A tight labor market has led to an expected increase in labor costs. Year over year increases to wages and benefits are roughly double what they were in 2020. Referencing the same JP Morgan business outlook survey, 70% of the respondents said that recruitment and retention constituted their second largest concern behind inflation. We concur with their view of its potency.
Chart Source: US Bureau of Labor Statistics Employment Cost Index QoQ data compiled by TradingEconomics.com
A poor labor market is a trend that will continue to impact both the delivery and pricing of products. Manufacturers have found it increasingly difficult to fill open positions caused by attrition or retirement. Plus, new entry level hires expect wages above prior industry averages, provoking adjustment of current employee wages to maintain a fair workplace. All of this impacts a manufacturer’s operating costs, and the differential is embedded into price offers with greater boldness and regularity.
Chart Source: US Bureau of Labor Statistics US Nonfarm Unit Labor Cost data compiled by TradingEconomics.com
The consensus of our discussions with our industry counterparts was this: If you can land a good worker, keep that person at all costs. As a result, and in conjunction with more periodic wage adjustments, we’re seeing trends in employer-paid benefits that to date have been either not offered or which were thinly subsidized.
Like it or not, the employer no longer possesses the advantage in the bargain for what an employee will deem acceptable when there are often many other openings in their industry for their skill set. Thus, maintaining competitive wage and benefit programs is more of an expectation than a discriminator today. That means work culture, flexible work arrangements, and various incentives are proving to be more influential to employee satisfaction and retention than previously considered by many employers. Those all come at a cost – and again, that cost will find its way into the supply chain, and into the hands of the customer.
What’s Ahead of Us
The JP Morgan Business Leaders Outlook Pulse surveys 1,500 business leaders of companies with $20 to $500 million in annual turnover. The 2022 survey was recently published. In it, only 19% of the business leaders surveyed were optimistic about the economy for the year ahead. (In the 12 years of the report’s publication, this was the lowest survey result ever.) This compared to the 2021 survey data that returned an expression of 75% optimism for 2022. So, “Sit down, strap in, and hold on.” Both the earlier shown data and this noteworthy industry leadership sentiment suggest the things both challenging us in the manufacturing business and disturbing us about costs are neither trending nor perceived to be leveling out soon.
While not suggesting we’ve experienced an inflation-driven shift to a seller’s market, it is evident that we are now in a market that encourages new buying tactics for managing delivery, inventory, and cost. Those tactics must increasingly accommodate their supplier’s (and their raw material sources’) capabilities and financial impacts. Else, there will be a loss of suppliers and the resulting loss of supply – and nobody needs self-inflicted disruptions when the market is already doing more than its fair share to trip everyone up.
The tactics earlier mentioned may address some ways to mitigate the challenges. However, they are only a few of many possible ones – and they may not be appropriate to your industry, customer base, or organization’s financial structure. Nonetheless, they are options to consider.
So, make sure you’ve got a strong manufacturing partner who can advise best material purchasing and order fulfillment strategies – with the goal to help you maintain reasonable levels of inventory and product in the pipeline to avoid another supply-driven hard stop and restart. Again, the supply chain is doing better, but it is still fragile. And demand is mercurial – so what was available once before may not be later at the same delivery and price. In this environment, more realistic goals are reliable (vs. rapid) delivery and cost control (vs. cost reduction).
In short, it’s broadly considered among those with whom we spoke that it is more important to get parts and products through production to the customer, and to try different ways to limit the magnitude of price elevations as all costs of manufacture grow remarkably now (and if the US business leaders perceive correctly, into next year). To that end, we hope these insights have been helpful.