The UK economy is experiencing the highest inflation in decades. The rate of inflation is the change in prices for goods and services over time. Measures of inflation include consumer price inflation, producer price inflation and the House Price Index.
When prices rise, supply chains carry the main burden with the main impact on labour, transport and energy costs. Everything costs more, not only goods but services too. Prices increase because prices are increasing, inflation is cyclical.
Since 2020 the pandemic has increased the demand for goods, closed factories, created port congestion and disrupted supply chains. All of these converge to lead to higher prices which have been further impacted by a rise in consumer spending.
Recovery is slow, impacted by the scarcity of labour, partly due to Brexit. The disruption in natural gas and oil flows from Russia because of the war in Ukraine is likely to continue. Energy price increases are driving up transportation and freight costs that were already on the rise because of the ongoing driver shortage.
The ongoing shortage of microchips is one example of how a lack of enough raw materials and transport delays created a knock-on effect on the availability and prices of new vehicles.
The PPI is one of the three main indicators used to measure inflation. It tracks changes in the prices of goods bought and sold by UK manufacturers, including price indices of materials and fuels purchased (input prices) and factory gate prices (output prices).
Input costs vary by industry sector, but all are affected by energy costs and wages. The greatest impact is felt in raw materials and operational costs in production including fuels, labour, warehouse logistics and transport. As input costs rise, prices follow. Supply chain instability and disruption are likely to continue throughout 2022. Economists suggest that there may be some respite in 2023. Fuel and gas prices are not expected to come down any time soon. As transport costs increase, who will pay for the additional costs, the manufacturer, the distributor or the customer? It may be possible to pass some of the extra cost to the customer in the short term but retaining customers means absorbing much of it.
To withstand the impact of rising input prices we need to be more efficient and find ways to manage our business differently. Operational costs need to be controlled without sacrificing product or service quality.
Areas of opportunity include:
Labour costs can be reduced through the more widespread use of automation in the warehouse. Companies who have reduced human transit time, either through better physical layout or through part-automation have managed to reduce their need for more employees.
In the longer term, more automation and technology solutions will deliver cost savings that will mitigate the impact of rising inflation. Digital solutions can provide visibility throughout the supply chain from spend analytics through all manufacturing and warehousing processes to the final delivery to the customer. Cost savings are achievable at every stage.
Find out more about How to combat the inflation in Logistics and Warehousing, in Part 2 of this article.
Throughout the years, SCCG has been helping companies to find a way to deal with different challenges, find the best solutions and showcase a suitable plan for growing a company that faces shortages and increased prices.
At SCCG, our consultants are professionally trained to help a business find the right solution and combat the negative effect of inflation. Improving both data and inventory, finding a suitable plan to optimise a warehouse or reviewing a tender contract, would be just a few services we offer in terms of Supply Chain and Logistics.