Dealing with Economic Slowdown through the Supply Chain

Patrick Daly:

Hello, this is Patrick Daly and welcome to Interlinks. Interlinks is a program about connections, international business, supply chains, and globalization, and the effects these have had on our life, our work, and our travel over recent times. Today on Interlinks, we are going to be talking about the effects of the slowdown that we’re seeing in economic growth in America, in China, and also in Europe. So this slowdown is ostensibly due to the effects of COVID, maybe the war in Ukraine, the energy crisis, inflation, and so on. So we’re going to talk about what companies are experiencing and what effects we’re seeing out there, some of the tactics and strategies that companies are using to respond and maybe come up with some recommendations for the future. So to discuss this topic, I’m delighted to be joined again by my colleagues from the supply chain special interest group at the Society for the Advancement of Consulting. And they are Dr. Karen Wilson-Starks, who’s president and CEO of Trans Leadership, Inc from Colorado Springs in the state of Colorado. So welcome Karen.

Dr. Karen Wilson-Starks:

Great. Thank you, Patrick. Delighted to be here again.

Patrick Daly:

Also Diane Garcia, president of Lorraine Consulting based in Phoenix, Arizona. Welcome Diane.

Diane Garcia:

Yeah. Good morning. Thank you, Patrick

Patrick Daly:

And Elizabeth Warren, president and CEO of Dial In Partners based in San Pedro in the greater Los Angeles area. Welcome Elizabeth.

Elizabeth Warren:

Thank you, Patrick. Glad to be here.

Patrick Daly:

So let’s see. What are you guys seeing going on at the moment? I read a lot about the slowdown in the US. I heard recently that there had been two successive quarters of negative growth, which in lots of places is defined technically as a recession, although not so in the US, but it seems to be there’s a slowdown recession or whatever. So I’ll go to each one of you in turn. So Karen, what are you seeing? How is that manifesting itself or is it manifesting itself?

Dr. Karen Wilson-Starks:

I think that we are still seeing a lot of the same issues and challenges that we’ve been seeing for a while when they came down to even just the supply chain availability. For example, the cost of goods is still high for people. There’s a lot of unavailability for materials or products that people need. There’s still a huge talent crisis, being able to get the right people to come to your company at the right time, which means people don’t have all the workers they need to get the jobs done. And then there’s a lot of uncertainty. A lot of uncertainty, because in the US they are predicting this recession, but what’s not clear is who’s really going to be most affected by the recession and what actions people should take to prepare for it, because there are some mistakes that people can make and doing the wrong thing at the wrong time.

Patrick Daly:

It is strange because normally when there’s a recession or there’s a slow down, unemployment is rising, people can’t find jobs, but at the moment, companies can’t find people for the jobs they have. And also there’s often a glut of inventory as well, that there’s too much stuff in the supply chain, and we don’t have that either. We have shortages of stuff. So it’s a kind of a strange one, isn’t it? Diane, what are you seeing out there?

Diane Garcia:

Well, I definitely agree on the talent shortage. My clients are facing that week after week. Some are still struggling keeping their positions filled or finding talent. Whether it’s hiring and then don’t necessarily have the right people in every spot once they have new demands and new products that come forward, or they just can’t find anybody to fill the spot and so they’re struggling to wear many hats. But I do think that clients are starting to worry about things like inventory, like you’re talking to, do we have too much? Are we prepared for what’s to come? Most of my clients are still really, really busy, and so like you said, it’s kind of a strange one because everybody’s still trying to meet such a significant demand, but at the same time, a little bit worried about things slowing down. So where does six months leave them from now and trying to be rush, rush, rush, yet be prepared for maybe an abrupt stop here.

Patrick Daly:

Yeah. Yeah. I was listening to some local economists, so you guys are all in the US and I’m here in Europe in, well, the corner of Europe. So I’m here in Ireland and a local economist talking about the likelihood of a recession. So he wasn’t necessarily saying that there wouldn’t be one, but that it might be quite gradual and shallow and probably of short duration. And the fact that inventories are probably low and there’s high demand for people and there’s still high demand in the economy for services and for products that it’s kind of a slowdown that’s been forced by some extraordinary events, but that the fundamentals of the economy are much better than, say they were in 2008. Where, for example, right here in Ireland we had what’s called a balance sheet recession where we had basically a property bubble and a debt crisis. And that’s not the case this time around, because when you have a property bubble and a debt prices like we had, it takes many, many years for that to work through. Whereas what we’re experiencing at the moment is probably, unless there’s another surprise which we can’t rule out, it’s probably likely to work through relatively quickly. So, Elizabeth, what are you noticing? What are you seeing?

