4 Ways to Be Ready When the Supply Chain Heats Up Again

To hear the Federal Reserve Bank of New York tell it, all is finally well in supply chains. The bank’s Global Supply Chain Pressure Index has fallen to the lowest level since 2009, during the slumping demand of the Great Recession. But businesses in the United States might not agree with the bank’s assessment — and they’re finding new ways to deal with the pressures that remain.

Early in the pandemic, supply chains were plagued with tremendous problems: lack of staff, stalled production lines and burdensome sanitary measures, to name just a few. Later, as the economy reopened in earnest, fuel prices began to rise — and they really took off after Russia invaded Ukraine. But by then, things had already started to change.

Related: 3 Fundamentals for Building a Resilient Supply Chain

Loosening the chains

People came back to the supply-chain labor force as wages climbed, with especially rapid job gains in transportation and warehousing. Then, as consumers started to spend more time outside their homes, demand for goods delivered to their doorsteps stalled. By the end of 2022, businesses throughout supply chains had built up unprecedented inventories of products sitting on shelves. Meanwhile, gas prices had fallen significantly and were back in their pre-pandemic range.

All of these factors helped to loosen the vise on supply chains. Yet all was still not well. In the Census Bureau’s survey of manufacturers for the last quarter of 2022, almost 40% said they were producing below capacity because of a lack of staff. More than a quarter said they couldn’t bring in enough raw materials. About 1 in 10 said logistics were an issue. That doesn’t sound like a big number, but it was four times higher than in the fourth quarter of 2019 before the pandemic began.

We heard similar complaints from the hundreds of companies we surveyed for our 2023 State of Warehouse Labor report. In 2022, 34% of respondents said they had to pass up business because of a lack of staff. Among these companies, about two-thirds said the foregone revenue amounted to 25% or more of their total business. Both of these figures were up slightly from the previous year’s survey.

A return to normalcy?

Clearly, all is not yet well in supply chains, at least in the United States. Yet as we look forward, the economy seems to be stabilizing. Inventories have leveled off and even started to clear at major retailers. The overall utilization of the nation’s manufacturing capacity has come off its highs as demand has cooled. And with less pent-up demand and excess saving among consumers — as well as the possibility of an economic downturn — the balance of spending between goods and services is likely to be much closer to pre-pandemic norms.

In this climate, it’s not surprising that businesses are more confident in their ability to deal with demand. For 2023, 76% of the ones we surveyed expected to be effective at recruiting workers, and 85% said they were effective at retaining workers. Both of those figures were higher than in the previous year’s survey, where only 59% said they were effective at recruiting and 76% said the same about retention.

One reason for their confidence has been their improving access to flexible labor, which gives them extra agility in responding to changes in demand. The use of flexible and temporary labor rose from 57% to 69% among these businesses between 2021 and 2022, and a majority said they could fill at least three-quarters of the extra shifts they needed. They also rated flexible workers better in terms of skills, training and reliability than they had in the previous year’s survey.

Related: 5 Ways of Effectively Navigating Supply Chain Disruptions

Preparing for volatility

That’s good news since payrolls are becoming increasingly difficult to manage. The volatility of labor demand in supply chains has never been higher. Two decades ago, employment in transportation and warehousing typically fluctuated up or down by around 2% over the course of the year. Even just before the pandemic, that volatility had risen to about 5%. So swings in employment are more than twice as wide as they used to be, especially at inflection points in the economic cycle.

How can businesses anticipate this volatility and manage the eventual return of demand? Here are some tips:

1. Watch what’s happening further up the supply chain. Some of the earliest signs of a recovery will come from orders by manufacturers for raw materials and other supplies. They’ll be preparing for expected orders from wholesalers and retailers. You can track these signs in your industry or at a national level using tools like the Institute for Supply Management’s Purchasing Managers Index.
2. Put a plan in place that’s not just for the short term. Booms in the United States tend to last a long time, with only four recessions in the past 40 years. When demand returns, it will probably be here to stay — at least barring some unexpected event like a pandemic. So try to avoid high-priced, short-term contracts that play on uncertainty.
3. Talk to your customers and use your network. It may be obvious, but you don’t have to sit on your hands and wait for new business to come in as if by surprise. You already have good relationships with your long-term customers — you can pick up the phone and ask them what they’re seeing in the market without having to give them a sales pitch.
4. Diversify your payrolls for maximum agility. Today companies can bring in job sharers, gig workers and flexible shift workers as well as traditional full-time and part-time employees. By diversifying payrolls across these groups, managers can reduce the risks of downtime, overtime and idle hours, as well as the resulting variations in overall pay.

The pandemic’s disruptions undid much of the fine-tuning that had characterized supply chains over the past couple of decades. But after last year’s cooling-off period, it’s time to regain that agility and look toward the future. Demand could return like a trickle or a tsunami. Either way, it will pay to be prepared.