The Minimum Wage Hike

California’s minimum wage went up to $20/hr. for fast food restaurants with at least 60 locations nationwide that do not make bread. This law is causing widespread unintended consequences. For example, Fosters Freeze in Lemoore closed suddenly after the wage hike. Mod 5 Pizza is closing five locations. There are widespread price increases including at In n Out, Burger King and more. Significant layoffs are also occurring at restaurants like Pizza Hut, Round Table Pizza, and Auntie Anne’s as companies determine how to deal with the wage hikes while maintaining profit levels. Some franchise owners are “on the move” to states with less regulation such as Nevada. It will also negatively impact manufacturing and supply chain as companies compete for resources and increase prices. The Skills Gap and misalignment of high-skilled and low-skilled jobs will worsen.

More Shortages & Sky High Prices…..NOT Chocolate!

The price of cocoa has doubled in the last year. After three years of poor cocoa harvests with a weak outlook, the supply of cocoa has been slashed. Thus, prices are escalating and shortages are becoming widespread. Processing plants are saying they cannot afford to purchase the beans. For example, 60% of the world’s coca is produced in Africa’s the Ivory Coast and Ghana, and these plants have stopped or cut processing. Unfortunately, there is a massive misalignment of demand and supply which is creating supply chain shortages and causing inflationary pressures. In addition, substitutes are starting to occur. To read more about persistent shortages, see our article, “Supply Chain Shortages Remain a Concern“.

Egg Inflation

The largest producer of fresh eggs, Cal-Maine Foods, Inc. temporarily shut down one of its facilities due to the bird flu. It also resulted in the depopulation of 1.6 million hens. These issues are bound to lead to further price increases. Egg prices increased over 8% in the last month, have more than doubled since before the pandemic, and are bound to go even higher as potential shortages loom. What is the bottom line? Supply and demand misalignment is creating havoc throughout the supply chain.

It Isn’t All About Food

Oil and gas prices are increasing again, which will have an impact on countless products from medical devices to electronics and industrial machinery. Since the supply chain has been thrust into chaos throughout the world (listen to our recent Supply Chain Chats on what’s going on in the global supply chain), container shipping rates are increasing. And after the recent bridge collapse in Baltimore, the automobile supply chains have been disrupted, and it is likely to lead to inflationary pressures. No matter the product, supply chain risks have been heightened.

How to Navigate

Unfortunately, there is no easy answer and magic wand to resolve the shortages and realign demand with supply. On the other hand, the focus of SIOP (Sales Inventory Operations Planning) is to align demand with supply and provide the visibility and insights to proactively navigate these rough waters. For example, clients are reallocating capacity among production facilities, making make vs buy decisions, offloading to supplement short-term spikes in demand, and maximizing customer and product profitability with a SIOP process. To learn more about these strategies, download our complimentary book, SIOP: Creating Predictable Revenue and EBITDA Growth.

In addition, there is no doubt the proactive clients are finding ways to leverage ERP systems and advanced technologies to automate, digitize and better navigate these trying circumstances. For example, a healthcare products manufacturer is using artificial intelligence and robotics to produce standard product with minimal resources so that they can dedicate their high-skilled talent to their complex product lines supporting aerospace and defense. Another client is pursuing additive manufacturing/ 3D printing to get a leg up on the competition and bring down lead times to support growth plans. There is plenty of opportunities if you look for them!

If you are interested in reading more on this topic:
How Do You Rate in Your Supply Chain?

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The Economy: Big Picture

In the last month, we’ve participated in at least six economic forecast presentations or discussions with experts (economic, banking, investment, manufacturing). Although they each had nuances, common themes emerged. Adding our expertise into the mix, we see volatility on the horizon. 

The bottom line is that inflation is likely to continue, interest rates are unlikely to decline near-term without creating additional down-the-line inflation, unemployment will have fits and starts and trend up slightly yet the labor participation rate will remain lower than pre-pandemic. From a jobs standpoint, low skilled jobs are being automated, yet high-skilled jobs are experiencing a severe skills gap. Overall, the economy will be slower than it has been. Last but not least, geopolitical risks are concerning every expert, leaving volatility the name of the game in the foreseeable future.

