As inflation rates rise in economies around the world, and a recession might be looming, there are four ways chief supply chain officers (CSCOs) can prepare their leadership response over the next months, according to Gartner.
“While CSCOs primarily focus on developing strategy and enabling organizational capabilities, the economic headwinds they experience these days call for a steadying influence amid reactive stakeholder tendencies, such as defunding strategic investments and slashing overhead costs,” said Paul Lord, senior director analyst with the Gartner Supply Chain practice.
Gartner analysts have identified four leadership priorities for CSCOs to respond to high inflation and recession risk.
Position Flawless Execution as Supply Chain’s Primary Mission
Most supply chain organizations have already developed plans for improving efficiency to offset a normal inflation rate. CSCOs should encourage their teams to implement these plans while remaining focused on their critical role in fulfilling demand to capture margin.
“Uncertain times require steady leadership from the CSCO, particularly to operating functions that are critical for ensuring product availability and service delivery, such as logistics and customer service,” Lord said.
Let the Planning Team Rise to the Challenge
An economically difficult situation is a good opportunity for CSCOs to evaluate and develop their planning teams’ capabilities and processes. For example, higher interest rates and material prices should prompt reductions in production batch sizes, where possible, to rebalance capacity and working capital economics.
Businesses are responding to high inflation with actions to manage margin and cash within sales and operations planning (S&OP). Findings from a Gartner survey conducted in May and June 2022 among 130 business executives include the following:
- 57% of manufacturing and retail companies have been able to maintain margins with pricing actions and are making little or no changes to their spending plans.
- Service-centric business models (including healthcare and information services) are having more difficulty raising prices to maintain margins, and 17% have been forced to extend longer payment terms to their customers.
Manage Cost Reduction Carefully
Most supply chains already operate with very little overhead costs. However, periodic checking demonstrates due diligence to the C-Suite. Another way to reduce costs and further improve efficiency is role consolidation. CSCOs can, for example, consolidate functions such as site quality, safety, environmental compliance maintenance and continuous improvement into fewer teams with improved focus and alignment.
“It’s important to focus on maximizing the ability of the supply chain to control inventory and optimize the cost of product supply,” Lord said. “The anxiety and fear created by unfocused overhead scrutiny during these times creates the risk of distraction from the primary mission of operating effectively to fulfill demand and serve customers.”
Protect Investment Spending
One learning from the last period of economic downturn was that growth leaders reintroduced capital expenditure after a recession much faster than their peers. That’s why CSCOs should be protective about their planned technology investments to not fall behind their competitors.
According to the Gartner survey, manufacturers and retailers are most protective of spending on product innovation, talent development and technology investment for price analytics and operations automation. Service-centric companies are most protective of technology investments such as back-office automation and operational visibility for increased efficiency.
Gartner clients can read more in “Quick Answer: 4 CSCO Leadership Priorities in Response to High Inflation and Recession Risk”.
Non-Gartner clients can register for the webinar “Key Strategies to Advance Your Supply Chain Through Economic Disruptions”.