Elizabeth Warren:

In Southern California, our ports here at the ports of LA and Long Beach take the vast majority of the cargo that comes into the US, containerized cargo, and they’re still at record rates. So we’re still seeing the cargo coming in and no place to put it, but on the other hand, as has been mentioned, there’s an excess of inventory. So we’re kind of in a flux right now of too much inventory, possibly discounted inventory coming soon, a lot of things going on sale just in order to move that cargo out, in order to make room for the holidays, because typically July is when all of our holiday inventories coming in. So we’ve got to make room for the Christmas season in all the warehouses. So we’ve got to move that cargo out. So it is a mixed bag, as we’re not quite sure what’s going to happen. I’ve heard the same thing as you, Patrick, that a recession is imminent and it’s going to happen, but hopefully it’s going to be shallow and not as severe.

Patrick Daly:

Yeah. It’s interesting as well, in the US and the fed has been quite aggressive in raising interest rates. Isn’t that right? And that has the effect of sucking investment into the US. So there’s a lot of money heading the way of the US, which is bad for countries like Sri Lanka or Lebanon, where money is flowing out of those places and into the US. So you would think fundamentally that the US economy would be relatively robust, and I would imagine as here, because of the lockdowns, because people weren’t able to go out and consume, people in America must have built up their savings, right?

Elizabeth Warren:

There has been some buildup and you get the messages every day on television to please spend. If you have the money to spend, please spend it. Please spend it on experiences like restaurants and entertainment. Please travel if you can. Because all of those services still are contributing to the economy. So we are hearing, if you’ve got it, spend it if you can, and help support the economy so if we do have a recession, then it’s not going to be as severe as in the past.

Patrick Daly:

Yeah. Well, there is a thing about spending money now because inflation is high. So there’s no doubt about that. Your dollar today is probably going to be worth 10% more than the dollar next year. So if you haven’t now, perhaps invest it in something productive, whether that’s in your own development or whether it’s in machinery or technology for your business, it would seem to make sense if you do have money to at least invest part of it in something tangible. That will set you in good stead for the future.

Patrick Daly:

Interesting as well about the interest rate rise in the US, because the European Central Bank hadn’t, it has lately, begun to raise interest rates, but the fed started sooner, was much more aggressive. So what’s happened is the dollar has appreciated and the Euro, which used to be worth, I don’t know, a $1.14 maybe only a few weeks ago, is now at parity or maybe slightly less than the dollar. And I noticed when I was on vacation in France, there were lots of Americans in France on vacation. So their dollar, they’re getting like 15% extra bang for every buck they spend in Europe. So maybe it’s the time for you guys to come over here and have a vacation.

Dr. Karen Wilson-Starks:

That sounds like a great idea.

Patrick Daly:

I know some of those places on your bucket list, Elizabeth. Yeah?

Elizabeth Warren:

Absolutely. Absolutely.

Speaker 5:

93.9 Dublin South FM.

Patrick Daly:

What tactics or strategies are companies now putting in place to deal with the situation and with the uncertainty? Karen, what are you seeing?

Dr. Karen Wilson-Starks:

Let me talk about what I’m recommending that my companies do, because with the personnel shortages, they’re running so fast on a hamster wheel, they’re not always thinking about what they should be doing, and I remind them that the predicted recession can be different from business to business. So some of my clients who thought that they were going to go under during the pandemic, they actually grew and got more business because the products that they were producing were needed more at that time. And so one of the things I try to stem is the behavior that’s irrational, that’s driven by fear, and I’ll give a little example from the past and then bring it to the present, which is, back in the great depression a lot of people were afraid that their money was not safe in the bank. So everybody ran down to the bank to try to get their money, and this forced the banks to fail.

Dr. Karen Wilson-Starks:

And so you have to really help people understand that you don’t act until it’s time to act. And so some people could prematurely get rid of people that are hard to recruit later, especially really skilled labor. So I’m talking to them about how to retain their good people, how to use their data so that they’re seeing, what are the products and services that they’re producing that are profitable right now? They have to do some future forecasting and think about, if certain things do happen in the marketplace, what are customers going to need and what are they going to want, and what are they willing to pay for? And also, what are, let’s say my clients, able to do in a value added way so that others are not able to easily copycat that and the other companies may not provide that extra value. So if I think back to the great depression, again, there was a feed and seed company. And what they did, not only did they sell the seed to the farmers, they also sold fertilizing. It automatically came with it. They would fertilize the crop, and then they also sold consultation with it to make sure the farmers would have a higher likelihood of their crops being successful. So you have to think innovatively and creatively about what would reduce risk for the customers and clients and have them inclined to see you as the go to persons.