The Economy & The Data

A summary of findings from recent research on the state of the economy includes the following:

• Stimulus (COVID money flooded the economy): Inflation would need to rise by 30% to absorb the stimulus. So far, inflation has gone up around 20%. Thus, there is around 10% left to absorb to get supply and demand in alignment. If interest rates stay put, the COVID funds will run out in about a year. Otherwise, we will have spurts & starts.
• Government spending: Government spending has continued at historic levels. For example, in 2023, nominal GDP was up $1.5 trillion yet federal debt increased $2.5 trillion, leaving a gap. Debt is increasing at what some see as an alarming rate.
• Inflation rate: It has gone up by 20%, but to absorb the stimulus, there is still 10% to go. It is likely interest rates will remain flat to work through the COVID money. If not, there will be bursts of inflation and recession (volatility). Inflation is likely to stay higher than the goal around 3-3.5%.
• Unemployment rates & labor participation rates: Layoffs surged 136% in January to the second-highest level on record with financial companies, the technology sector, food production companies, and retail with the highest levels (in order of sequence). On the other hand, these findings led the experts to think employers would show the latest hiring at 180,000 workers yet the number came in double that amount (353,000). The unemployment rate stayed about the same at 3.7% with the labor force participation rate at 62.5% (which close to 1% lower than pre-pandemic, 63.4%). There is 1.3 jobs for every person looking for a job. From a client point-of-view, they simply do not have the high-skilled resources required although they are automating low-skilled jobs, and depending on the industry, they have put a pause on hiring.
• Wages: Workers’ wages are improving but they still have not caught up with inflation. In the last three years, real average hourly earnings are still down 2.4%. Thus, people are not feeling better.
• GDP (gross domestic product): Real gross domestic product has largely recovered. It increased 3.3% in the 4th quarter and consumer spending has remained relatively strong. It shifted from goods to services, but has held up overall even with the interest rate hikes thus far.
• Banking: There is concern about the regional banks. They hold most of the commercial real estate loans that will need to be refinanced at higher rates over the next few years. Also, bank’s liquidity requirements are driving concerns with the changing of bonds prices with the quick increase in interest rates.
• Geopolitical risk: Every expert mentioned concern around geopolitical risk. It will lead to inflationary pressures with reshoring, increased prices (for example, the Red Sea rates, diversion costs, and/or expedite costs), impact on energy prices, etc.

The bottom line can be summed up in with the misalignment of demand and supply, the shrinking workforce (with Baby Boomer retirements – by 2030, the youngest of the largest generation in history will be older than 65) combined with the divergent needs for high-skills vs low skills, and the emergence of high geopolitical risk. Thus, volatility and uncertainty will remain.

What Should We Take Away

Smart executives will take bold actions to ensure they can supply their key / ideal customers while pruning low margin/ non-value added customers. They are adding customer/ product profitability, pricing, and costing trends into their SIOP (Sales Inventory Operations Planning) processes to evaluate options, set strategy and make decisions.

They will invest in the best high-skilled resources, supplement with additional options (refer to our article, Where the Talent Has Gone, and create a high-performance culture. Strong leaders will be pivotal to ensuring success. People follow leaders; not companies.

Proactive clients are upgrading ERP systems to ensure the basic processes (blocking and tackling) are in place. Additionally, they are rolling out advanced technologies including artificial intelligence (AI) to automate, digitize and thrive. To read more about these strategies, refer to our article, Automate, Digitize and Thrive in Supply Chain. It will be cornerstone to success in the next decade.

Additionally, smart clients are upgrading business processes, cleaning up their data to better utilize their ERP and peripheral systems, and building flexibility and scalability into their future thinking. The core processes include demand planning, production planning, engineering (for engineer-to-order ETO and configure-to-order CTO companies), production and inventory control, and replenishment/ distribution planning processes. From a data perspective, it is important to review bills of materials, routings, work centers, item masters, customer and supplier masters, and MRP parameters. Proactive clients are ensuring the basics are intact and they are focusing on the roadmap to stay at least a few steps ahead of changing conditions.

If you are interested in reading more on this topic:
Supply Chain Volatility, Risk & Capacity Remain Critical Priorities

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Inflation and disruption are increasing again. Wholesale inflation as measured by the producer price index increased by .5% since last month which was more than expected. Core inflation (excluding food and energy) went up by .3% which was also more than expected.

These figures coincide with what we are seeing across a broad spectrum of clients. Raw materials, components, and other inputs continue to increase and are challenging to cover with increased pricing. Thus, margins decline, additional improvements and cost reductions are pursued, and clients prioritize customers and/or increase prices to cover costs.

