The BIG SEVEN in 2023 for Procurement Series: #2 Inflation/Shrinkflation

Posted by Mita Gupta on Jan 12, 2023 5:11:51 PM
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By Mita Gupta, Board Advisor at Mintec

Inflation and Shrinkflation are not new phenomena, yet today it seems the "flation factor" has created a threat or crisis that few have been able to deal with (including governments worldwide) effectively.

In this context, it is important to point out that over the past decade or so, we have had the benefits of what many call "cheap money." It's been an "easy ride" with low gas prices and inflation, tons of jobs and wage increases. And further, the pandemic created close to two years of what was the equivalent of an economic hockey stick, during which time experts told us that inflation was a transitory threat that would pass. By 2022, we realized this was not the case, and at the start of this new year, we are facing the equivalent of a reverse hockey stick.

So, why is this time different?

Transitory, Transitory, Transitory

What might make this period of inflation more notable is that despite what we now can see as clear warnings, we put our trust (and deep hopes) in the constant communication from experts that inflation was temporary and would not have a persistent effect. Many were "caught up" in the updraft of meteoric growth and the associated prosperity. Given the suppressing conditions and hardships caused by the pandemic, it is easy to see the desire for people to embrace dynamic growth.

The question now isn't why this recent period of inflation is so concerning. Instead, we must better understand what is happening and what we can do to navigate through economic uncertainty effectively.

A Wake-Up Call

We must learn something from our experience today. For many of us, a key lesson is that we can't reliably use what happened during past inflationary times to guide us in the here and now.

Take Zoom, for example. Before the pandemic, few people had heard of the platform. With the implementation of social distancing measures to limit the spread of COVID-19, remote working became the new normal. As a result, Zoom became a ubiquitous part of everyday work life. What is worth noting is that even with the broad easing of restrictions, most people will only return to the office part-time, meaning that Zoom has transitioned from a situational product to a permanent business tool.

There are, of course, many other examples similar to that of Zoom that have and will continue to alter the business landscape. It is hard to predict what impact this new reality will have on future periods of inflation.

"In a world of change, the learners shall inherit the earth, while the learned shall find themselves perfectly suited for a world that no longer exists." – Eric Hoffer

The next decade will likely represent a period the like of which we have never seen before, which means we must look beyond the silos of the familiar past to respond effectively to an uncertain future.

Supply Chain Resiliency and Inflation

Supply chain resiliency today is not about responding effectively to the last crisis.

Resiliency means we have the ability to recognize and adapt to the unknown circumstances of doing business in a complex, global environment in the future - when it occurs. We are in a time of increasing uncertainty, with many economic factors compounding unpredictability, including the Russian war in Ukraine, restrictive covid-related policies in China, and supply chain disruptions.

The following Nokia-Ericsson case study provides the exemplary example of resiliency in facing an unexpected, catastrophic event such as a lightning strike.

Nearly a decade ago, lightning struck a Philips microchip plant in New Mexico, causing a fire that contaminated millions of mobile phone chips. Among Philips' biggest customers were Nokia and Ericsson, the mobile phone manufacturers, but each reacted differently to the disaster. Nokia's supply-chain management strategy allowed it to switch suppliers quickly; it even re-engineered some of its phones to accept both American and Japanese chips, which meant its production line was relatively unaffected. Ericsson, however, accepted Philips' word that production at the plant would be back on track in a week, and it took no action. That decision cost Ericsson more than US $400 m in annual earnings and, perhaps more significantly, the company lost market share. By contrast, Nokia's profits rose by 42% that year.

Referencing the above example, we would also be wise to think of inflation (and shrinkflation, the inflation we aren't supposed to see) in the context of a lightning strike. In other words, we may not know exactly where lightning will hit, but we can see the storm clouds looming on the horizon and prepare for when it does.

Next Up: Part #3 - Supply Chain Risk/Resiliency

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Topics: Commodities, Procurement