Inflation. What is the current situation?
Inflation is the average price increase of the goods and services that consumers buy. An inflation rate of 2% is what economists see as healthy and means that following an index (CPI – Consumer Price Index) prices increase per year by 2% compared to the previous year. However, at the moment we are experiencing inflation of much higher percentages with 10% to 14% being no exception. This has a global impact on governments, businesses and consumers.
Effects of inflation on e-commerce businesses
The disruptions of the supply chains caused a long-term effect of rising prices leaving both businesses and consumers uncertain and resulting in decreased consumer spending confidence. Below you find four challenges for the purchasing operations of your e-commerce businesses.
- Rising prices – there is a cumulative effect in the supply chain with increased costs being passed on through the supply chain resulting in price increases at every link in the chain.
- Delivery delays – transport networks never truly recovered from the disruptions caused by the Covid-19 pandemic. This situation has only been intensified by the inflation of fuel prices. This has a significant impact on e-commerce businesses relying on quick, accurate and cost-efficient deliveries to serve customers.
- Overhead costs increase – as an e-commerce business, your fixed cost base will be smaller than if you operate as a brick-and-mortar and/or multi-channel organisation. However, there will still likely be an impact from increased rent and utilities.
- Decreased customer confidence – depending on your business’s sector you will feel the impact of less spending power of consumers. A change in customer behaviour can lead to a focus on essential goods and services – e.g. food, housing and transport. People will be less likely to spend money on ‘luxury goods’ and opt to buy cheaper or discounted products. Long-term inflation will only amplify this behaviour.
Inflation per sector
Not every e-commerce business will be equally impacted by inflation. The current level of inflation might be on average 14,5% (September ‘22 in the Netherlands), but percentages will vary per sector. However, the highest price increases in transport, energy and food will trickle down to other sectors. It will become more crucial than ever for your business to be focused on the performance of your products and monitor customer behaviour in light of current events.
3 ways to address inflation’s impact on your business
Whatever your sector, the likely impact of the wider economic conditions is reduced demand. The business needs to prepare for this eventuality in advance by adapting its cost base to ensure a profit can still be made. As a purchaser, you will need to consider how to adapt your purchasing plan and make your operations more efficient. Find below three ways to address the impact of inflation.
1. Focus on efficiency
Implementing automation allows you as a purchaser to focus on operational efficiency and reduce your fixed costs. Move away from a manual and time-consuming purchasing process and focus on more strategic tasks, such as monitoring supplier performance, negotiating with suppliers and/or working collaboratively with your marketing team on a new campaign.
2. Optimise your stock
With the use of a data-driven purchasing tool, you will be able to categorise and analyse your stock. This can be a very important step to getting insights into your product performance. Focus on product availability for your most important products (category A), to maintain meeting your customer demand. Getting insight into your stock (via the ABC analysis) means also that you can bring the less important B and C categories down in volume to save on stock holding costs. Also, consider putting slow-selling items on backorder, so that you do not have to commit to purchasing these products upfront.
3. Cash is king
In challenging times, cash should be one of the main focus points for your business. Avoid funds getting tied up in excess stock by selling what you have. Use data to show you what products you have been holding for a long time and work with the marketing team to sell them.
Control what you can control
The reality of inflation is that it will be always present, sometimes as a threat and sometimes without hardly any impact on your business or the spending levels of your customers. The purchasing department can play a role in how to deal with the effects of inflation. Adding automation to your purchasing process will allow you to work with a lower fixed cost base, master your replenishment and save on stock holding costs. Real-time data will allow you to purchase more dynamically, allowing you to respond quickly to changes in market demand. Inflation will play a factor in any business regardless of size. However, making sure that your business is focusing on what you can control is crucial in dealing with the effects of inflation.