Supply Chain Shortages and Cost Inflation

Current cost inflation and supply chain shortages are unprecedented. This is partly due to a sudden surge in demand after the Covid recovery, but also to monetary inflation and structural underinvestment in critical sectors such as container shipping, mining and fossil fuels.

The question arises: how does this affect your business? A-INSIGHTS put together a simple cost calculation to demonstrate the impact of supply chain shortages on the cost price. Will your production costs also increase by +50%?

Pressure on the food supply chain is increasing
Russia's foray into Ukraine has accelerated the unprecedented market situation, characterized by supply chain shortages and extreme gas and energy prices. The economic sanctions imposed by the European Union on Russia will further increase pressure on the food supply chain. In addition, central banks want to end their stimulus programs and interest rates are likely to rise in the coming years. Combined with high prices for critical building materials, rising fertilizer prices, structural staff shortages and poor harvests, this poses an unprecedented challenge for companies in the food industry.

The impact of shortages on cost: the case of French fries
Let's use a simple example to quantify the cost implications. The production of chips is a resource-intensive process: in addition to potatoes, which are the largest cost item for chips (about 50%), the most important costs are gas, energy and container transport. These three components represent only 15% of the normal cost of a kilogram of chips, but their costs have increased significantly. At current market prices, these three factors increase the total cost price by 50%.

This scenario does not yet take into account other direct inputs (sunflower oil, packaging and potatoes) that we know also increase the cost price, as well as the lower quality of the potato harvest this year.

Disruption in the food supply chain: how to tackle cost inflation?
What we want to show with this example is that cost inflation can be significant. In fact, the disruption of the food supply chain is so significant that we need to rethink and redesign current food systems. The disputes between major food producers and food sellers are a clear signal. If not, the discussion will soon no longer be about the price, but about the availability of products and the continuity of supply. In short, that means your company needs to think about a longer-term strategy and tactic that takes into account:

• Rising monetary inflation, associated market interest rates and labor cost inflation
• Significant labor shortages in many occupations and industries
• Long-term high prices for gas, energy, transport and logistics
• Fluctuating resource availability and prices

A-INSIGHTS has drawn up four steps to help you factor these factors into your business operations. Download our Industry Insights Report on Cost Inflation in 2022 and learn how to prepare your business for what's to come.