During ‘normal’ times, consumers expected supermarket shelves to be fully stocked and smoothly functioning supply chains were always taken for granted. Lockdowns and shutdowns accounted for up to 40 per cent of supply shocks during the COVID-19 pandemic. Lifestyles changed as people embraced remote working and relied less on services to minimise human contact. As the demand shifted from services to goods such as beverages, food and consumer goods, the unexpected demand and the negative effects of COVID-19 on the production affected the availability of goods, which also raised prices.
Global supply chains are interconnected. While this helps boost trade, it also means that pricing is affected throughout the system. When one price goes up, a domino effect ensues. Prices increase because prices have increased, and inflation drives further inflation. The increases in labour, energy and transport costs are all contributing factors to the rise in inflation. In the US, consumer price inflation has been relatively stable for the last twenty years. However, the big jump now wreaking havoc across the globe has renewed discussions on global supply chain management.
The COVID-19 pandemic spiked the cost of shipping goods, which in turn raised consumer prices worldwide. As countries recover from the negative impacts of the pandemic, high shipping costs continue to drive the rise in inflation in 2022.
In the past year, there has been a steady increase in the container freight index, which approximates the cost of transporting goods via shipping liners. Other freight costs such as air freight costs have risen similarly. The rising cost of freight is driven by higher oil prices and other factors related to COVID-19. Travel restrictions had a knock-on effect. Aeroplanes that were no longer flying with passengers also reduced air freight of high-value goods. These high-value goods were then competing with low-value goods for space on cargo ships. Therefore, the shipment of lower-value goods faced price increases. Delays in unloading cargo due to understaffing because of sickness and isolation further compounded the issue. There was a widespread shortage of heavy goods vehicle drivers, which delayed the emptying of warehouses. Costs increased as ships had to wait to unload goods, which increased shipping times and these costs were then passed on to customers. All these events cumulated to introduce bottlenecks into the system.
Let us reflect on where price increases originate. Typically, producers set prices to maximise their profit in the long term. They may also seek to at the very least cover the costs of production as they build brand loyalty and increase demand for related products. Therefore, recent price increases are related to increases in input costs. Generally, most costs are incurred from labour charges, production costs, raw material costs, machinery and technology costs and logistics that involve storage and transport. If any of these input costs go up, then companies have to raise their prices. Furthermore, if the inputs that are similar for most firms go up, then more sectors increase their prices, which raises the cost for the sectors they supply.
Some industries are suffering more than others, especially those with a long supply chain. Companies that rely on a long supply chain to get their goods to the market have bigger input prices as every step along the chain will compound the inflationary impact from the raw inputs and finished goods. If we consider the production of beef steaks: cows need to be fed and housed. Forage needs to be obtained and that is also a by-product of agriculture that needs inputs for its production. Harvesting, transforming, storing and delivering the feed to farms and then the cows to slaughterhouses and then wholesale retailers and finally supermarkets all incur costs. Vertically-integrated products that do not require much processing may not have to find ways of absorbing the extra costs as they have shorter supply chains.
Companies that need to pass on extra costs to consumers run the risk of losing customers. Before the pandemic, stable input prices reduced the pricing power of firms. However, in the past year, the resurgence of demand as economies re-opened has fuelled inflation. The rebound in economic activity following the pandemic has led to further strains on supply chains.
Central banks globally are trying to ensure that larger price increases do not become the norm and are therefore raising interest rates. This is a difficult balancing act and consumers are feeling the pinch. As inflation soars across the globe, aggressive monetary policy tightening may not be enough to curb this phenomenon as rampant supply chain disruptions continue.
Industry experts had forecasted that supply chain bottlenecks would dissipate by the end of 2022. However, the war in Ukraine and the resurgence of COVID-19 in China could result in disruptions that continue into 2023. Policymakers are now facing tough choices to support economic recovery and avoid the trend of high inflation becoming entrenched.
Careers in supply chain management are becoming more appealing as some companies have elevated supply chain management to the C-suite. The career path for supply chain professionals can lead to positions such as Chief Supply Chain Officer (CSCO) and even CFO or CEO. Top companies worldwide are on the lookout for supply chain professionals. These individuals will have an important impact on society as they tackle and solve some of the complex problems we are facing today.
Are you looking for a career in Supply Chain Management? At Strathmore University Business School, we offer two courses in Supply Chain Management: The Pharmaceutical Supply Chain Management Programme and the Bachelor of Science in Supply Chain and Operations Management.
The Bachelor of Science in Supply Chain and Operations Management Programme is an undergraduate degree programme designed to integrate supply chain, logistics, operations and digitization. This course lays a special emphasis on Production, Logistics, Big Data, BlockChain, Automation and Artificial Intelligence, and how they will impact supply chain and operations management in the near and far future. July 2022 intake is ongoing! Apply here!
The Pharmaceutical Supply Chain Management Course is an Executive Education Programme designed to equip participants with an in-depth understanding of supply chain and operations management best practices in the healthcare sector. By going through this Programme, participants are equipped with the knowledge, skills and practical learnings to plan, implement and control forecasting, procurement, warehousing and distribution, while taking into account the applicable legal and regulatory framework, to satisfy the customer requirements as efficiently as possible in the health care organisations. July 2022 intake is ongoing! Apply here!
Would you like to share an article? Write to us at email@example.com
Article by Shailja Sharma, Executive Fellow and Coach