Welcome to Elementum’s Supply Chain Market Report. Business leaders need to know what’s on the horizon and how to prepare their organizations. This monthly newsletter observes one or two important macro trends through the lens of Supply Chain Management. We review how those trends are likely to impact Supply Chain and what leaders can do to adjust. We’ll also highlight emerging technologies that we believe can have an outsized impact on global supply chains.
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Supply Chain Market Report – July 2022
This edition will cover:
- The signs of looming stagflation
- How executives can prepare their supply chains
- The imminent problem of staffing shortages
- The latest use of drones in supply chain
- Notable changes in the leadership ranks
The economy is careening toward Stagflation
While countries all over the world responded to the pandemic in March 2020, companies quickly began to see the cost to produce goods go up. In just 21 months, the Producer Price Index went from -2% to almost 10% in year-over-year change.
As companies began raising prices to cope with increased costs, consumers started seeing the impact on their own pocketbooks. Now, the Federal Reserve is deliberately trying to bring down inflation by raising interest rates, and while inflation has been one of the country’s top concerns, there are reasonable indications that the Fed’s actions may inadvertently push the economy into a recession (i.e. contracting output). However, the risk of the less discussed, but potentially more damaging scenario – a prolonged period of stagflation (i.e. slow growth plus high inflation) – could also become a reality.
What are these signs?
- Sustained Inflation. In 2021, Treasury Secretary Janet Yellen optimistically predicted that inflation would be transitory. Most now recognize that inflation has not been transitory. In fact, June’s report from the Bureau of Labor Statistics showed that inflation is accelerating.
- Stalling Demand. Output stalls as price increases reduce demand and it becomes more expensive to borrow money. Early signs of demand destruction are cropping up in various sectors. Prices of agricultural oils (e.g. soybean, palm kernel, and rapeseed), timber, fertilizers, and metals (i.e. aluminum, copper, iron ore) have fallen nearly 5% from May to June. This could indicate manufactures are expecting to reduce production and are, therefore, ordering fewer raw materials.
- High unemployment. Corporate layoffs are starting to make headlines. Notoriously, Elon Musk said that Tesla would lay off 10% of its salaried workforce in the next three months. Meta froze hiring. Peloton cut 3000 employees. Real Estate companies Compass and Redfin cut 10% and 8% of their workforces, respectively. Several noteworthy tech companies have announced layoffs, which some interpret as an early sign of a broader economic trend. While a low unemployment rate has been the silver lining in the economy up until this point, these are the earliest signs of a tipping point in a tight labor market.
While everyone has started to talk about Recession, these signs indicate that the economy is slipping into a period of Stagflation.
But why should anyone care? There are several reasons why Stagflation is actually worse than Recession.
First, any increase in economic output during Stagflation can be erased by the diminished purchasing power of the dollar. For example, in a Recession the economy could contract by 2%. In Stagflation, the economy could grow 1%, but, if inflation is 10%, the real impact consumers feel is a 9% contraction.
Second, Stagflation is much more difficult to address. In a Recession, there is usually a market that needs to course correct (e.g. tech stocks, mortgages). The purchasing power of the dollar can remain relatively stable. With Stagflation, high unemployment is exacerbated by the eroding effects of high inflation. Imagine being unemployed while everything is getting 1-2% more expensive every month.
Finally, it takes much longer to recover. The last time the economy went through Stagflation, it lasted nearly a decade, which is much longer than the typical recession. During that time, the Fed was able to raise interest rates to 20% to tamp down inflation. Some economists have said that today the Fed could likely not raise rates above 4-5% before triggering a federal debt crisis. When Volker raised the interest rates to 20% in 1980, the US debt was $908B and the Debt to GDP ratio was 32%.
Today, the US debt is $30.5T, and the debt to GDP ratio is 129% (!).
This could be far worse than an economic speed bump
How could Stagflation impact Supply Chain?
Over the last 2 years, Supply Chain teams have been struggling to procure and manufacture enough inventory. Global supply constraints have come from (1) supply-side disruptions like China’s Zero-COVID policy and the Russia / Ukraine conflict and (2) from demand pressure as federal stimulus flooded the market with extra cash in 2020 and 2021.
