Economically, we are certainly in some grey areas, where even the most intelligent economic minds are unsure of what will happen. Most recently, MarketWatch published an opinion piece on the feds ability to execute a soft landing with the economy, and the chances of stagflation. To understand the potential impacts of stagflation on retailers and supply chain models, we first need to understand what stagflation means.
What is Stagflation?
Stagflation is an economic phenomenon characterized by a combination of slow economic growth, high unemployment, and high inflation. It occurs when an economy experiences a slowdown in output and rising prices at the same time. This can lead to decreased purchasing power for consumers and decreased economic activity.
Stagflation is seen as a difficult problem for policymakers to address. It typically requires balancing the conflicting goals of reducing inflation and promoting economic growth.
What makes this current situation unique is the strong labor market along with the rising interest rates. While stagflation traditionally refers to a period of high inflation and high unemployment, in theory it is possible to have stagflation with low unemployment.
For example, rapid increases in prices due to high demand for goods, with a tight labor market could result in long term stagflation.
However, low unemployment is usually seen as a sign of a strong economy. So, the combination of high inflation and low unemployment is unexpected. Typically, stagflation is associated with an unfavorable economic environment where high consumer demand and increased production costs coincide.
How Stagflation Hurt Retailers and Supply Chains
For retailers and distribution oriented companies, preparing for a recession or stagflation is critical to successfully weathering any economic conditions. To prepare for stagflation, companies need to understand how it can hurt businesses. Stagflation can hurt your ecommerce supply chain and retailers in several ways, including:
- Decreased consumer spending. When consumers have less money to spend due to high inflation, this can lead to reduced sales and increased inventory levels.
- Increased production costs. If retailers face higher costs for production this can lead to increased prices for their products. This leads to retailers being less competitive and reduces demand.
- Uncertainty. Stagflation creates uncertainty in the economy. Uncertainty can lead to decreased investment and reduced consumer spending, both of which can negatively impact retailers.
- Reduced profitability. Higher costs and reduced demand can lead to lower profits for retailers. This can make it difficult for them to invest in new products, hire additional staff, or expand their operations.
Stagflation can make it difficult for retailers to maintain profitability and growth. As they face decreased demand and increased costs it can be challenging to drive profits. This can also have significant impacts on supply chain management, including:
- Increased production costs. If manufacturers face higher costs for raw materials and labor, this can lead to increased prices for the products they produce.
- Reduced availability of goods. If economic growth is slow, this can lead to reduced customer demand for goods, causing suppliers to reduce production. At the same time, if inflation is high, this can increase demand for goods, leading to reduced availability and higher prices.
- Uncertainty. Stagflation creates uncertainty in the economy, which can make suppliers hesitant to invest in new products or expand production. This can result in reduced availability of goods, making it difficult for retailers to maintain their product offerings.
- Disruptions to international trade. Stagflation affects different countries to varying degrees, this can lead to changes in trade patterns. These changes can disrupt international supply chains and make it difficult for companies to access the products and raw materials they need.
What Retailers and Supply Chains Can do to Counter Stagflation
Effective supply chain management means proactively assessing the day to day head winds and adjusting accordingly. While we may not the timing of a recession or stagflation, companies can certainly assess order fulfillment. Identify opportunities in the day to day warehousing operations to reduce costs.
By getting ahead of potential economic impacts, companies can decrease the negative impacts on customer service and develop effective warehousing strategies. Consider the following supply chain strategies within your operations.
- Improve operational efficiency. Implement a disciplined warehouse assessment to identify processes that drive up costs. Operational assessment should evaluate the processes, management systems, and flow through all departments. Additionally, it should identify KPIs and operational metrics that are being ignored, or that should be implemented. Begin by focusing on areas with the highest labor costs such as order picking and shipping.
- Cost management. Identify ways to reduce costs and increase efficiency in the operations. Implement the recommend changes from an operational assessment. Consider how the use of automation and technology can drive down labor and operational costs. Automation can greatly improve how teams manage warehouse operations. Even without automation, most operations can identify ways to reduce labor costs.
- Optimize facilities. It is vital that the existing facilities maximize the capacity and utilization of available space. With warehouse space at a premium, and long lease terms, companies cant afford to be wasteful. Understand ways to improve how product is being stored and opportunities within your warehouse layout and design.
- Build supply chain flexibility. Having flexible operations and supply chain processes that can quickly adapt to changing conditions can help retailers and supply chains remain competitive. Consider ways to leverage existing relationships with suppliers and distributors and potential storage or fulfillment options. Additionally, consider how 3PLs can support your operations. 3PLs have the ability to handle everything from order fulfillment to, kitting and other value added services. If your operations deal with high return rates, consider a 3PL to handle your reverse logistics. These options can often improve customer service and satisfaction.
- Freight options. Retailers and supply chains have been dealing with a wide variety of freight challenges from ports to small parcel delivery. An in-depth analysis of your inbound and outbound freight can identify opportunities to reduce time in transit as well as costs to customers. These types of analysis can also assist with determining the number of facilities and location within the US.
In summary, preparing for stagflation requires a combination of cost management, flexibility, and planning. Proactively review these aspects to help your company remain competitive and withstand the challenges of any economic environment.
A strong warehouse strategy and effective warehouse operations within your traditional supply chain will mitigate the risk from stagflation. Failure to plan is planning to fail. A warehouse consultant can easily help you navigate the challenges and identify opportunities for improvement. Leverage their expertise and knowledge on how other retailers and supply chains operate efficiently.
If the economy is fortunate to avoid a recession, or stagflation, your operations will primed for strong growth. This is the perfect opportunity to fine tune the operations and deliver exceptional results and customer service. Implementing changes can take time to implement, waiting until an economic downturn puts you behind the curve.