The manufacturing supply chain has been bruised and battered in the last few years, and the hits keep on coming: the pandemic, extreme weather, geopolitical challenges, the Great Resignation, and a wave of retirements – and now, global inflation.

Supply chain managers are seeing more volatility in order cycle times, reduced inventory of raw materials and finished goods due to associated stock-outs and lost sales, as well as the need to find alternative, last minute — and often more expensive — transportation and logistics options, according to a recent survey.

The recent spike in prices and associated uptick in inflation can be traced back to the pandemic, global lockdowns, port closures and shortages of semiconductors and commodities such as steel, oil, copper and medicines, among other variables.

A recent article defined two main causes of rising prices related to inflation:

• Demand-pull inflation, when demand for goods or services increases but supply remains the same, pulling up prices, and
• Cost-push inflation, when supply of goods or services is limited in some way but demand remains the same, pushing up prices. 

We shouldn’t be so surprised by the level of inflation right now. Modern monetary theory (MMT), which has grown in popularity over the last five to 10 years, suggested that governments can create new currency money without significant consequences (such as inflation). I believe MMT’s assertions are proving to be false and are distorting demand.

It will take some time to figure out what is true demand. In the words of Milton Friedman, “Inflation is just like alcoholism.” When you start drinking or start printing too much money, the good effects come first, and the bad ones only later. Businesses want to increase productivity, but when demand outstrips supply, prices go up. Consequently, we often can’t meet the robust demand currently facing companies. All of these facts point to inflation affecting brittle supply chain networks.

First-generation supply chain networks were based on manual paper-based processes, spreadsheets and e-mail threads. Next came electronic data interchange, as a way to standardize and send documents, integrate them with systems and map them. However, the transactional nature of EDI automation means it’s often based on a brittle system that offers poor integration. Now we have modern systems with application programming interfaces (APIs), which can connect with other solutions across an ecosystem rather than a network, leading to more flexibility.

Here is where optionality and digitization come into play. Optionality is defined as something that offers more than one good solution to complex challenges. To react to brittle supply chain issues, companies need alternative solutions that promote optionality. Like dating, dining or rideshare apps, digitization promotes optionality by presenting users with a wide variety of options.

In an inflationary environment, the one constant that promotes deflationary forces is digitization. More so than automation, it provides the optionality that businesses need, especially supply-side options when faced with the pressures of inflation.

Forward-looking companies are using digitization to move from brittle supply chain networks to flexible, API-based ecosystems that are composable, and therefore able to increase supply in response to higher demand. Say that a brand working with 50 suppliers needs to add or subtract some of those. How can it do that with speed and grace? Digitization with an interconnected ecosystem allows for such changes.

The global supply chain is exceptionally lean right now; any disruption causes immense problems. If supply chains were more agile, they could maintain their lean operations but also be much more responsive to disruptions. I often use a sports analogy to talk about the supply chain: agility is your offense, while resilience is your defense.

With the current inflationary scenarios in place, supply chain leaders are navigating disruptions by adopting technologies. According to a recent survey, 72% of supply chain leaders expect most of their processes and workflows to be automated in the next five years. Digitization and automation are becoming essential in the supply chain ecosystem. The survey also confirmed that 87% of supply chain leaders plan to implement execution management systems.

Supply chain leaders also need tools that speak to the current labor-related constraints. Businesses are facing inflationary pressures resulting from full employment and a very low unemployment rate, the gray wave of retirements, the “great resignation,” and low immigration rates.

Digitization responds to many of the inflation-related challenges facing manufacturers today. Software that builds efficiency into the supply chain ecosystem is critical. The inflationary impacts we’re currently seeing on the supply chain won’t be solved overnight. But it’s way past time to get started.

Jason Tham is co-founder and chief executive officer of Nulogy.