How to deal with inflation: Think digital tech
Every economic shift is always followed by a flurry of speculation. Companies want to know who survived, who failed, and who thrived. And more importantly: How they did it. When it comes to dealing with inflation, if you had to compress 100 years of corporate wisdom into three words, they could be: planning, visibility, and agility. Fortunately, that’s where digital technology shines. Modern, AI-powered business solutions help companies centralise their operations in the cloud – seamlessly connecting assets, people, and suppliers. Powerful analytics put data to work, delivering customisable reports and helping to automate workflows, finance tasks, and much, much more. Digital tech helps businesses spend smarter, cut costs, and see around corners.
How inflation impacts business
Forewarned is forearmed. Each business will face a unique set of challenges and opportunities during times of economic instability. The key to survival and growth is accepting that change is coming and ensuring that you have the tools and strategies you need to prepare for some of the most common inflation-related business consequences.
Here are some of the most common business impacts:
- Procurement is under a microscope. With heightened sensitivity to spending, it can seem like a scary time to propose enterprise expenditures. More than ever, businesses need to be able to quickly perform cost/benefit analyses and determine the potential ROI of investments. During inflation, business gets more competitive, so it’s urgent to be able to make confident and informed procurement decisions, faster than ever.
- Outstanding payables become a bigger problem. Beyond loans or operational debt, outstanding invoices can also lead to losses. When the value of cash goes down, the cost of your invoices goes up the longer they sit around – leading to reduced working capital. Inflation puts additional pressure on businesses to tighten up their payables and receivables.
- Hedging is more important than usual. Inflation means things cost more. This results in your inventory – of both products and raw materials – being worth more than ever. In times like these, companies must walk a fine line between the risk of surplus and the benefit of holding higher-value liquid assets within their warehouses and factories.
- Supply chains get costlier to run. Supply chain operations take up an enormous share of energy usage and expense, particularly for manufacturing companies. Economic inflation means that already beset-upon supply chain managers will feel a heavy push to improve visibility and ROI, and to optimise all manufacturing and logistics activities.
- It’s a good time to spread your risk. Your suppliers and vendors are facing their own issues during inflation, including labour shortages, higher interest rates on existing debt, and untenable operational costs. If the past few years have taught supply chain managers one thing, it’s what can happen when they’re too dependent upon a single or small range of suppliers. So when inflation hits, companies need to be prepared with solutions that help them more easily diversify and spread their risk when it comes to suppliers.
- Raw materials and energy cost a lot more. For businesses, these particular expenses are often shaped by politics and global economic forces well beyond their control. While sustainability and waste reduction remain important environmental concerns, during times of inflation, they become matters of economic survival as well. During inflation, companies seek extreme measures to use less energy and fuel, and to streamline materials usage in manufacturing.
- Your teams need to work smarter. Regardless of the economy, your most valuable and important asset will always be your people. History has shown us that now is not the time for layoffs and squeezes. The best companies take a “team effort” approach to economic upset, helping their executives and employees find measurable ways to automate tasks and be more ergonomic and efficient.
How to fight inflation with smart digital technologies
After looking at some of the most common ways in which inflation impacts businesses, the big question now is what to do about it? In the not-so-distant past, stand-alone business technologies lived in siloes and hoarded data. Business leaders became frustrated because even with the best of intentions, the right hand often had no idea what the left hand was doing.
But today, the essence of digital business systems is integration. Data from disparate departments informs real-time actions and reporting. People and machines across a global supply chain share intel as and when it happens. Information from every corner of the business and world is centralised, secured, and accessed from anywhere – leading to greater agility and faster, more confident decision-making .
Here are some ways that digital tech can help your business during inflation:
Spend more strategically
When procurement teams can quickly and easily produce variety of spending reports and profiles, it helps them make informed decisions. The ability to customise data analysis and leverage predictive analytics further adds to accuracy and an enhanced ability to peek around corners. This extra layer of confidence and insight can help businesses to make enterprise investments and take advantage of the lower cost of debt (during inflation). It can also help to inform helpful and innovative cost-saving measures, without compromising standards.
Forecast optimum liquidity levels
Roman olive oil supply chains go back almost 2,000 years and records still exist of those early supply chain managers tearing their hair out, trying to manage inventories and predict supply and demand. Fortunately, modern supply chain planning solutions can help to centralise and integrate inventory forecasting, and materials requirement planning (with DDMRP). By accessing and analysing data from across the business, these solutions can help you more accurately hedge the value held in both your inventory and your raw materials. And inventory financing software can further protect you by allowing you to speculate on future purchases at today’s rates – in anticipation of an inflation rate that will exceed the cost of that debt.
Diversify your sourcing
Even before the lessons taught by COVID, it was no secret that it was unwise for companies to put all their eggs in one basket where their suppliers were concerned. Yet if businesses knew the risks, why has there been so much inertia around supplier diversification? The answer is primarily due to the hassle and risk of finding and onboarding new vendors and service providers. What companies are looking for today are software systems that can help them source and vet new suppliers, integrate their processes and applications, and manage all their interactions on a single, unified platform.
