How to Cope with the Effects of Inflation and the Great Supply Chain Disruption
By Ted Witt, AEPA Board Member
If your school district ordered a set of Chromebook computers and was told to wait in line, or if your purchasing agent noticed a ream of copy paper costing upwards of $43, then you have experienced first-hand the inflation and supply chain disruption affecting global trade.
The chaos known as the Great Supply Chain Disruption is among the reasons why, when the news broke that we’ve been experiencing the highest degree of inflation in 40 years, the stock market tanked.
Days later (June 16), the Federal Reserve hiked its discount rate again. As of October 2022, the rate saw increases five times in hopes that inflation can be tamed. But these actions simultaneously pushed the stock market into depressing losses. Investors now face an official “bear market” after enjoying a market high on Jan. 3, 2022. Recession looms.
From a generalized macroeconomic perspective, we have too many dollars chasing too few goods. Between COVID shutdowns, a shortage of truck drivers, other labor shortages, clogged ports, energy policies, and a war in Ukraine, the supply chain is off kilter.
The money supply is high due to a massive influx of federal spending, the Fed’s management of the money supply, and changing consumer spending habits.
With towering inflation, the Fed’s newly aggressive approach to interest rates comes with this risk: the brakes on the economy may skid us into a recession. Past recessions have led to cutbacks and layoffs among government agencies and school districts. Already, the state of California anticipates an 11 percent reduction in tax revenues in the current budget year.
Time Magazine quoted Brad McMillan, the CIO for Commonwealth Financial Network, saying, “I think we probably are going to be facing a recession because the Fed has explicitly said that’s what it needs.”
In managing the economy, one action begets consequences, some intended, others dangerous, not only to our personal routines but to the management of our school districts.
Some economists interpret the current high demand as temporary; people may now be spending a lot, thinking that the prices will be even higher later if they do not buy now.
But as Coca-Cola CEO James Quincey told CNBC: Customers won’t “swallow inflation endlessly.”
From its conversations with Bank of America, CNBC contemplates that people are tapping into their savings.
Anna Zhou, an economist for the bank, confirms that consumers have money socked away from the pandemic. “On average, low-income households have $3,000 in their savings and checking accounts – nearly double what they had at the start of 2019,” the network reports.
School districts face a similar situation. Many still have federal one-time, non-recurring grants in reserves or money deriving from the multiple rescue efforts passed by Congress. However, the law stipulates the money can only be spent in several categories of acceptable expenditures, like upgraded heating and ventilation systems or new forays into technology. The Association of Educational Purchasing Agencies has purchasing contracts in those categories.
Looking into the future, school administrators are peering into a hazy fog with common questions like:
- How long will the war between Ukraine and Russia cause sanctions to last? What is the impact on fertilizer and food supplies, especially USDA commodities for school lunch programs?
- Will we face more requests for price increases and freight surcharges? What impact will fuel and transportation have on essential commodities into next year?
- Where will we get our technology products? Does China’s no-tolerance policy on COVID mean more shutdowns as it did for Shanghai and its factories?
- What are the looming threats over Taiwan, the leading source of our computer chips?
- Should we stockpile goods?
- What if we can’t get products from our current vendors?
- Should we cut budgets and save money in anticipation of a recession?
From a contracting perspective, here are four beginning strategies a school district can use to cope with supply chain shortages and inflationary pressures:
1. Don’t wait
Supply chain shortages are real. The waiting list to buy a small tractor is about one year. Air conditioning parts are frequently on backorder. Even common commodities can be hard to get. For example, most copy paper is now imported. This year, some mills and dealers have been putting their product on allocation. That means your regular school supplier may have less copy paper. Or, your dealer may be limited to historically purchased quantities. Consequently, new customers may be left wanting. Order products now to get in the queue. The wait does not get shorter in the current environment by postponing a purchasing decision.
2. Establish relationships
A school business official who studies purchasing patterns will often find a high degree of purchasing fragmentation within their operations. For example, it would not be unusual to learn that the district buys from ten different office supply vendors. Once you establish a contract with a low-price vendor, curb all maverick spending outside the contract. Concentrating spending with your primary contractor gives you more leverage against product shortages, requests for price increases, and shipping delays. Move to the head of the line by being a loyal contract-using customer.
3. Use a cooperative purchasing contract
If your school district is going to bid by and for itself, you have given up purchasing leverage, protections, management oversight, and efficiency. In contrast, using a reputable purchasing cooperative like AEPA will drive down product costs, help prevent price spikes, and ensure vendor compliance with contract terms. A reputable purchasing cooperative brings its collective expertise and purchasing power to achieve lower prices and hold vendors accountable.
4. Promote your purchasing agent to be a valuable problem-solver
By offloading bidding routines and paperwork to a cooperative, you can free up your purchasing agent to solve other severe inflation and disrupted supply chain problems.
For example, could purchasing agents redirect their time to energy conservation solutions and products? After all, natural gas prices will be skyrocketing this fall and winter. Could the district’s purchasing agent develop new product specifications that solve worker compensation claims? Could the district make its school buses into internet centers that bridge the digital divide? Does the instructional division need help renegotiating textbook prices?
Purchasing agents know the pulse of activity occurring among all buildings and sites. They deserve a higher role as a consultant and problem-solver so that they can breathe more space into their agency’s budget.
School administrators who study the economic landscape will be prepared to act defensively if inflation and the Great Supply Chain Disruption push us into a recession.
Ted Witt is the CalSave cooperative purchasing program administrator in California, where contracts are locally awarded by the Monterey County Office of Education. He is also a board member with the Association of Educational Purchasing Agencies. He currently sits as oversight chair for contracts related to technology and also landscaping equipment and supplies.