Rethinking Inventory Planning and Supply Chain Logistics

Rethinking Inventory Planning and Supply Chain Logistics

One of the major drivers of the wave of inflation currently sweeping the global economy (and the New Zealand economy) are the issues arising from stretched or broken supply chains. 

You would have to be comatose not to have noticed shortages in the past couple of years as they have affected almost all products – dunny rolls, medical supplies, personal protective equipment, new cars, computer chips, cleaning supplies – even food. And because these shortages started manifesting themselves about the same time that the COVID-19 pandemic started spreading around the globe, it is easy to assume that the pandemic has “caused” the supply issues.

They are not unrelated. The pandemic certainly caused some demand surges that were not able to be immediately met by inventories on hand, and staff shortages due to illness combined with lockdowns to cause production and logistic slowdowns.

Significant choke-points have arisen in the world’s transport and logistics industries – shipping container shortages, congestion at major ports and rail shipping hubs, lack of capacity in road transport (to name only a few).

In short, the pandemic has resulted in widespread disruptions, dislocations and delays. And transport costs have risen significantly, up to about 10x for container shipping.

However, to attribute the supply chain issues solely to the pandemic (or, in fact, to any single cause) is an oversimplification that will not serve us well in adjusting to the new operating environment. The pandemic may well have been the snowflake that started the avalanche (or the proverbial last straw that broke the camel’s back), but the real causes are systemic weaknesses that we have spent the past decades building into our supply chain management and inventory policies.

It is important to acknowledge that the pandemic exposed the supply chain and inventory management problems rather than causing them because if the pandemic was the cause we could think that the problems might be fixed with a vaccine. But the problems are far more complex and are unlikely to be resolved quickly, even if the pandemic quickly came to an end.

For many decades we have been focused on cost-cutting in the areas of transportation, warehousing, and inventory carrying costs by implementing “Just-in-Time” manufacturing and logistics, zero-inventory (or at least very minimal inventory) policies, and lean supply chains. This has been very effective at reducing costs in all three areas of transportation, warehousing and inventory carrying costs as long as there were no supply-chain disruptions or supply/demand shocks.

But the reality is that there will always be disruptions and shocks from time to time. When that happens, the worst-affected economies and businesses will be those with the longest supply chains (i.e. those furthest from the sources) and those for which transport costs (rather than warehousing or inventory carrying costs) represent a larger proportion of the costs of goods. This does not bode well for New Zealand businesses and consumers, because we are relatively remote from most sources of supply (excluding primary industry goods) and transport costs are a significant part of our cost structure.

Of course, all businesses are different and business owners need to think about the implications of the supply chain “new normal” as it affects their own business. There are seldom any solutions that are universally appropriate for everyone.

The leaning of supply chains and inventories have been very effective in cutting business costs and improving competitiveness, so it would be counter-productive to throw out the baby with the bathwater. What is needed is a more nuanced approach that identifies which supplies are critical to business continuity and planning for more buffer stock of those critical items to keep the business going through supply chain shocks.

There may be no need to increase inventories of non-critical items.

The analysis needs to be informed by a detailed analysis of total costs to ensure that savings in warehousing costs and inventory carrying costs are not eaten by increased transport costs. It also needs to be informed by supply chain risk and resilience considerations, and by sound continuity of operations planning.

Inflation will be a significant business challenge in 2022

Inflation will be a significant business challenge in 2022

There can be no doubt now that we are in for an inflationary period.  Quarterly inflation for the period ended 30 September 2021 is the highest for 10 years (see chart below) and the RBNZ Monetary Policy Committee (MPC)’s report of 24 November 2021 states that headline CPI inflation is expected to measure above 5% in the near term.

NZ Quarterly Inflation Graphic
NZ Quarterly Inflation Graphic

The MPC’s report attributes rising inflation to tightening capacity pressures in the economy and specifically cites employment as being above its maximum sustainable level.  The report also refers to higher oil prices, rising transport costs, and the impact of supply shortfalls as a consequence of global supply-chain disruptions.

Some economists might also argue that monetary and fiscal policy might also be contributing to inflationary forces, and there has certainly been a significant and rapid expansion in the RBNZ’s balance sheet (as shown in the chart below).

Graph of the NZ Central Bank  Balance Sheet 2012-21
Graph of the NZ Central Bank Balance Sheet 2012-21

Irrespective of the causes of inflation (and whether it will be “transitory” or longer-lasting), business people will need to focus on how to mitigate the effects of inflation on their businesses.