Disruption is also increasing as the UAW strike persists, the Israel war started, and the China risk continues to escalate. Unfortunately, potential strikes and labor union negotiations / disputes seem to be contagious and are exploding across the supply chain. At the minimum, it causes supply chain partners to make preemptive moves and creates disruptions along the supply chain. Global risk continues to expand and appears contagious as well.

Inflation: Pivoting From Reactive to Proactive

If clients are not proactive in addressing rising input costs, margins decline. Unfortunately, during the height of the pandemic, they were racing to keep up to simply survive and didn’t always keep with inflationary pressures quickly enough. Your options become limited as time goes by. For example, a potential consumer products manufacturing client had significant price increases on purchased components. Fast-forward a year later, and the executive team wanted to address these issues. However, by then, customers were less accepting of price increases and too much time had gone by that cost reduction efforts were lagging.

We were brought on to provide business consulting assistance. Although time has passed, we helped them put together a customer and profitability model so that they could decide which products to discontinue, which customers to request price increases from (and how much), which customers and products to focus on and where to focus operational improvement efforts. We provided a roadmap for improvement; however, the benefits were muted from what could have been achieved if proactive earlier.

On the other hand, a building products manufacturing client also experienced rapid and frequent price increases with their raw materials. They quickly pivoted and pursued two paths forward. First, they assessed the impact on product groupings and key customers and passed on price increases for what seemed fair. As most clients did, they absorbed some of the price increases while passing on what made sense. We also proactively addressed service policies with the Sales and Operations teams. And they pursued backup suppliers, material changes, waste/ scrap reduction activities, and several other operational improvement strategies to maintain and improve margins. For additional ideas strategies for proactively navigating inflationary pressures, read our Brushware article “Case Study: Strategies to Successfully Navigate Inflation“.

Disruption: Pivoting From Reactive to Proactive

Similarly, if clients are not proactive in addressing disruption, it can lead to lost and unhappy customers and decreased profitability. Depending on each client’s end-to-end supply chain, the situation is different. For example, if the client is supplied from Russia or Ukraine, disruptions have already occurred, and there doesn’t appear to be an end in sight. If transported through the Suez Canal, they were likely disrupted by the stuck ship. Certainly, during the pandemic, if supplied by Asia, they experienced delays as ships mounted outside the L.A. and Long Beach harbors. Recently, if they went through the Panama Canal, they experienced delays and/or increased costs. If related to one of the potential striking entities, they could have experienced preemptive disruption, and if they related to striking entities, they will experience delays. And these are only the ones that popped to mind. We cannot wrap up a paragraph on risk without mentioning the heightened risk of producing in China.

Proactive clients were far more successful during the pandemic and post pandemic as sales pipelines were robust for those that are proactive and ready to pivot. For example, an industrial manufacturer was quickly able to move crews that were cross-trained to the most critical jobs. They also offloaded a portion of their volume to regional and local suppliers that could start up rapidly to supplement their volume. They also pursued creative strategies to hire additional resources and retain talent. They purchased ahead for high risk items and pursued backup sources of supply. Additionally, they also rolled out a SIOP (Sales Inventory Operations Planning) process so that they could get ahead of their demand plan and pursue proactive strategies to ensure Operations could execute the plan while continuing to focus on operational performance and profitability. For additional ideas in pivoting from reactive to proactive with disruption, read our article “SIOP / S&OP: Creating Predictability & EBITDA Growth“.

The Bottom Line

The business pundits do not see an end for inflation anytime soon. As interest rates rise, the rate of inflation has declined; however, it remains sticky. The same story holds true with disruptions. Although supply chains have leveled out, supply chain risk remains at an all-time high and disruptions continue to occur. Successful clients are pivoting from reactive to proactive to satisfy customers, establish priorities and grow profitably.

If you are interested in reading more on this topic:
How Smart Manufacturers are Navigating Interest Rate Hikes

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Originally posted in Adhesives and Sealants Industry in May of 2023

As the healthcare industry supply chain faces more challenges, supporting industries must be proactive, resilient, and innovative.

Although the visible bottlenecks in the healthcare supply chains are getting calmer, volatility will remain high. From the impacts of increasing interest rates and bank failures to labor and material shortages to global conflicts, the risks in healthcare supply chain will skyrocket. This situation will create as many opportunities as challenges, and so the proactive, resilient, and innovative companies will thrive while the rest diminish. The key will be deliberately making that choice and ensuring your end-to-end supply chain partners are on that same trajectory.

