The two decades of low inflation we experienced in the noughts and tens are two decades we won’t experience again in our lifetimes. Thus, this is a significant concern.
Why?
More precisely, this is a significant concern for two reasons. The first reason is that if costs rise too much, the cost of acquiring the necessary materials and services to make the products and/or deliver the services you sell rise, as well as the cost of MRO and day-by-day operations. If you’re in a thin margin business, inflation pressure is thus a significant concern.
Moreover, this is also a significant concern because wages never keep up with inflation (because, if they did, we wouldn’t see so many port and logistics strikes every time cost of living skyrockets while wages remain flat or indexed against an outdated cost of living increase as of the last contract negotiation that occurred two to five years ago), and if the inflation leads to substantial cost of living increases, the relative share of consumer spending that will be spent on the organization’s products and services will drop, giving them less cash on hand to deal with their rising costs, increasing the spend pressures of their top joint risk.
Impact Potential
The impact is straightforward.
- If costs rise too much, not only does profitability fall significantly, but after a point, so does the sustainability of business operations. Cuts could hav to be made with devastating future conferences.
- If sales drop too much, critical revenue stops coming in, and the same problems arise.
Major Challenges/Risks
Inflation Projection
Predicting expected inflation over time based upon typical trends as well as from the impact of significant economic events that can cause rapid increases in inflation.
Impact Mitigation
Finding ways to mitigate the expected impact through alternate sources of supply, currency exchanges, operational efficiency improvements, investments, etc.
Final Words
This is a tough nut to crack, especially for Procurement. The organization needs to hire a top economist to help it predict and prepare for inflationary times.