Optimise your manufacturing
Today’s best businesses already have formidable sustainability goals and targets in place. And with the rise of inflation, there is no better time to for companies to minimise waste and energy usage. Fortunately, smart manufacturing technologies are literally built for this kind of thing. For example: Industrial IoT networks can not only save on maintenance costs by predicting maintenance and service, they can also integrate with ERPs and smart systems to recommend more ergonomic and power-saving workflows. And with integrated business systems, manufacturers can take their cost-saving measures literally back to the drawing board. With analytics and simulations, designers can reimagine new and existing products that keep the quality yet cut back on the amount and cost of raw materials used in manufacturing.
Streamline your supply chain operations
The combined necessity and complexity of a global supply chain makes it a uniquely vulnerable component in your business. If managed with strategy and care, your supply chain can bolster you up and over your competition. Yet if allowed to become siloed and inefficient – especially during economic disruption – it can drag you down like a bag of rocks. It’s therefore no surprise that some of the most powerful modern software solutions have to do with supply chain optimisation and efficiency, including:
- Supply chain control towers that give real-time visibility across the business, on a unified, cloud-based platform
- Integrated business planning tools to centralise and optimise activities ranging from sales and operations (S&OP) to response and supply planning
- AI-powered simulations and digital twins that help test new supply chain processes and push virtual assets to their limits, without the costly risk of physical damage
Tighten up your payables and receivables
During inflation, businesses don’t want to leave their payables sitting around any longer than they have to. Furthermore, in times of instability, businesses want to minimise the risk of large amounts of outstanding receivables. Traditional finance processes are complex and slow – taking weeks (or months) to settle accounts. When the economy is a bit wobbly, businesses need financial management solutions that can deliver customised, real-time reports, and make cash available sooner, before inflation reduces its value.
Optimise your workforce and business processes
When it’s time to tighten belts, digital solutions can help you boost productivity and efficiency. On the factory floor or in the back office, smart cloud technologies help to automate both physical and administrative tasks. This benefits your teams by reducing their load of error-prone and repetitive tasks. It frees them up to work on more value-added tasks. And connected technologies also help you get a bird’s eye view of both your workforce and your business processes, showing you where bottlenecks and problems are, and what to do to reduce them.
Webcast series: Outsmart inflation
Get best practices on how to deal with soaring costs in these expert webcasts.
Stagflation vs. Inflation
When just a few specific items rise in cost, this can be attributed to many things including isolated shortages or even social trends. But inflation occurs when the overall price of all goods and services goes up across an entire economy. Inflation can be caused when demand exceeds supply (demand-pull inflation); when production costs go up, taking prices with them (cost-push inflation); and finally, by the chicken-and-egg relationship between wages and prices: When prices go up, workers traditionally expect a rise in pay. And when wages go up, businesses tend to raise their prices concurrently (built-in inflation).
Obviously, inflation is not something anyone wants. But it’s not necessarily a symptom of a more deep-rooted economic illness. Nor is it all bad with some business benefits including higher sticker prices for goods produced, and cheaper debt. Furthermore, periods of inflation – and even recession – are usually over fairly quickly and historically lead to periods of rising growth.
Stagflation on the other hand, is a far more dire situation. Fortunately, it is fairly rare but when it happens, it has the historical tendency to stick around for a long time. Inflation and stagflation both lead to a rise in price and a devaluation of cash. But while inflation can be caused by healthy and often temporary influences, stagflation is characterized by long-lasting periods of minimal economic growth and ever-rising prices.
Stagflation is a term used to describe an economy experiencing significant inflation, high unemployment, and slow to no economic growth. The term is a portmanteau that combines the words stagnation in GDP and inflation.
Furthermore, inappropriate government fiscal policies both cause stagflation and exacerbate it after the fact – like when governments overspend to try to compensate. It can also be brought on by long-lasting supply shocks around essential commodities like oil and gas, as happened in the U.S.A in the 1970s.
Of course, it goes without saying that COVID and the rise in crisis-level climate events (like wildfires and floods) have brought unprecedented upheaval across the world. Economists are still on shaky ground when it comes to determining the mechanism of how these global events may contribute to cases of stagflation. Yet there’s little doubt of their potential to disrupt economies in the longer term.
Is hyperinflation coming?
As the prefix “hyper” implies, hyperinflation is characterized by the speed and volume at which prices go up during a short period of time. It is often triggered by a rapid rise in the cash supply as governments literally print or create more money in a reactionary fashion. At its worst, this often leads to those stories we hear about countries where you need a suitcase-full of cash just to buy a loaf of bread.
So is hyperinflation on its way? In the suitcase-full-of-money sense: No. Yet there’s no doubt that G8 nations and other established economies are in the grips of a period of growing and worrying inflation. As part of their role in staving this off, the best thing business leaders can do is remain successful and profitable so that they can continue to innovate and drive the economy.
How to deal with inflation: Next steps
The strongest and most successful businesses know that economic storms come and go and, historically, are often harbingers of periods of renewal and innovation as they tend to have a cleansing effect. Of course, it’s essential to be aware of some risks and shifts to expect during these times, and how to put the best technologies to work on your behalf. But in the end, the companies that survive and thrive during rocky times, are those that remain calm and strategic – those that integrate their operations and communicate clearly and openly with their teams, their suppliers, and their customers.
SAP Insights Newsletter
Subscribe today
Gain key insights by subscribing to our newsletter.