This article originally appeared in Supply & Demand Chain Executive.
More than two years after the initial pandemic-related supply chain turmoil, the supply chain continues to experience high inflation—despite the stabilization of many supply chain functions. Contrary to broader perception, the supply chain is not back to ‘normal.’ Rather, the disruption has centralized upstream, increasing operating costs for companies, and resulting in higher prices downstream for consumers. Luckily, there are strategic steps that companies can take to navigate this volatile market to work towards a ‘new normal’ in their supply chain.
During the pandemic, changes in consumer demand, supply shortages and transportation delays drove supply chain disruption. Businesses and consumers alike felt these pressures—businesses were hit through warehouse surpluses and increased logistics costs and consumers saw empty shelves and delayed delivery times. Now, with demand and transit times normalizing, shelves are stocked, and deliveries are back to normal. However, a variety of pandemic-related factors persist, still causing inflated costs for companies – including persistently high transportation and storage costs, rising costs of goods and labor challenges.
Of these factors, shipping container prices, one of the major culprits of original pandemic chaos, are still high despite the container shortage ending. These high prices are due to many companies remaining locked into their long-term contracts negotiated during peak COVID-related shortages in 2021 and 2022. In addition, land-based transportation costs provide no reprieve, as industrial equipment and truck prices remain high due to the proliferation of warehouses in the wake of the pandemic-induced e-commerce demand.
On top of this challenging transportation environment, storage costs have become a major contributor to supply chain inflation. As a reaction to extreme shortages, companies over-ordered as a safety measure. However, this practice is now backfiring, as consumer demand has normalized, and surplus inventory is sitting in storage stalling cash flows.
In addition to the underscoring logistic challenges are two additional factors: a decreased labor pool due to the COVID-19 mass workforce exodus and the rising costs of goods due to companies leveraging an inflationary macro environment to increase prices. Together, all these factors erode companies’ profit margins and the ability to compete in the marketplace, even in our post-pandemic time.
By targeting the underlying factors driving inflation, companies can help return costs to pre-COVID levels within the next two years. However, to make this happen, companies will need to actively address the two largest contributors to high costs – goods and logistics.
On the logistics front, companies must renegotiate pandemic-era contracts as soon as possible. While these contracts may be temporarily binding, companies can generate leverage and potentially modify existing contracts by gathering data on their current transportation spend. Using this data, companies can demonstrate their spend to extract lower costs in exchange for increased contract length. Transportation spend data will also be crucial when negotiating a net-new contract to communicate the volume that will be provided and the accompanying discounts. Once contracts are optimized, freight audit and payment companies can analyze invoices to achieve maximum discounts.
Along with rectifying transportation over-spend, companies must take a holistic approach of utilizing sales and operations planning alongside optimizing warehouse space through consolidation. These tactics can help improve current inventory positions through rationalizing stock against current demand to liquidate unneeded inventory, freeing up warehouse space and minimizing losses. In addition, companies should maximize the functionality of their warehousing management systems by using them to support core warehousing processes, such as bin utilization and cycle counts.
Lastly, to address the rising cost of goods, companies should prioritize their sourcing and procurement function to more than just a support function. In doing so, cost takeout and optimization efforts can be driven across functions through a combination of category management, strategic sourcing and supplier relationship management tactics to address the artificially inflated cost of goods. Embedding the new processes into a procure-to-pay system will enhance process adherence, leading to cost savings.
Ultimately, altering companies’ long-term mentality around inventory and labor will impactfully reduce inflation costs. This shift should be led by a proactive inventory management strategy built on a digital platform for demand and planning. This investment will help companies order to their needs, preventing waste in both cash flow and warehouse space.
Additionally, companies should work to keep labor and turnover costs in equilibrium considering the high cost to hire and the cost of labor itself. The most sustainable path is to determine what wages and turnover rate coincide with the lowest total labor expenditure. To boost retention, companies can use incentive-based pay and learning management systems to better equip employees to succeed; and to determine proper wages, companies should quantify personnel acquisition costs.
Even after solving these pandemic-related issues, another global disruption is always a possibility. While there’s nothing imminent on the horizon, companies should prepare themselves to handle disruptions right from the onset.
Moving forward, companies will need to watch closely for events that could have long term supply chain implications—including geopolitical relations, like those between the US, China and Taiwan. With these proper tools and processes in place, companies can go on the offensive and proactively protect themselves against uncertainty.