Ask anyone about their reflections on last year and sure to be high on the list is the impact of rising inflation. Turn on the TV or pick up a newspaper and it is hard to escape just how this has impacted all our lives in so many ways.
There are a few upsides to inflation; much depends on which side of the transaction you sit on. Look hard enough and you will find them, however, be it in mortgage rates or in salaries, although the latter is often counterbalanced by higher prices at the checkout.
It is not just households that have been exposed to rising costs, businesses across both the private and public sectors, in industries such as manufacturing, transport, healthcare and consumer goods to name but a few, have all been hit hard by the impact of inflation.
The negative impacts of inflation are well known, but there are other, less direct downsides that can have a knock-on effect on the longer-term economy and impact an organisation’s ability to meet its corporate objectives.
With no sight of recovery on the horizon, it is no surprise that in response to a recent survey of industry leaders conducted on behalf of Argon & Co, 45 per cent of organisations have deprioritised ESG spend and 55 per cent have delayed or cancelled planned investment as a response to rising inflation.
You could look at it in terms of the glass half full and consider that 55 per cent have not deprioritised. This is a positive view in terms of environmental impact and could be because the ESG targets form a central part of the commitment made by the business and the long-term value delivered from them is clear or that in some sectors there is a higher priority placed on delivering ESG initiatives than others.
We should also consider that deprioritising ESG is often a path of least resistance where it doesn’t directly hit the bottom line often meaning that investment and resources can be diverted into delivering quicker wins, or that there is a lack of clearly defined goals and a strategy to meet them when compared to other initiatives.
Given the importance of supply chains in driving change in ESG topics and the key role that procurement can play in releasing value through ESG initiatives, this poses a real risk to the ability of an organisation to meet its goals and the contribution of businesses to the environmental targets that governments are committed to driving. In turn, it would not be unreasonable to expect that this would lead to an increased need for greater regulatory stimulus in the coming years to hit those targets.
There is much conjecture on whether inflation leads to growth and just how long the current impact of inflation will be felt by households and businesses across the globe. So it is understandable that 55 per cent of respondents expected to delay or cancel planned investment as a result of rising costs.
Whilst this feels like a very balanced number with respondents coming from a cross-section of industry, it is clear that inflationary pressures will not let up any time soon and therefore we must accept that to an extent, prices increase, and rising costs are unavoidable and that the knock-on effect of reduced spending will compound the effects of inflation for many years to come.
Delaying or cancelling planned investment should not limit an organisation’s ability to create shock absorbers in their business to mitigate the impact of inflation. Indeed, organisations that build capability into their processes and design out inefficiencies will find it easier to manage periods of disruption whether inflation driven or otherwise.
After many years of low inflation and low interest rates, is now the time for organisations to recognise the new normal and focus on taking steps to better manage disruption? For instance, reviewing inventory levels, which can act as a hedge during high volatility, longer-term planning and forecasting as a lever to automate and become more effective in a period of resource and capability scarcity or improving supplier relationship management (SRM) to work collaboratively with suppliers to drive out inefficiencies and manage costs.
Our experience tells us that by taking immediate action in the face of inflationary headwinds, supply chain and procurement functions face a real opportunity to capitalise on the tough choices that business leaders are taking to reduce investment across a range of initiatives that implement inflation focus strategies that reduce costs, remove inefficiencies, encourage innovation, and mitigate supply risk and disruption. Thus, in turn creating a competitive advantage for the long run, delivering a significant contribution to business-wide growth, and positioning the organisation to be ready to tackle the next challenge.
About the author: Chris Gardner is the managing principal at Argon & Co Australia.
