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Three Ways Technology Helps Alleviate Inflation Challenges
By: Neil Krefsky, Eamon Ida, Haresh Chhaya, and Max Hendrickx
Inflation has become central to the business zeitgeist in a way that it had not for decades. With historically high rates for most of the developed world, organizational leaders are making decisions – such as reducing production, increasing prices, or seeking out new suppliers – based on the latest monthly economic report and less-than-precise outlooks.
But no matter where nations are on the roller coaster of steep rises, dramatic declines, and seemingly stable plateaus, inflation brings wide-ranging impacts that vary across industry, geography, and supply chain design. Adequate liquidity for smooth business operations can be affected. Centralized banking actions on interest rates can ease or restrict short-term lending and borrowing activities. Even supply chain challenges can dissipate or intensify as costs fluctuate and inventory on hand becomes less or more expensive.
There is no simple, magical financial instrument that can help businesses plan around the realities of inflation, but intelligent technology can help. Tools such as artificial intelligence (AI) and predictive analytics can help companies anticipate and see around the corners of their operation, simulate and prepare for multiple contingencies, and pivot their business models as needed. Best of all, they gain numerous options to understand economic circumstances, predict the impact, take near-term actions, and establish structures to secure a position of strength.
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Below are three key areas where these types of technologies can help companies understand the impact of inflationary challenges, act quickly, and prepare for what’s next.
Move Cash with Intelligence and Confidence
The overall value of money and assets reduces in the future, and having cash sooner allows a business to quickly accomplish more. To mitigate this risk, companies must recognize the potential impact of various scenarios, ranging from rising prices on commodities to shortages of raw materials. This knowledge then needs to be translated into comprehensive and clear cash flow projections and flexible strategies that can be adjusted to manage liquidity shortfalls and surpluses effectively.
Using working capital management solutions from Taulia, now part of SAP, finance leaders can guide their business down the best-possible pathways. They can choose to adjust receivables and payables strategies or tap the lowest-cost credit line available from their banking institution. Plus, working capital assets can be unlocked with financial tools such as dynamic discounting and supply chain financing.
The working capital management solutions accurately reflect inflationary conditions with AI-enabled forecasts and updated views that are always available to the business planner. From planning and simulation to picking the right funding alternatives and controlling processes, these functions work synchronously to help ensure effective coordination of cash movements – using a single source of trust integrated smoothly across the enterprise.
While every decision boils down to the movement of cash, the combination of well rounded, real-time information, auto-generated possibilities, and predictive insights can help businesses make the best choices with confidence. And as their values change over time, goods and assets can be purchased and maintained in the future at the original price with a carrying cost that’s less than the inflation rate.
Limit Exposure from Global Differences
Different geographies rarely have the same experience with inflation, but a rise in commodity prices inevitably increases raw material costs. And in higher or unstable inflation regions, currencies can depreciate quickly, causing exchange rates to spike.
These global economic fluctuations can be particularly risky for corporations that have borrowed capital in response to low interest rates over the last few years. Inflation is already eroding their planned repayment strategy for outstanding loans. And additional exposure to another region’s instability can further exacerbate cost pressures, squeezing margins tighter and limiting access to cash.
With the SAP Treasury and Risk Management application, treasury managers and financial leaders can monitor risk positions, commodity price changes, and currency conversion rates, even during the most volatile economic situation. They can develop compliant hedge accounting strategies with a complete audit trail, while staying compliant with regulations such as the Market Infrastructure Regulation (EMIR) and the most recent version of the International Financial Reporting Standard (IFRS 9).
Treasury teams can also gain insights to tackle debt and manage investments more effectively. SAP Treasury and Risk Management offers information such as available cash, balance risk, and return on investment (ROI) and monitors investments against potential interest rate fluctuations. In addition, borrowing and lending transactions through the life of a loan can be captured, analyzed, and reported as they occur.
Act Quickly Today and Prepare for Tomorrow
When the engineering and production of manufactured goods grow more expensive, businesses must decide on whether to reduce margins or pass additional costs to the customer. It is a tough choice, especially when people already feel financially overburdened.
By integrating SAP Digital Supply Chain solutions with SAP Business Network, procurement, supply, and logistics organizations can get the insight they need to generate more revenue from every spend event and optimize cost reduction. Together, they can run simulations and what-if analyses to identify and engage trading partners with the capacity and expertise to handle emerging situations such as scaled-up production and further drive down financial and material waste.
Of course, effectively managing inflationary risks requires businesses to have access to the right data to make decisions and move their supply chains forward. The combination of SAP Digital Supply Chain and SAP Business Network enables companies to manage resources more strategically in ways that help increase productivity, decrease operating costs, and free up employees for more mission-critical work. In addition, organizations can get ahead of supply chain delays and downtimes to prevent revenue loss and avoid unforeseen costs with visibility into inventory and production capacity, asset maintenance, and logistics processes.
Come from a Position of Financial Strength
With recent inflationary events in mind, understanding and managing the financial risks in the supply chain play a significant role in the race for survival. And companies that can step up and make the right decisions at the right time are the ones that have clear visibility over their procurement, supply chain, and logistics data and processes.
For many organizations worldwide, SAP solutions are already one of the most effective means of protecting their financial strength during times of inflation. And they will continue to alleviate their challenges as the portfolio continues to evolve to meet the needs of a changing economy and competitive landscape.
Inflation impacts costs, interest rates, and supply chains worldwide. Find out how SAP can help you address inflation challenges head on.