Supply Chain Issues and Inflation Force Businesses to Strategize
Among the many stresses brought on by the COVID-19 pandemic is inflation. According to the US Bureau of Labor Statistics' Consumer Price Index, or CPI, which measures the average price of consumer goods and services over time, the All Items Index—including everything from shelter and transportation to gasoline prices—rose 7.5% between January 2021 and January 2022. Much of this comes from the push and pull between supply and demand. As consumers rapidly return to the market, supply chain issues are becoming exacerbated, driving this inflation even higher.
Although price fluctuations are a regular business occurrence, inflation can decrease purchasing power for businesses of all sizes and adversely impact those already struggling with other effects of the pandemic. Fortunately, companies are quickly learning to adapt and apply new strategies to address the negative impacts of inflation and supply chain issues.
Inflation's unique impact on all businesses
Although the All Items Index shows one percentage, the rate varies greatly according to the type of goods, thus impacting industries differently. For example, energy—driven by fuel oil—rose by 27% and used cars and trucks increased by 40.5%. Food, on the other hand, increased by just 7%. Hence, non-dealer businesses, such as local delivery firms, saw greater inflation impacts than those focused on food.
Businesses must also manage rising costs not reflected in the CPI. A big one is personnel. Late last year, Walmart raised its minimum wage to $12 and Amazon raised its starting wage to an average of $18, which challenges small businesses to match. Furthermore, when schools closed and children had to be homeschooled, many parents—especially women—left the workforce and haven't returned. These wage increases and supply constraints put pricing pressure on businesses seeking to recruit and retain employees.
Ways to manage inflationary impacts
In an effort to stave off the negative impacts of inflation, many businesses are implementing new strategies. For example, many national and regional homebuilders are pushing the sell date of new housing inventory back. Instead of preselling homes before construction, many are waiting until the last 60 days of construction to place homes on the market. This strategy allows builders to recapture price increases in materials and capitalize on the increased demand for housing.
Identifying potential shocks to the supply chain ahead of time and proactively addressing them can also help tremendously. One way to do this is by monitoring the price of raw materials, like rubber. If you see the price rising, you can assume it'll soon impact products that depend on it. By purchasing these as soon as possible, you may avoid the coming price rises.
According to CNBC's quarterly Momentive Small Business Survey, almost half of small business owners say the most significant consequence of supply chain disruptions is an inability to meet customer demand. In turn, businesses risk losing customers to competitors. To avoid this disruption, business owners should consider a more diverse supply chain, allowing one vendor to make up for another when it's stressed. They can also consider replacing products with similar ones from other producers.
As for the worker supply chain—with almost 31% of business owners in a recent CNBC survey saying they can't fill positions that have been open for 3 months or more—some options include automating certain parts of your business, allowing more remote work, narrowing your business operations to the core elements, outsourcing benefits management and targeting employees who have been laid off elsewhere due to pandemic stress.
Financial insights for your business
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.