"Net Input Cost Inflation" in Supply Chain - An enhanced way to report Supply Chain inflation

An unprecedented inflation in commodities has created an equally unprecedented situation for enterprises. In India, the WPI has consistently been in double digits over past 15 months or so & CPI has been in single digits, indicates that the enterprises have absorbed larger part of input cost inflation.

Supply Chain teams, particularly the Sourcing / Procurement teams have experienced a phenomenon that most of the practitioners have never experienced within their working life - a pandemic followed by sudden spurt in demand followed by trade barriers followed by geopolitical conflicts and in all that an unforeseen material inflation. Post the first few months of pandemic, commodity prices have shot out of the roof, post the Ukraine - Russia conflict even Oil is up 60% or so, agricultural commodities in some case have doubled. During these challenging periods enterprises ability to pass on the input cost to its end consumer has been limited due a post pandemic recovery period. Now with increased global pressures (trade, geopolitical & re balancing of Supply Chains) the Supply Side shocks will increase further.

 

An important point of deliberation is that - How does the Supply Chain report inflation?

Supply Chain inflation has, in my opinion, two strategic impacts;

a) Recognizing the Sourcing/Procurement teams efforts to de-escalate the entire input cost inflation to the enterprise.

b) Management gets deeper insights into impact of input cost inflation in its strategic decision making.

Take an example. Say Hot rolled steel prices in the markets have shown a 80% increase (with reference to the base price used by the Supply Chain). Theoretically, the enterprise may consider the same while calculating its COGS & ultimately the product pricing strategy.

While in reality, the Sourcing team deploys multiple Strategic & Tactical levers to have less than 80% input cost inflation. The levers may be forward contracts, volume based price discounting, altering delivery & payment terms, leveraging Supplier relationships, enhanced negotiations, Strategic stocking & some others. These initiatives by the Sourcing team, in practice, lead to dampening the input cost inflation. So the "Gross" inflation is reduced by a certain percentage points & "netted" off. This is a key reporting which has to be captured in Supply Chains.  

Reporting "Net Input Cost Inflation" which is arrived by the above method [Inflation based on base line minus efforts taken by Supply Chain ] is a true depiction of the organizational input cost inflation. Reporting Net Input Cost inflation shall also recognize all the efforts of Supply Chain in avoiding the full blown input cost inflation impact on the enterprise. At the same time Supply Chain shall be to evaluate which of its levers have proven to be ore effective in managing input cost inflation. Those levers can be deployed to the benefit of the enterprise.

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