Patrick Daly:

Yeah, it’s interesting because this inflation, for example, is kind of concentrated in certain areas. It’s relatively narrow in its effect, although it has become kind of embedded across the economy. Maybe more so in the US than some other places, but sector by sector it’s a different story. So as you say, you really do need to think about what’s the situation for my sector, because some sectors are still going to grow and prosper despite slow down in the economy overall. And even those sectors that won’t necessarily grow or may even shrink, because people have become a little bit more accustomed to accepting price rises, it may be an opportunity not just to slavishly follow that, but maybe you do increase your prices, but at the same time, you take some initiatives internally to improve your efficiency and your costs. So you gain a benefit.

Patrick Daly:

So either you can simply increase your margin as you increase your price, which the customers accept, or you say, “Okay, well, I’m now this bit more efficient so my price is going to rise less than the next guys. So I’m now going to get an advantage.” So I think there are lots of opportunities. This thing about cutting people is really interesting. There’s been some really severe after effects of companies that during COVID laid off workers, particularly in the aviation industry, both at airports and also in airlines. So both of those sectors here in Europe are having almost a meltdown in terms of service because they’re not able to get the people to work in the airports, baggage checking, for example, for security checks, and also the crews for the airlines. Is that something that’s affecting America as well, in the airline industry?

Dr. Karen Wilson-Starks:

I’ll make a comment in general. Not so much airline industry, but yes, it is affecting the airline industry because pilots are not always available, flights are getting canceled, crews aren’t always available. That’s happening. However, even broader than that, I think there’s a fundamental issue with how the contract between companies and employees has eroded even further. In the US, it started eroding significantly in the early nineties anyway. And because of those broken contracts, people now don’t have a sense of loyalty to a company anymore because the companies do not demonstrate loyalty to the people. So when you’ve been laid off or something’s already happened to you like that, you go away and you think, “What do I really want to do?” And it may not have anything to do with this, and you may not be as inclined to come back and try that well again because it went dry on you unexpectedly. So I don’t think that industries are thinking about that psychological contract between company and also the worker that’s affecting whether people are signing up to come back into the marketplace or not.

Patrick Daly:

Yeah. That’s interesting. Diane, what are you seeing in terms of tactics and strategies to help companies deal with the situation? What are they doing?

Diane Garcia:

Well, I work, Patrick, with manufacturing companies and distributors globally. So Karen mentioned a few strategies that I would certainly agree with. One I wanted to point out was, lately I’ve been working with clients to model, like she mentioned, utilizing data and making better decisions off that data. So one of the more recent projects have been centered around customer and product profitability models. So how do we take our information, whether out of our ERP or however we may have, maybe it’s taking it out of people’s heads and confirming and validating the data, but we do spend time to say, “Okay, what are our top customers, bottom customers, top products, product groupings.” Like you mentioned, there’s cash on hand so how do we better prepare with equipment purchases and what kind of equipment do we need? So these models do help support that better decision making for changes and disruptions that we’re all anticipating to happen.

Patrick Daly:

Yeah. It’s a good point. I was at a seminar in Amsterdam, in late June and point was being made that one size fits all supply chains, really their day is passed and too many companies have tried to do that. So they’re over servicing some parts of their customer profile and they’re under servicing others. So the argument that was being made is that there are certain archetypes of customers, and most companies would have maybe three or four different archetypes and it’s worth designing supply chain solutions, not an infinite number, but maybe three or four supply chain solutions within each business to deal with different customer archetypes. And they were also making the point that a customer today may behave in one way and be serviced on one type of supply chain solution.

Patrick Daly:

But for whatever reason, they may, on occasion, behave in a different way or they may migrate permanently to a different way, and that you need to have the watchers, if you like, or the feelers to detect that and to respond accordingly and deliver the right solution. And also that when you’re doing that on the customer side, you should also be doing it on the supplier side. That there are different archetypes of supplier and that works on both sides. Elizabeth, what are you seeing then in terms of tactics and strategies to respond?

Elizabeth Warren:

I think that our clients need to diversify their supply chains as much as possible. It may raise their costs in the short term, but I think that trying to be foolproof against inflation is going to really be impossible, but if we do some mitigation, we can make some wise decisions. So having some vendor diversification, looking at keeping more critical materials on hand, and stockpiling some items that are hyper sensitive to inflation might help ease those effects of some of the rising prices. So when you’re looking at sourcing materials to make sure that you have suppliers that you work with on a regular basis, but also diversified some of that a little bit, looking at your demand planning, how you’re receiving those materials from suppliers. And then I think one of the most important things is to look at your warehousing space. Having that brick and mortar space for warehousing is, especially in Southern California, is really critical right now because we have very, very little spacing. So sometimes having a third party logistics provider, a three PL, on call in case you get some warehouse availability would really be helpful if you can meet some surging demand, having a little bit of extra warehouse space.

