3 ways inflation is impacting global supply chains

High inflation has been one of the lingering consequences of the COVID-19 pandemic. According to the U.S. Department of Labor, the Consumer Price Index in November 2022 had increased 7.1% over the previous 12 months. Resurgent consumer demand, business closures, transportation disruptions and port congestion have all conspired to put pressure on suppliers and raise the cost of doing business.

Many suppliers and manufacturers have struggled to adjust their management and logistical structures to keep pace, forcing them to push increased costs down to consumers. While this can help them maintain profit margins in the short term, it only contributes to the rise of prices across the supply chain and the long-term persistence of inflation, putting businesses in a double bind.

Regardless of the possible solutions, inflation is likely to pose several challenges for suppliers and manufacturers throughout 2023 (and beyond). These include:

1. Increased foreign exchange risk exposure

Many manufacturers and suppliers today maintain business relationships across international borders, meaning they often have to deal in multiple currencies and balance fluctuating exchange rates. Inflation tends to impact countries in different ways, however, and less stable currencies are often unable to weather the crisis and maintain their value.

Businesses that buy from suppliers based in countries with weaker currencies could expose themselves to significant risk if the values of those currencies drop too much, while those that sell to certain buyers might make bloated returns that artificially inflate performance reports and revenue projections.

Businesses might respond to inflation by overstocking warehouses, which could make inflation worse.

2. Raw materials procurement could fuel further inflation

Raw materials are in short supply and many manufacturers are finding it difficult to source the materials they need to fuel their production processes. As Zurich Insurance noted, manufacturing executives often respond to supply shortages by purchasing excess raw materials to bolster their inventories.

While this might help the few fortunate companies that can secure needed materials offset the impacts of supply shortages, it can have wider, negative consequences for other stakeholders across the supply chain. Procurement surges cause demand to increase further, which puts even more pressure on suppliers to deliver sufficient quantities of raw products.

3. Rising interest rates make it harder to access capital

The U.S. Federal Reserve has increased interest rates in an effort to tamp demand and stabilize prices. Raising interest rates makes loans and credit lines more expensive, however, making it difficult for suppliers and manufacturers to access capital they need to address the unique economic challenges posed by rising prices.

Without fast access to cheap capital, businesses have to institute stricter oversight and better management of their cash flows, ensuring budgets are tightened and receivables are properly processed to limit the impact of reduced working capital. If they don't, they might not have the cash reserves to sustain normal business operations.