Current Status of Healthcare Supply Chains

Since the supply chain is an interlinked series of suppliers, manufacturers, and logistics partners, the bottleneck moves from one link to the next as demand and supply are out of alignment. During the pandemic, the visible signs were abundant with ports stacked up at the ports. Fast-forward to post pandemic and much of China was locked down for almost a year, the Russia-Ukraine region has been in war and the Great Resignation has grown across the world (reducing the number of people in the workforce to lower than pre-pandemic levels), severely limiting supply while demand raged as people started to spend money, catch up on medical appointments and live life again.

Thus, critical shortages and extended lead times remain while there is a glut of inventory in the “wrong” products in the “wrong” place at the “wrong” time, leading to continued disruption, inflation caused by limited supply, and recessionary signals caused by the cost of capital and the oversupply of “wrong” products throughout the supply chain. To make matters more challenging, global tensions are on the rise with China and several other countries that supply essential medical devices, key materials, and active pharmaceutical ingredients, as well as other critical commodities and components.

Inflation, Workforce Issues & Labor Shortages Adding to the Volatility

Inflation, workforce issues and labor shortages are further disrupting healthcare supply chains. The country faces a shortage of up to 124,000 physicians by 2034, including 48,000 primary care physicians, according to the American Medical Colleges. Of immediate significance, according to The American Hospital Association, 136 rural hospitals closed from 2010 to 2021 alone. And, according to the Chief Healthcare Executive, the Texas Hospital Association has warned that 1 in 10 hospitals in that state is at risk of closure, with nearly half of that state’s hospitals projecting negative operating margins. As these medical professional shortages persist and closures occur, patients still require attention. Thus, healthcare is on the move, and the supply chains will have to catch up. Thus, more of the “wrong” items will be in the “wrong” places at the “wrong” time., thereby creating additional disruption, inflation to move and/or transfer them (from one owner to the next), and inventory stockpiles in the “wrong” place.

The Successful Path forward

There will be more opportunity than ever before for proactive, resilient, and innovative companies to gain market share during these volatile times. The successful companies will take control. Starting by targeting their ideal customers, they will focus limited resources on what provides the most value to these key customers, including providing value-add services such as vendor managed inventory so that their customers have the “right” products in the “right” place at the “right” time with minimal resources and risk.

They will go further into their supply chain to assess risk and mitigate shortages of critical components and supplies due to resolvable issues such as delays in transportation and material and labor issues at a third-tier supplier. Reliability will be prioritized over cost, and additional suppliers will be qualified even though the cost and time required is high. Backup suppliers will be scalable to mitigate issues such as those that occurred in the baby formula market. And taking control of essential healthcare supply chains will become a priority as reshoring and nearshoring production gains momentum. For example, Costa Rica and Mexico are building strong medical device manufacturing clusters to support healthcare supply chains. And the successful will deploy technology to support the sustainability and scalability of these initiatives.

It is no longer sufficient to leave manufacturing and supply chain reliability to chance. The proactive, resilient, and innovative will thrive and gain the opportunity to grab market share from those remaining on the roller coaster of volatility. Think ahead, be proactive and be willing to invest in supply chains of the future to support your ideal customers and be uniquely positioned to grow and thrive.

Lisa is founder and president of LMA Consulting Group, Inc., a consulting firm that specializes in manufacturing strategy and end-to-end supply chain transformation that maximizes the customer experience and enables profitable, scalable, dramatic business growth. She recently released SIOP (Sales Inventory Operations Planning): Creating Predictable Revenue and EBITDA Growth as an e-book that can be found at https://www.lma-consultinggroup.com/siop-book/.

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Supply chain disruptions continue at a break-neck pace. For example:

• Shanghai suspended production: Shanghai has suspended production in some factories due to power rationing. High temperatures are causing the government to shut down factories. This is not long after factories were shut down due to COVID restrictions. If China has to prioritize production, who do you think they will prioritize?
• China’s drought & impact on key manufacturers already in short supply: Apple iPhones, Tesla lithium batteries, Intel manufacturing, fertilizer companies, aluminum, solar, and more are affected. Concerning impacts….
• Trucking slows in China: If you could get product produced, it will take longer to get it exported due to COVID testing requirements. The timeframe has extended from days to weeks.
• Rail bottlenecks: Although port congestion has eased with China’s COVID shutdowns and retailers easing purchases due to inventory stockpiles, rail is the latest bottleneck. There are almost 34,000 containers designated for rail at the ports which is almost quadruple the standard. Rail had to slow down intermodal rail volumes because inland hubs such as Chicago are already congested and shippers aren’t picking up their containers.
• FedEx Ground contractors sounding the alarm: At least 1/3 of FedEx Ground delivery network is reportedly at risk of collapse because the contractors are facing soaring inflation, higher gas prices, and more complications. 
• Food & farming issues soar: 50% of the prices for farmers related to fertilizer and diesel costs. Fertilizer prices have tripled, diesel costs have doubled. Small truckers cannot make money transporting from farmers.  
• Russia shuts down pipeline: They said they are shutting down the pipeline for routine maintenance but…..
• China threatens Taiwan: They continue doing military exercises and tensions rise.

