Inflation has been only a minor influence on the U.S. economy for decades—so long, in fact, it’s difficult to fathom the full impact of its return, especially in regard to supply chains.
According to the latest Bureau of Labor Statistics figures, the Consumer Price Index (CPI) has risen 8.5% over the past 12 months, the highest annual rate since 1981. Inflationary pressures affect every aspect of life, from the price of cookies to the cost to ship a sofa. The average price for beef and veal has risen 16% in the past year; gas prices, spurred by recent global events, have recently reached their highest (nominal) levels in history.
Wage inflation is staging a comeback as well. After hitting nearly 15% in the early days of the COVID-19 crisis, the unemployment rate dropped to 3.6% in March. The latest Labor Department employment report shows the average hourly pay barely rose in March and increased only 5.6% in the past year, indicating that wages haven’t kept up with inflation—and that the standard of living, for many people, has dropped.
Far-Reaching Effects
Like many market observers, we do not foresee inflationary pressures subsiding to any extent before the end of 2022. And yet inflation is just one of several factors that continue to plague supply chain managers.
The current geopolitical crisis in the Ukraine, and subsequent economic sanctions, are deeply impacting manufacturing timelines. In Asia, production lead times are expanding. Labor shortages and, in some cases, factory closures are shutting off sources of supply.
Modern logistics systems are designed to run at near-capacity. When bottlenecks occur, problems can cascade through the system. When COVID-19 hit, for instance, it didn’t take long for distortions in demand, caused by changes in consumer behavior, to snarl traditional supply chains. Ocean-going shipping backlogs, increases in unloading times and delivery challenges have created retail shortages that have driven prices upward.
Upgrades Overdue
Our belief is that technology, through its ability to lower operating costs and increase efficiency, will play a major role in helping businesses to lessen the resurgent influence of not only inflation, but other nagging supply chain issues as well.
Traditionally, the supply chain sector has been slow to benefit from the digital transformation that has modernized hundreds of other industries. In some ways this is understandable. Supply chains are notoriously complicated; unlike many business practices that are primarily digital (e.g., finance and legal), supply chains involve physical assets such as warehouses and transportation. Tech innovation favors answers to abstract challenges.
Yet given the difficulties in hiring workers in the current economy, technology, in all its forms, can make supply chains more productive. Robots are replacing humans in environments as diverse as restaurant kitchens and pack/ship operations, while machine vision systems are helping increase warehouse efficiency. Digital solutions are improving retail fulfillment; and on the financial and operations side, automation software is speeding supply chain logistics and collections.
Digitization—the application of digital technology to business processes—greatly enhances the ability of companies to manage supply chains and transportation/delivery networks. Examples of the benefits of digitization are everywhere. Internet of Things (IoT) systems, for example, are leveraging emerging 5G networks to capture mobile elements (i.e., delivery vehicles) through sophisticated distributed wireless infrastructures. Activity in this field is heavy, with consolidation among providers creating greater efficiency for those businesses in the last mile of supply chains. Thanks to IoT, vehicles, containers and products are visible in real time. This data has immense value in improving outcomes; what can be seen can also be analyzed, measured, organized and scheduled.
Implementation of RFID/QR tracking on products and packaging allows each product to be monitored as part of a verified, collective set of product data, also known as the product cloud, for tracing when needed. Adidas is among the first major manufacturers to use software to validate trusted sources of materials used in products such as garments or footwear. Other solutions allow manufacturers to check for unauthorized or counterfeit materials that may enter the factory, or be unintentionally sent to unauthorized geographic markets as finished product.
AI/ML, Digital Twins
Artificial intelligence (AI), machine learning (ML), digital twins and other advanced software technologies are already reinventing the logistics field. Through the use of intelligent solutions, companies are managing complex shipping networks in real time and eliminating bottlenecks by deciding when, where and how to shift goods from marine networks to air, or from rail to road, in order to speed high-value products to customers. AI and machine learning systems are also advancing the concept of supply chain “control towers” that can not only predict slowdowns but also provide alternatives that direct inventory, people and equipment to correct potential disruptions.
In the downstream portion (i.e., “last mile” of supply chains), AI is used to optimize delivery routes and manage personnel, enabling logistics services to maximize the value of IoT data. AI can also analyze data sets to learn more about customer behaviors and predict future demand: retailers are becoming proficient at finding ways to optimize their product mix, sharpen strategies and avoid overbuying/discounting cycles.
Digital twins may be the most important tech innovation to lower cost and ultimately help organizations counter inflation. Digital twinning involves the use of multiple technologies to build highly sophisticated, virtual simulations of supply chains. Updated continuously with real-world data, a digital twin enables organizations to analyze supply chain dynamics and predict process success.
Experts contend that AI/ML-enabled digital twins supersede just-in-time as a better way to optimize networks. Twin modeling allows organizations to anticipate disruptions and then use AI to determine a workaround. Machine learning, by contrast, trains the system to run progressively better simulations over time. Consumer behavior, inventory and shipping data, and supplier stress tests can all be factored into supply chain twins to improve decisions and reduce delays.
Multiple Advantages
From top to bottom, technology is increasing efficiency, lowering operating costs and helping to mitigate the impact of inflation on supply chains. Here are just a few of its benefits:
It drives visibility. In today’s interrelated world, events occurring two continents away can disrupt operations overnight. Today, data scraping technology can pull information from a variety of sources, then overlay it on supply chain profiles to assess risk and offer proactive responses.
It increases agility. Tech supports faster and more accurate decision-making in regard to production, reconfiguring logistics and opening additional downstream demand channels.
It supports better management of complex supplier networks. Intelligent procurement platforms make it easier to coordinate and manage vendor networks that can easily number in the thousands for large enterprises.
It helps build better partner organizations. Using diversity analytics, software platforms can inform the creation of reserve networks of agile local and regional suppliers.
It provides an early warning system. AI-enabled solutions can forecast demand surges, plan for contingencies and coordinate programs of response.
According to a CapGemini study, 62% of organizations believe resilience is a key priority for supply chains in the post-COVID world. Supply chains are indeed recovering—but disruptions and cost pressures are on the rise. To be resilient in an era of economic and geopolitical volatility, supply chains will need to increase their digital transformation.
In 2021 alone, supply chain management technology providers attracted over $11 billion in funding, according to Crunchbase data. Investors see that technology can, and will, not only innovate the supply chain, but also create financial returns for them as well as for practitioners. In an era of renewed inflation, technology is showing immense promise for its ability to reduce the impact of rising prices for fuel, labor and hard assets. Supply chain executives should take note—and quickly, take action.
Derek Wittenberg is a managing director of Progress Partners, a digital technology investment bank. With over 30 years of experience in technology investment banking, he provides mid-market M&A and capital-raising expertise to enterprise software and technology firms, particularly supply chain, healthcare, fintech and edtech.
