have a better crystal ball than the competition should be top of mind. Being able to read the crystal ball and anticipate future flows of cash (in and out) based on data from purchase orders, payables, and receivables is now table stakes. Business is largely a working capital game.
Those who manage it best free up additional capital to deploy in any number of ways and ultimately will WIN. This storyline will be especially true in a high-interest-rate environment where the stakes are higher and access to cash is more expensive. So the companies that take action to improve their toolset in this area will emerge stronger. Having a big bold working capital goal is the first step. Having a comprehensive plan on how to get there, which is more than a pep-talk is where many struggle.
4. Embrace the potential of early payment solutions
A challenging macro environment will put a premium on every last cent.
Companies are increasingly looking to give their suppliers flexibility and choices. This may be from a desire to be easy to work with (to ensure a supplier continues to serve you versus your competition) or an insight that stronger suppliers mean a healthier supply chain and a stronger, more competitive enterprise.
Giving suppliers flexibility in what they care most about (getting paid ASAP) has caused an explosion in early payment programs in the market. These programs can allow the buyer to use their own cash to pay early (at a discount) or they can leverage third-party financial institutions to pay early (so the buyer can hold onto their cash longer).
Most early payment programs are now being coordinated with environmental, social, and governance (ESG) initiatives. Want a preferred rate to access your cash? Just raise your ESG score. Preferred pricing and rates for early payment can be earned by hitting specific ESG metrics managed by third parties to ensure there is no green-washing.
5. Put it all together
In sum, the months ahead will likely separate the corporate wheat from the chaff. There is a massive opportunity for companies to use this environment to their advantage. A key will be making sure functional leads get off Zoom calls and get out to meet their peers in different functions. Specifically, treasury, procurement, and logistics teams would do well to spend more time together writing down the specific moves that will allow them to not only weather the storm but emerge stronger.
Access to cash and working capital will be paramount for companies and their suppliers in the coming months. The companies that understand this and architect win-win agreements with suppliers will have the capital to invest when their competition is struggling to cut. Clearly, some companies are starting to do this as they lock in their plans for 2023. While many companies will clearly have to play defense, a smart few are getting ready to go on the attack.