Typically, the business challenges associated with higher rates of inflation are as follows:

  • As the purchasing power of the currency decreases, customers become discouraged from buying goods and services in the same quantities as they used to. This impact can be particularly severe on businesses selling non-essential services and goods. Consumers will often choose to forego luxuries and minimise on the quantities of essential goods and services as a result of increased prices.
  • Currency held in bank accounts by both businesses and consumers loses its value day-by-day. This exacerbates the falling demand for goods and services as consumers typically feel “poorer”. It also reduces the value of the reserves that businesses hold to fund equipment replacements, new products and services, and to see them through unforeseen setbacks.
  • Business costs increase across a broad range:
    • As transport costs and the price of products and materials increase, so does the cost of replacing inventories.  It is obviously important to be increasing the selling prices of goods and services to at least a level that will fund the purchase of new inventories, but this is often difficult to do in an environment in which demand for goods and services is already falling due to the decreasing purchasing capacity of customers.
    • Rising costs of replacing inventories can be amplified for goods for which there are supply shortages, as competing businesses attempt to fulfil their requirements by bidding up the supply prices.Employee wage demands typically increase during periods of high inflation due to the increasing cost of living.  While this is quite understandable (and it is important to increase wages in order to maintain consumer demand), a lot of businesses will struggle to afford payroll increases because of decreasing revenue.
    • Borrowing costs typically increase along with inflation, as interest rates are increased to try to counter the increasing inflation rate.  At its November 2021, the Monetary Policy Committee increased the Official Cash Rate (OCR) to 0.75%.  The interest rates have already started to increase and it is only a matter of time until the increases flow through to the retail interest rates charged by banks and other lenders.

Of course, different businesses have different characteristics and different circumstances, so there is no single solution that will be best for all businesses (just as there is no financial advice that will be most suitable for everybody).

Members of The Alternative Board are in the fortunate position of being able to access the collective experience and knowledge of their fellow members, and then apply that knowledge and experience to making their own business decisions grounded in the knowledge of their own businesses and circumstances.

Take time to reflect these holidays

Take time to reflect these holidays

The summer holiday period is an ideal time to reflect on your personal and business visions.

2021 was a tough year full of many challenges for most business owners. Some businesses were closed due to COVID restrictions; others had their employees working from home. There were supply-chain issues, staff shortages, and difficulties maintaining contact with customers.

The problem with tough times is that they can lead to feelings of woefulness or despondency, and nothing can undermine lives and businesses as quickly as negative feelings and negative mindsets. So, it will pay benefits to start by reflecting on the many things that we can be grateful for. And there are always many reasons for gratitude:

  • Gratitude for our families and friends (even though pandemic-related restrictions may have changed or restricted our interactions with them)
  • Gratitude for the many small and large kindnesses that we have received.
  • Gratitude for the gift of life is the primary wellspring of many religions
  • Gratitude for the tough times in our lives that help us to appreciate the good times.

The list of causes for gratitude could be never-ending.

As I get older I suffer the aches and pains that come with my age and I live with the knowledge an incurable illness has reduced my life expectancy. But I’m grateful for the wonderful life that I’ve already had. Even in the toughest times of my life, there has always been food on my table. I have travelled enough to know that that makes my life bounteous compared to the lives of most people on our planet.

It was tough in 2021 to be separated by travel restrictions and public health regulations from some of our beloved family and friends. But many of my grandfather’s generation were also separated from their loved ones when they were sent (as volunteers or conscripts) to the Great War, and they spent months or years in filthy rat-infested trenches where they were exposed to bitter cold and wet conditions, live gunfire and artillery fire, and diverse diseases such as dysentery, cholera and typhoid fever. I am grateful that my separation from my loved ones was spent in relative safety and comfort, isolating at home on my sofa.

I’m grateful for Skype and Viber and Zoom and such-like modern telecommunications that helped us keep in touch with those dear to us even through the lockdowns.

I’m grateful for my feelings of gratitude because it is my experience that:

  • Gratitude increases my happiness and strengthens other positive emotions
  • Gratitude increases my energy levels
  • Gratitude makes us more resilient and helps us to bounce back faster
  • Gratitude helps our relationships
  • Gratitude increases our productivity
  • Gratitude helps us to network, helps us to make friends, and deepens friendships
  • Gratitude improves my decision-making and increases productivity
  • Gratitude has made me a more effective manager
  • Gratitude increased my goal achievement.

When grounded in gratitude and positivity, the holidays are an ideal time to reflect on those big-picture personal and business visions.

  • Do you want more from life?
  • Do you want more time with your family?
  • Do you want more time pursuing certain activities or achievements (and is your “bucket-list” up-to-date?)
  • Do you want better health and/or deeper relationships?
  • Is your business helping you to achieve your personal vision? And how could things be improved to bring your business vision more in line with your personal vision?

The tough times that we have experienced during 2021 may well have changed your views on a number of matters, and the holiday period is an excellent time to consider whether your personal and business visions should be updated in the light of changes.

Author: Warren Olsen