Patrick Daly:

It’s interesting you talk about warehousing, because warehousing is one of the core areas that I work in and I’ve done work in the US and I’ve done work in Europe, and I notice in American warehouses traditionally, they tend to be lower and bigger because I guess land prices are probably lower in general than they are in Europe. But the situation where we are now where there’s pressure on warehousing space, I think there’s a lot of opportunity, particularly in America where there are lots of kind of bog standard warehouses. So they’re low, they’re big, and they’ve got very conventional type racking and materials handling equipment inside. Whereas in Europe for a long time, because land has been expensive and labor has been very expensive, there’s a lot of automated warehousing. So there’s lots of interesting storage and materials handling solutions that can make much better use of the available space by reconverting existing warehouses.

Patrick Daly:

So for example, normal racking where you have one pallet deep this side of the aisle and one pallet deep the other side of the aisle, the cubic space utilization is very low. Whereas there are storage solutions now, automated, where you can literally have a warehouse totally full and it’s the automation then that is doing the selection. Now there’s lots of different options, but that’s probably, I think there’s a big opportunity in the US for that particularly. And if people have money and you want to invest, now is the time because of it because of inflation. And just on automation, although in a different space and I know a space that you’re more familiar with Elizabeth, I read a headline, I didn’t read the article, but there’s some controversy or arguments going on in west coast ports in the US about the rollout of implementation in those parts. Can you say a little bit about that? What’s going on there?

Elizabeth Warren:

Sure. We have labor unions all over the US, but the west coast labor unions are very, very strong and they are, for the most part, opposed to automation because it eliminates those jobs for their members. So it is a struggle. It is something that is always on the table for contract negotiations. We have a few terminals that are automated, but it is a very divisive topic that is always in contention when it comes to contract negotiations. So the west coast, I’m not going to make a prediction whether or not there will be more automation. I will just say that it’s a challenge.

Patrick Daly:

I guess inevitably there will be more, it’s just a matter of how painful the implementation process is and how long it takes, right?

Elizabeth Warren:

That is fair to say. One of the issues that we have is that other states are building a lot of warehouses and distribution centers as well. And if they are more friendly to automation and then that reduces costs, then some of that cargo that comes here into California or the west coast may go to other states just because of the cost being lowered due to automation.

Patrick Daly:

Yeah.

Elizabeth Warren:

So the trade off of jobs and costs is something that we have to take into consideration.

Patrick Daly:

Okay. Just coming into the last minute or two now so I might just ask each one of you for what would be your parting recommendation for listeners as we look to the second half of 2022. We’ll start with you, Karen.

Dr. Karen Wilson-Starks:

I would say, start doing scenario planning now. Think about what you do best and well and how you can succeed in the marketplace, what your customers value, want, and want to purchase at this time. And I would say plan for success, not for failure. Think about what will be successful for you, given whatever the market may be in the future.

Patrick Daly:

Thanks, Karen. What about you, Diane? What would be your final recommendation?

Diane Garcia:

I think I would tell manufacturing companies here, don’t panic. Really, like Karen’s saying, do that scenario planning. Maybe that inventory may be increasing, but think about, how do you strategically place inventory along your supply chains? And then my second recommendation would be, always work on developing your people internally.

Patrick Daly:

Thanks, Diane. And Elizabeth, your parting recommendation.

Elizabeth Warren:

Boy, those are hard to top. I certainly agree with my colleagues, Dr. Karen and Diane. I think that what I would say is just watch your spending, watch your cash flow, and make sure that you have that diversified supply chain and investing in those critical materials that you need to help you plan for that success that we know is coming around the corner in a year or two.

Patrick Daly:

Thank you, Elizabeth. And thanks to all. It’s been a pleasure as always and looking forward to picking up the conversation with you all next month. No doubt there will be plenty to talk about, maybe even some more surprises. There seems to be a surprise a week at this stage in world affairs. Thanks also to our listeners for tuning in, and you can find the Interlinks podcast on iTunes, Spotify, Acast and other platforms. And for any comments or questions, drop me a line on PDaly P D A L Y at alba, A L B A, logistics.com. And in the meantime, keep well and stay safe.