Are You Reactive or Proactive?

Supply chain disruptions will not improve anytime soon. 

• The Russia-Ukraine war rages on
• China continues to threaten Taiwan
• Inflation will continue to soar
• Stagflation seems like it will take hold with inflation and recessionary trends occurring simultaneously
• The supply chain remains misaligned

If you react to changing circumstances, you will forever be behind and not in control over your future. On the other hand, the proactive will thrive.

What are the Proactive Doing Differently?

What are the proactive doing to prepare for success?

• Expanding manufacturing: Aggressively expand manufacturing in the US. Putting your toe in the water will not suffice if you want to succeed long-term. 
• Reshoring/ Nearshoring/ Friendshoring: Move manufacturing to the US and surrounding, friendly countries such as Mexico and Costa Rica
• Getting out of China: The risk in China is VAST. Source new suppliers outside of China in countries such as Vietnam, India, Mexico, the US and  more. 
• Supporting common sense policies: Support common sense practices and policies to support US manufacturing and regional supply chains. 
• Investing wisely: Invest in future opportunities as closely held businesses sell or retire in increasing numbers and supply disrupted competitors will struggle.
• Investing in people:  The war on talent is real, and only the strong will thrive
• Prioritizing differently: The proactive are prioritizing based on customer and product profitability, market opportunities, and other progressive means instead of based on the loudest customer, panic, or another short-term metric.

Please keep us in the loop of your situation and how we can help your organization thrive during these times of volatility and disruption. There will be more winners created than at any other time than since emerging from the Great Depression. To gain additional ideas and insights on how to best navigate these volatile times and thrive, read our new eBook Thriving in 2022. Learning from Supply Chain Chaos. Download your complimentary copy.

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In this episode of Interlinks, we’re going to check in on some of the major global regions, namely Europe, North America and Asia Pacific, to see what is going on and what is topical in supply chain in summer 2022.

We’re also going to touch on what companies are doing more generally to overcome the challenges posed by inflation and the shortages of human resources that are generalized across the major regions at the moment.

To discuss these topics, I’m joined by two of my supply chain consultant colleagues from the supply chain special interest group from the Society for the Advancement of Consulting (SAC), Lisa Anderson, president of LMA Consulting Group from the Los Angeles Metro area and David Ogilvie, principal at David Ogilvie Consulting in Brisbane, Australia.

Originally published on Interlinks, August 15, 2022 .

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Click here for the transcript.

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Experts advise looking at the coming months with an eye toward estimating what will happen to cash balances. “Proactively managing cash flow is critical right now,” mentions Lisa Anderson, president of LMA Consulting Group.

“Retailers must deal with rapid cost increases by managing cash flow efficiently and communicating effectively with customers and suppliers. The benefits of inventory reduction must be balanced against the need to maintain critical stock for the most profitable items.

Inflation has taken root and is rising faster than any time in recent memory. Retailers everywhere are dealing with annualized cost increases of more than 8 percent—the fastest pace in 40 years and significantly higher than the 1.8 percent average of the past decade. According to the U.S. Bureau of Labor Statistics, The Consumer Price Index increased 8.5 percent for the year ended March 2022, which is an average of all items. Among items that impact the floral industry, prices for fuel oil increased 70.1 percent, gasoline prices increased 48.0 percent, natural gas prices increased 21.6 percent and electricity prices increased 11.1 percent. The resulting upticks in operating costs can cause serious damage to a business’s bottom line.

Most experts don’t see relief any time soon. They point to a number of root causes, one of which is energy.

Of all the steps retailers can take to mitigate the bottom-line effects of inflation, the most important is better management of cash flow. Inflation tends to accelerate the drain of money from company coffers and throttle the flow that comes in. If left unaddressed, these battling trends can gut profits and threaten business survival.”

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