Economic uncertainty is clouding the future of supply chain and conflicting signals making it difficult for procurement professionals and supply chain leaders to plan, Gartner says.
In Australia, the Reserve Bank has pushed up rates for a seventh consecutive month with inflation sitting at 7.3 per cent as of late October.
Treasurer Jim Chalmers cited inflation as the ‘number one challenge’ facing the country as procurement teams consider how to overcome more turbulence.
Some procurement leaders are even saying it’s the toughest market environment in at least 20 or 30 years.
Gartner says for supply chain leaders to control costs and navigate demand volatility with recession looming, they should take a look at “critical differences between today’s conditions and prior downturns.”
“In general, today’s environment is economically ambiguous,” Gartner says.
“Record inflation and governments’ fiscal responses are contributing to recession concerns but other typically reliable indicators of a recession — the credit and term spreads — are signalling that the risk is low.”
Gartner says there’s two key differences between past recessions and today, the first is a low level of risk-readiness and the second, supply-constrained vs. demand-driven market dynamics.
How to set the right course for the supply chain
On setting the right course for the supply chain, Gartner says there is three main considerations.
- Identify critical resource bottlenecks to cost reduction.“In the current environment, many supply chains are struggling to meet demand anyway. The constraints they are experiencing can clarify other decisions about how much raw material and work in progress (WIP) inventory to carry, backup labor to retain or freight partners to secure,” Gartner says.
- Redefine the desired risk appetite to identify strategic decision points.
Gartner says a critical flaw of managing risk pre-2019 assumed that supply chains would recover from any single high-impact disruption before the next one occurred. “The past three years have demonstrated how consequential that assumption has been. Supply chain leaders must reevaluate their risk appetite and adjust to a level that is appropriate to the current environment,” says Gartner.
- Make decisions based on recession recovery projections only after the supply chain has achieved its target volume.
“Base those strategic decisions on recession duration and the anticipated rate of recovery for the most severe bottlenecks in the supply chain,” Gartner says. “The pace of recovery for both critical resources and demand are critical uncertainties.”
The view of McKinsey on inflation is that procurement leaders fronting the “toughest state of play in many years across global markets.” But the consultancy also says this creates an opportunity for the profession “to raise the bar on value creation and think long term to become a more strategic function.”