As the economy begins to stall, the problems will reverse. The new headaches for Supply Chain practitioners will be canceled orders, demand destruction, and delayed receivables. Suppliers will continue to ship orders in an effort to get the inventory off their books.
If left unchecked, these issues can severely hurt the company’s outlook.
Dr. Bruce Arntzen’s article Recession Proof your Supply Chain is relevant. In it, he warns of six ways a downturn can impact the supply chain and how to mitigate them. Summarizing Arntzen:
- Inventory piles up as customers cancel orders
- Customers stall payments and stretch payables
- Inbound material builds up too much raw inventory
- Suppliers can go out of business, constraining critical parts
- Direct labor spending stays high
- Overhead spending stays high amid eroding sales
His common-sense advice on how to overcome these impacts boils down to: be prepared and act quickly. Whether the economy slips into a recession or stagflation reins, supply chain leaders would do right by embracing Dr. Arntzen’s recommendations.
Have open lines of communication with customers and suppliers so that when things go wrong, leaders can adjust as fast as possible. Modify designs so as to use up excess raw materials, allow for substitute parts, and leverage industry standard components. And, yes, reduce workforce, outsource functions, and control costs.
Most importantly, have the difficult internal conversations to align executive leadership. When demand craters or costs shoot up, it’s too late to have the “what do we do now” conversation. The economy is definitely hitting a period of high volatility. Run the scenarios internally, identify your key metrics and triggers, be prepared with different action plans, and execute intentionally and confidently with the full support of your company’s C-Level.
What are Supply Chain leaders facing in the short term?
Already, Supply Chain leaders are trying to cope with staffing shortages, high wages, and burned out employees.
It’s obvious that Supply Chain teams have been understaffed over the last two years. Talk to anyone working in Supply Chain, and they were probably working 12-15 hours per day to keep up with demand. But, during an economic downturn, keeping demand as high as possible through world class customer satisfaction is the primary objective. When companies fail to invest in Supply Chain, customer experience suffers.
Executives need to determine how to adjust to the likely economic downturn. Should they fight to keep requisitions open and try to snatch up talented free agents? Or close the reqs out and batten down the hatches?
Either way, executives must refocus on improving their current processes so that their teams are as efficient as possible. At the moment, demand is at somewhat predictable levels and supply constraints are easing. This is the calm-before-the-storm moment during which leaders need to act decisively.
Executives need to quickly judge where they need to add more people and where they should introduce automation technologies–– both on the floor and in the office. Then, fight like mad to get what they need from executive leadership to ensure customer satisfaction and demand protection.
Emerging technologies: drones taking flight
Remember when drones were going to take over final-mile logistics? Well, it’s not exactly a take-over, but we are finally seeing some benefits from the widely touted unmanned aerial vehicles in supply chain.
By the end of 2022, Wal-Mart will expand their drone delivery network to 34 sites. They forecast that this will cover 4 million US households and enable 1 million packages to be delivered. Earlier this year, Walgreens Boots Alliance expanded their drone delivery pilot from Christiansburg, Virginia to the Dallas-Fort Worth area, reaching 100,000 customers.
Because traditional final-mile delivery requires trucks, fuel, and drivers, drone technology is an attractive area of innovation for leading retailers. For consumers, they can enjoy deliveries within 30 minutes, and, in Wal-Mart’s case, for just a $3.99 delivery fee.
Who is moving around in the industry?
Javier Echevarria has joined Ingredion as their Chief Procurement Officer. Previously Mr. Echevarria was the CEO of VVF Americas.
Dave Clark is leaving his position as Amazon’s worldwide consumer chief. He will be the new Chief Executive Officer of Flexport, a freight forwarding company.
Willem Appelo will succeed Sophie Bechu, leading the global Operations organization at Royal Philips. Prior to joining Phillips, Mr. Appelo was Johnson & Johnson’s Medical Devices Vice President of Supply Chain.