Managing Inventories and Sales Along With Global Inflation and the Supply Crisis
For all the hope we harbored about enjoying a strong economic recovery as the coronavirus pandemic seems to be partially under control, economists from the International Monetary Fund believe that a global recession could develop by the end of 2022. There is no question that the global economy has bounced back from the depths reached over several months in 2022, but merchants are still dealing with issues that date back to the Global Trade War, and they are being exacerbated by rising inflation, the Russian invasion of Ukraine, and overall uncertainty across global markets.
The gloomy scenario of a global recession is intrinsically tied to how likely the United States would be to fall into a recessionary period. As of late April 2022, Goldman Sachs analysts believed this was a likely outcome. We already know that the American gross domestic product outlook was lower during the first quarter, so we should not ignore the analysis issued by Goldman Sachs. With all this in mind, quite a few merchants have struggled to keep up with the various economic fluctuations of recent years, and managing inventories has been one of their most difficult challenges.
How Inventory and Procurement Managers React to Inflation
Let’s start with discussion of a fairly common scenario: Merchants who reduced their inventories during the most difficult months of the pandemic have been happy to see increased demand, but they are not able to stock their shelves because of the stubborn issues affecting the global supply chain. In the U.S., we know that various factors converged to create an ideal situation of high demand. Low unemployment, people working longer hours, coronavirus relief payments, and higher wages boosted consumer confidence during 2021, but the supply chain crisis got in the way of what should have been a long period of economic recovery and prosperity.
Most of the product price inflation we have seen in the U.S. since before the 2021 holiday season is related to the global supply crisis. To a certain extent, the government has tried to limit its influence on the marketplace. This has caused a huge impact on retailers and manufacturers who have been caught in a web of trade wars, border closings, and other challenges. The bottom line is that we have not really had a global recovery period that will make up for the short-term supply chain problems that arose in the first quarter of 2021, and now we are facing a recession.
We also know that a lot of merchants have not been able to restock their shelves with enough inventory to avoid higher prices when their products are back on the market. We all know that inflation has eaten away at the value of the dollar, so how should price-conscious merchants react to this? It will depend on which product categories they offer, but in general, they should expect to see more inflation in their products than they would see in a traditional economic cycle.
Unless you are a merchant flush with cash, major inventory expenditures would be out of the question at this time. You do not want to expand into a new warehouse, but this does not mean your stock levels should be ignored. If anything, this would be a good time to stock up despite higher purchasing and distribution costs.
Understanding Inventory Risks and Costs
Not all merchants will be able to maintain overflowing inventories during periods of inflation or recession; this should never be done without a thorough risk analysis. Lost sales, for example, are part of inventory risks that should not be ignored. Do you have what it takes to move this inventory in terms of marketing and sales generation? If you can afford to lower your profit margins and are able to increase the pace of sales, your taxable income would be lowered, and you may be able to entice shoppers with prices that are more comfortable than the inflated average.
Under normal circumstances, high inventories are considered to be appreciating assets because some level of inflation is always expected. At this time, however, we do not know for sure that this will be the case because of uncertainty in the global supply chain. More than one economist at the Center for Economic Policy and Research believes that the inflationary pressures we are feeling now will not last as long as previous periods. What this means for both merchants and wholesalers is that their inventory overflow could turn from an appreciating asset into a speed bump in a matter of weeks. Needless to say, merchants should be able to rely on a strategy they can quickly implement to reduce inventory levels when the market suddenly shifts.
There is no single or standard recommendation for inventory managers in terms of reacting to the current situation. The only way out of the inflation upsurge we are currently going through would entail a full recovery of the global supply chain; moreover, we can’t ignore the impact of the war in Ukraine on the energy, industrial metals, and cooking oil segments. Let’s not forget that many global brands were forced to stop doing business in Russia, and this has cut their bottom lines as exporters. Should we see a peaceful resolution to the conflict in Ukraine, the positive economic impact would be felt almost immediately around the world.
The Bottom Line of Inventory Management During Times of High Uncertainty
Strategic inventory management should always be practiced by retailers and wholesalers at all times, but particularly when external events such as pandemics and armed conflicts put pressure on the market. The current situation is extraordinarily difficult, but not without precedent. More than a century ago, the influenza pandemic and World War I wreaked havoc on global trade and national economies. The difference now is that we operate on larger scales and within a highly competitive business sector.
There is an important difference in how retailers, distributors, and manufacturers should approach their inventory processes and strategies at this time. Market leaders and major players such as Walmart and even Amazon will act upon the advice given by economists and global policy analysts; in other words, their decisions are largely based on geopolitical forecasts and macroeconomic projections. All other market participants should rely on the findings and opinions of their accountants.
While the inventory strategies you adopt ultimately come down to the decisions you make, they should be based on principles of business accounting. Owners of small and medium-size business are more likely to be affected by past financial performance, and this is why it only makes sense to listen to accountants at this time.
Finally, the key to surviving these difficulties always falls to adopting proper pricing strategies. The best way to achieve this is to look at inventory costs and risks while using accounting principles to keep track of your business strategy. Most merchants understand that inventory costs are going to increase, and the question they need to ask is how high they will rise. They must also figure out if these new costs will be offset by an increase in sales volume. You should not automatically pass every cost increase onto shoppers, at least not across the board. Inflation will always be there, but your shoppers may not always stick with you as they try to deal with inflation themselves.
