Inflation uncertainty, profit warnings and excess inventory: what’s next for supply chains?

With inflation at record highs, interest rates soaring and a cost-of-living crisis looming, the global economy looks like it’s headed for stormy waters this year. Supply Chain Insights asks: how can a unified supply chain help weather the storm?

Early economic predictions for this year are urging consumers, investors and businesses to brace for another turbulent year as financial pressures accelerate in early 2023.  

The most recent Australian Bureau of Statistics’ consumer price index (CPI) revealed headline inflation rose to 7.3% – a 32-year high. According to Michelle Marquardt, Head of Prices Statistics at the Australian Bureau of Statistics, the latest data demonstrates there are still ongoing inflationary pressures in the economy. “Increasing operating costs, including wages, electricity, and weather affected reductions in food supplies continue to drive prices up,” Michelle said.

Ongoing disruptions since the onset of Covid-19 and rising energy and food costs originating from Russia’s invasion of Ukraine are continuing to push inflation even higher. According to NAB forecasts, inflation is expected to peak higher and persist for longer, with headline inflation to peak at 8% this year.

While the greater impact of rising interest rates and tighter household budgets are not yet clear, here we discuss some of the key themes and coping strategies with ANZ’s supply chain leaders.

Rising markdowns, falling profits

Largely driven by a shift from a ‘just in time’ to ‘just in case’ mindset that dominated supply chain strategies since the onset of the pandemic, retailers are now carrying more inventory than ever before. 

According to Pas Tomasiello, Senior Director – Integrated Systems at Dematic, there are difficult decisions ahead as retailers need to decide what to do with excess inventory.

“As supply chain leaders embrace a ‘just-in-case’ mindset instead of the previously well-established ‘just-in-time’ model, there will be competing pressures on surety of supply in today’s volatility vs inventory levels and associated cash flows,” he says.

This inventory stockpiling of the past two years was not unique to the Australian market. Data from the US Census Bureau revealed in August last year, clothing retailers were holding US$58 billion in inventory – a 28.4% increase on August 2021.  

In a low-growth economic scenario, businesses may be forced to sell their inventory at discounted prices or even write it off to free up pressure on their balance sheets. However, Royston Phua, Vertical Practice Lead, APAC Supply Chain for Zebra Technologies says this may not provide the necessary liquidity for targeted investments or operating activities.

“Businesses will have to weigh their options carefully and act quickly to take advantage of any opportunities in a year of uncertainty,” he says.

According to Travis Erridge, Co-Founder and Chief Executive Officer of TMX, while Black Friday sales were strong across the board in Australia, at a closer look there’s a different story behind the sales figures.

“Black Friday sales were up in most segments, but what’s interesting is discounting rates almost doubled during that time,” he says.

Raghav Sibal, Managing Director – ANZ at Manhattan Associates says retailers have had to get ahead of the predicted pull back in consumer spending and think strategically about how they can shift large amounts of stock as a recession looms.

“Many of the retailers who accumulated more stock than they needed have had to offer prolonged periods of discounting during peak sales periods,” Raghav says.

Similarly, sports retailer Nike recently reported a rise in earnings and revenue for its second quarter ending 30 November 2022 – however the retailer spoke of the need for “aggressive markdowns” in an attempt to liquidate inventory.

Many retailers worldwide are on the same journey, and locally in Australia e-commerce retailer Kogan revealed as of June 2022 its inventory levels reached $227.9 million – compared to $160 million the previous year.

However, Manhattan’s Raghav Sibal points out discounting inventory as a way out of this situation requires a delicate balance.

“Turning inventory around quickly enough without giving up all of the margin, or too much margin, is a difficult situation to be in. Retailers will need to look at which categories, which brands and think opportunistically to free up cash flow and working capital,” he says.

According to TMX’s Travis Erridge, by heavily discounting, retailers dodged a bullet this year.

“During Black Friday, Cyber Monday and early Christmas sales retailers were clearly desperate to clear stock and get their inventory down. Selling large amounts of stock to free up warehouse space and capital is likely to help avoid some of the difficult inventory decisions retailers would have been facing in the first quarter of 2023,” he says. 

Creating a supply chain ecosystem

Volatility, uncertainty and disruptions are driving companies to shift their supply chain strategies and the key to success lies in the transformation to a more connected and self-orchestrating supply chain ecosystem.

“Many supply chains have traditionally been ‘broken’ through inefficient operational methodologies, lack of visibility and resistance to technology deployments and partnerships etc., and this continues to be one of the key challenges for supply chain operational excellence during and post pandemic,” Zebra Technologies’ Royston Phua says.

Similarly, Raghav Sibal at Manhattan Associates notes that the organisations who came out of this period profitably have managed the supply chain effectively and digitally. “They know where their inventory is, they have visibility across their network and they are making stock available at the right time, and at the lowest cost to the consumer,” he says.  

In a survey conducted by PwC, which featured responses from 1,600+ executives across seven industry sectors in 33 territories, the companies who were identified as “Digital Supply Chain Champions” were well ahead of the curve when it came to supply chain excellence.

