This is the first blog in a series where we will explore the biggest roadblocks executives are facing in today’s dynamic supply chain. With rapidly changing customer demands and leading companies offering services such as free same day shipping, mounting pressure is challenging executives to build increasingly flexible supply chains. At the same time, they face significant headwinds that have yielded a level of uncertainty that is not matched in recent history. In today’s booming economy, the U.S. is attempting to level the playing field through tariffs, unemployment is at record lows since 1969, and domestic transportation carriers cannot fill customer demand. As we see it, the three most imposing obstacles to consider in overcoming the new dynamics are:
- The Trade Wars
- Labor Uncertainty
- Domestic Freight Cost Inflation
The cost of ignoring these risk areas and failing to sufficiently mitigate them could lead to an erosion of both margin and customer value proposition.
The Trade Wars
U.S. import tariffs have trended downward since the 1950s, but tariff activity has ratcheted up this year. Companies importing steel and aluminum saw their costs increase with 25% and 10% import tariffs, respectively. Apparel and chemical companies saw the costs of headgear and cadmium sulfide increase when duties were levied on just over 6,000 products valued at $200 billion. Companies also must navigate and address retaliatory tariffs from economic units like China and the EU. Finally, as trade agreements and renegotiations depict an optimistic end to the current trade war, it may have emboldened this administration to take on other economic powers.
Demand for distribution center (“DC”) and warehouse labor is growing faster than the labor supply. DCs and warehouses in the U.S. need an additional 452,000 workers in total this year and next. This push for workers could add significant costs for operations via upward wage pressure. With the unemployment rate below 4% and many other industries competing within the same labor pool, finding skilled labor is going to be challenging. The causes vary from changing workforce patterns driven by millennials to the growth of e-commerce and the rising talent requirements that come with it, among others. Many of these causes don’t appear to be letting up anytime soon.
Domestic Freight Cost Inflation
On the roads, distribution networks have seen a drastic spike in several cost levers culminating in a 30% Y-o-Y increase to $2.32 per mile. The causes of this increase are many. Fuel costs have gone up, as seen in a 41% increase in crude oil from September 2017 to September 2018. There are 50,000 fewer truck drivers than are needed to meet rising demand for truck freight, which creates upward pressure for driver wages. Additionally, the service level and last mile expectations of e-commerce are generating unprecedented shipping volume that is putting stress on domestic distribution networks.
Each of these risk areas cannot be viewed in isolation from the others. Strategic supply chain decisions should account for the connections across all three areas (e.g., expedited shipping of products with imposed tariffs would have a direct impact on the shipping costs and the labor to support). In this series, we’ll discuss the suite of solutions to these risks, which are as varied as their causes. Although some of what we will review will be around long-term opportunities such as autonomous vehicles and far-reaching technological advancements, many of the solutions are immediately achievable. Most importantly, we’ll explore how you can structure the analysis to address each one of these risk areas.
Check out Part 2 of this series on Unpacking the Supply Chain here.
This blog was co-authored by
Nelson Ho is a manager with North Highland’s Retail and CPG practice. Nelson has more than eight years of experience and expertise in end-to-end supply chain and sourcing transformation, cost transformation, merchandising, and significant implementation experience. Areas of industry experience include commodity and program management, make/buy strategy, supplier negotiations, logistics and process improvement. Nelson has served various clients, including specialty retailers, discount retailers, big box leaders and wholesalers.
Jonathan Wetherbee is a Senior Consultant in North Highland’s Strategy capability and specializes in helping organizations accelerate growth while addressing a changing world. Specific areas of expertise include growth opportunity assessment, project management, data analytics, and regulatory risk mitigation.