8/19/2022

Digitalization gives retailers essential tools to combat inflation

Digitalizing the supply chain can mitigate inflation’s impact.

In June, the U.S. Bureau of Labor Statistics announced that over the last year prices surged, exemplifying a key post-pandemic challenge facing retailers.

Amid ongoing supply chain woes, the global economic effects of the war in Ukraine, and fears of an impending recession, inflation continues to be a key concern. Compounding these challenges, the Federal Reserve is expected to continue raising interest rates through the end of the year, which will make access to much-needed capital even more costly.

In the current climate, digital transformation tools are of growing interest to retailers. According to an Economist Impact study sponsored by SAP, 78.6% of retail respondents have seen a modest to significant rise in spending to support digital transformation.

The long-term benefits of digital transformation are numerous. Digital transformation, or “digitalization,” applies the latest computing technology and industry best practices to key business processes like source-to-pay and procure-to-pay.

It enables procurement and finance teams to work across a cloud-based “digital supply network” with thousands of suppliers, distribution centers, transportation companies, as well as select financial institutions. This access to real-time data allows businesses to anticipate changes in the economic landscape or explore alternative sourcing options.

Digitalization opens the door to more effective strategies retail CPOs and CFOs can use to moderate the effects of inflation, and other negative economic influences.

Digital supply networks help reduce cost and mitigate risk
Procurement is experiencing a once-in-a-generation moment, in which it is evolving from being considered a “cost savings function” to a central and strategic aspect of business decision making.

During this period of inflation, procurement leaders should focus on their core mission: to source goods and services at competitive prices and ensure effective delivery.

With rising prices and goods in short supply, a digital supply network gives retail CPOs the tools to:

Identify and onboard lower cost suppliers quickly.
Automate manual trading partner collaboration to increase productivity and focus procurement teams on strategic initiatives.
Reduce end-to-end costs by redirecting supply and distribution channels to low-congestion ports and lower-cost ocean lanes.
Diversify supplier base to reduce risk.
Monitor alerts about inventory and order shipment delays and take action to prevent revenue loss.

Now is the time to dust off your working capital management strategy
For several years preceding the pandemic, working capital management strategies were not hot topics in the finance world. Interest rates were low, cash was plentiful, and the economy was growing at a steady rate.

In the current inflationary period, liquidity is the name of the game. Retailers are asking themselves, “How do I secure the cash to build the inventories required to meet consumer demand?” Suppliers are asking, “How do I get the funds to finance my orders?”

Now is the time to develop or refine a working capital management strategy. At a high level these are some of the key actions that comprise an effective strategy:

Monitor your working capital position. Closely monitor available cash and liquidity forecasts for your business and be prepared to take proactive steps.
Reduce costs by paying early. Leverage the availability of capital afforded by working capital solutions to negotiate early payment discounts with your suppliers.
Extend receivables or supply chain financing to suppliers. Although early payment can help your suppliers with their cash position, that may not be enough to ensure they have the funds they need to produce the goods you need. Working capital solutions enable you to offer affordable options to bridge the “cash gap” and keep production rolling.
Purchase and hold inventory. In inflationary times, the value of goods is likely to increase over time. As part of your overall strategy, consider building your inventory before prices go up.
Think collaboration. The capital liquidity of your suppliers can be critical to your business, but your cash flows may not always be in sync. As a guiding principle, implement a collaborative working capital management strategy that considers the needs of your business and of your suppliers to ensure the health of your supply chain.

An effective working capital management strategy gives retail businesses, regardless of size, the tools to collaborate with suppliers with clear benefits. With a healthy supply chain, goods are more likely to be available when you need them, and collaborative relationships with suppliers can help to mitigate unanticipated challenges.

Effective digitalization grants business decision-makers greater visibility into all aspects of a supply chain and makes it possible to implement more comprehensive working capital management strategies for long-term growth and economic resiliency.