FOOD INFLATION AND SUPPLY CHAIN MANAGEMENT
SYED ALAMDAR ALI
Hailey College of Banking & Finance Lahore
July 23 - 29, 2007
Inflation has always been a dilemma for the economy of Pakistan. Fortunately or unfortunately it provides opportunities to the controlling authorities to camouflage their inefficiencies. A view of the items that constitute the index of inflation reveals that about 40% of the weight is assigned to food items while measuring the inflation for the country. According to a survey report of the World Bank, Pakistanis spend about 45% of their monthly income on food items and about 20% on fuel and power. Therefore any impact on the prices of items falling in food and fuel segment will definitely have significant effect on the inflation figures of our country. The State Bank of Pakistan and the Ministry of Finance in their reports has also emphasized it with great concern that the existing rising inflation in the country is cause of rising food prices. This is an economic development phenomenon. The pattern of consumption of the economy definitely needs to be moved from consumption goods to investment goods.
Over consumption on consumer goods affects the economy in a number of ways. For instance, due to continuous increase in population the demand for consumption goods keeps on moving higher thus exhausting the existing production capabilities of the economy. Due to the shortage of supply the effect goes on to the price till the time the authorities decide to import required goods. Such imports also ultimately increase inflation. The government definitely needs to have reserves of either the currency of the country from where the imports are intended or the reserves of the currency acceptable to the goods exporting country. These reserves are created due to the exports the importing country has made to the exporting country earlier, or from the remittances from the exporting country, or in the ultimate case the importing country will first have to borrow the currency acceptable to the goods exporting country and then it will utilize the currency to pay for imports. Such loans are subject to many risks the most important of which will be exchange rate risks. The loan of so obtained will keep on increasing if the currency of that country appreciates, and so will be the interest payments on such loans. As the loans are spent on consumption goods therefore the burden of repayment will be on the existing resources. The government will have to generate additional revenues for repayment of loans by either taxing the individuals directly or taxing the production. Taxing the individuals is more a political issue. It is generally observed that masses react more abruptly on taxing themselves compared with taxing the production. The reason might be the undocumented income! In case of indirect taxation it is the consumption of the masses that is taxed. There are many individual who have undocumented income resources therefore they manage to sustain the production taxation. Furthermore, in case of production taxation it is not clear how much tax has been paid by the individuals which also conceal the income, further many individuals do not wish to claim anything at the time of tax assessment because they find it better to conceal their income even though the tax on consumption has been deducted as withholding tax. The better option of increasing revenue in this scenario turns out to be production taxation. Such taxation ultimately increases the cost of production and in case of persistent imports will turn out to be leading to cost push inflation which also carries unemployment with it
An alternative available to the imports is managing, improving and augmenting the domestic supply chain. A supply chain primarily consists of all the parties involved in fulfilling the customer requirements. The supply chain consists of not only the manufacturer and supplier but also the transporters who have to carry the goods from the manufacturing point to the consumption point, retailers and in many circumstances the customers themselves.
In an economy like that of our country where the markets are not very well structured the responsibility of managing the supply chain lies primarily on the government. In order to achieve the goal it must realize that a successful supply chain management involves various decisions relating to the flow of information, product, and resources. Here significant economic decisions are required to increase the supply chain surpluses. These supply chain decisions fall into three categories:
Supply chain Design: In this phase the government apart from developing the marketing and pricing plans should try to structure the supply chain over the next several years. It should decide what the chain's arrangement will be, how the resources will be managed to augment the supply and what extra process needs to inserted or eradicated from the existing supply chain in order to achieve the required results.
Supply Chain Planning: Empirical evidences show that the decisions made during this phase are accomplished at least in a period of four months unless taken on war basis. The structures of supply chain are temporarily static in nature. These structures establish the parameters within which the planning must be done. The ultimate objective of the supply chain planning is to maximize the supply chain surplus that can be generated over the planning horizon keeping in view the parameters established during the planning phase.
Supply Chain Operation: The time perspective here is weekly or daily. During this phase arrangements should be made to access the average individual requirement. At this level the supply chain structure is fixed and preparation policies have already been defined. The ultimate objective of the supply chain management at the operational level is to meet the requirements of the masses at the individual level.
Having made basic decisions about the supply chain the next objective is to identify the drivers of supply chain which interact with each other to determine the supply chain's performance in terms of responsiveness and efficiency:
Conveniences: These are the actual physical facilities in the in the supply chain network where the products are gathered, congregated, or made-up. The products are stored basically first at production sites and then at storage sites. The decisions regarding these have significant impact on the performance of the supply chain. For instance, in case of wheat, sugar etc., the government has many warehousing facilities because it has to meet responsiveness during the whole year even though it costs efficiency.
Stock: This encompasses all raw materials, work in progress and finished goods in a supply chain. Changing the inventory can affect the supply chain's responsiveness and effectiveness awkwardly. For instance, holding huge amount of wheat, sugar etc., may be very highly uneconomical for government. But not doing this will affect the market balance abruptly.
Haulage: It means moving the goods from one place to the other. It can take the form of many combinations of modes and routes each with its own performance characteristics.
Information: It is undoubtly the biggest driver of supply chain. It consists of analysis of facts and figures concerning inventory, transportation, costs, prices, and customers throughout the supply chain. Information enables the government to make the supply chain more objective and responsive and efficient.
Starting place: These are the options that how the government will assign the performance of supply activity such as production, storage, transportation, or the management of information. At the strategic level this will determine what should function should primarily undertake by the government itself and what should be entrusted to the private sector.
Consequences: It means how the government will regulate the prices of goods and services that have been made available in the supply chain. Prices affect the behavior of the prospective buyer of the goods or service thus it ultimately affects the supply chain performance.