Those identified as “Digital Champions” by PwC achieved strong cost savings and sharp revenue increases across the board. They also benefited from more reliable delivery, reduced inventories and benefits beyond the numbers including strong collaboration and partnerships.

The report, titled Connected and autonomous supply chain ecosystems 2025, identified four areas that organisations need to develop: cross-functional organisation, digital supply chain upskilling, technical enablement and collaboration with ecosystem partners.

TMX’s Travis Erridge says the term ‘ecosystem’ is going to be a key theme for supply chains this year.

“In low capital environment business there is not as much opportunity to invest, so you have to innovate. For me, that means people working together and partnering up to share infrastructure, resources and developing supply chain ecosystems that benefit everyone,” he tells Supply Chain Insights.

However, long-term investment still has a major role in supply chain success. “By partnering and clustering to create ecosystems, businesses can facilitate short-term developments but they still need to continue to invest in the longer-term as soon as the capital becomes available,” Travis says.

While automated warehousing has been the focus for many businesses in Australia, businesses now have more of an urgent need to look at areas such as sales and operations planning (S&OP) planning, integrated business planning and end-to-end supply chain monitoring,” Travis says. “These are typically the boring, nerdy parts of supply chain management – they’re not as exciting as large-scale automated warehousing, but we need to get back to basics as we continue to navigate this unsettled environment.”

Manhattan’s Raghav Sibal agrees that unification will play a key role this year. “The unification of the supply chain is going to be the next critical area for larger multi-channel retailers to focus on. Not only do we need a unified supply chain – unification across the distribution and transport and warehouse systems - but also unification on the order management side. We need more and more visibility for the customer regardless of whether they are interacting online, in-person or at a digital self-serve kiosk,” he says.

Trends for 2023

According to Zebra Technologies’ Royston Phua, supply chain 4.0 will be the vision and mission for businesses this year. “Businesses will likely continue to explore and adopt cloud computing technologies and AI to improve decision-making and streamline operations. Digitisation and partnerships will also be critical for businesses looking to modernise and adapt to the new normal,” he says.

For TMX’s Travis Erridge, 2023 will be all about data-driven supply chains. “While we’ve had access to data for a long-time now, it was often data which looked backwards and not forwards. The difference this year will be using data to predict what’s going to happen, rather than analyse what has happened,” he says.

Though we are yet to see a decline in the most recent retail figures, most economists are predicting that the economic downturn and high inflation will drive consumers to be more cost conscious this year.

“In a volatile environment, sales may continue to be erratic and unpredictable but if you use data to make informed forward-looking decisions then you will be in a stronger position,” Travis says.

Dematic’s Pas Tomasiello predicts that customers will favour retailers with a reputation for fast and accurate delivery, alongside seamless returns. “There’s likely to be a shift in consumer behaviour, especially with online shopping, as customers can easily shop around and look for the best priced item online,” he says.

Zebra Technologies’ Royston Phua agrees. “We need to also remember that rising inflation and disruption do cause challenges to consumers who potentially have less to spend, but more alternatives to consider based on their preferred purchasing criteria,” he says.

In addition, Manhattan’s Raghav Sibal says improving the customer journey will be critical this year. “No retailer wants to put consumers in a position where they don’t have flexible choices around buying online, returning in store or through any channel they wish. Going beyond good customer service will be essential this year,” he says.

In line with TMX’s Travis Erridge’s thoughts on data and predictive analytics, Dematic’s Pas Tomasiello says AI diagnostics and predictability will be central to supply chain operations this year.

“Scenario planning in consideration of volatility and unknowns, alongside data and information, will be key to managing volatility and disruption this year,” he says.

The curse of high inflation

The International Monetary Fund’s (IMF’s) October 2022 outlook warned: “the worst is yet to come and for many people, 2023 will feel like a recession.”

Australia is a key player in the global economy, both as an exporter and consumer of goods and services. As such, global issues have a significant impact on Australian businesses.

“Industries such as timber, agriculture, and fossil fuels are particularly vulnerable to disruptions in global trade, geopolitical conflicts, supply chain constraints, and natural disasters. These disruptions can affect the ability of Australian businesses to sell their products and access the resources they need to operate, potentially impacting their financial performance,” Zebra Technologies’ Royston Phua says.

TMX’s Travis Erridge shares this view and says this year will be testing for many Australians and Australian businesses.

“Interest rates will continue to rise until inflation goes down, which is unlikely to be this year. With thousands of ultra-low fixed-rate loans expected to expire in mid 2023, the real economic hardship will be in the second half of 2023,” he says.

With so much uncertainty around capital and the economy, there is naturally a growing concern and caution around business investment. However, Travis warns that organisations still need to think long-term.

“The importance of planning has never been greater. Businesses need to continue to invest, because when the market returns, they need to be ahead of the game. The big watch this year will be ensuring that businesses don’t stop investing in their future. We’ve seen the pandemic cause 10 years of supply chain pain in a two-year period and this need to adapt, change and innovate to survive does not go away just because there is an economic downturn,” Travis concludes.