Elevated freight and labor costs remain issues for stressed out supply chains

Despite the instability that first reared its head during COVID-19 and continued with the disruptions caused by the Russia-Ukraine conflict, the greatest pressures on the supply chain are not the headline grabbing news events, but rather more common problems: labor and freight costs.

Granted, freight costs encompass a myriad of inputs, including the aforementioned events. But when combined with labor challenges, the two categories contribute to 92% of the supply chain stress being felt today.

That is the finding of the second Supply Chain Stability Index, a joint venture between the Association for Supply Chain Management (ASCM) and KPMG, the U.S. firm of the KPMG global organization of independent professional services firm.

The recently released index tracks supply chain stability through the end of Q4 2022.

“In Q4 2022, there was a minor shift toward supply chain stabilization compared to the previous quarter and the launch of the index in September 2022. However, overall supply chain stress remained high at 1.88 as December came to a close,” the report said.

The Stability Index measures variability across U.S. market indicators of service level, inventory, material and logistics cost, and labor.

Labor market

The index found that while the U.S. unemployment rate remained low with a 3.5% reading in December, that was adding pressure to supply chains and their ability to fulfill orders. While the U.S. economy shed some 13.5% of jobs in 2022 according Bloomberg, December saw job openings overall increase to 11 million and there were 1.9 job openings for every unemployed person in December, the Labor Department reported, despite the overall hiring rate increasing from 6 million in November to 6.2 million in December.

According to the Supply Chain Stability Index, “the number of job openings also remains high across supply chain functions but has stabilized,” yet “unfilled orders continue to increase, which also illuminates the impact of the labor shortage on service levels.”

Other factors contributing to supply chain stress include supply (7%) and capacity (1.5%).

In September 2022, ASCM and KPMG released a full report on supply chain stability, detailing many of the variables that go into the Stability Index. 

That report found that logistics accounts for about 71% of supply chain stress, with freight cost and labor the primary drivers. Capacity (19%) and supply (10%) are the other two drivers of supply chain stress.

Logistics is the biggest stress point

Logistics stress has been driven by the Russia-Ukraine conflict. Since 2008, the U.S trucking industry has seen an average 2% year-over-year price increase, the report said. In the past two years, though, that increase was 45%, driven by the conflict and worker shortages that have contributed to significant payroll increases.

The report noted that capacity underutilization, which is defined as the lack of labor efficiency, has been on the decline since 2020 because of the ongoing levels of attrition in a tight labor market.

“Two job openings for every unemployed person means workers who resign or lose their jobs are landing new ones almost immediately,” the report noted. “Hence, workforce utilization remains strong with capacity continuing to regress back toward a more stable state of pre-pandemic behavior.”

Supply, on the other hand, is moving in the opposite direction. Driven by commodity and material costs, supply has doubled in magnitude on an annual basis for the past two years, the report said.

“Supply chain globalization has helped U.S. companies realize their ambitions of higher cost efficiency through low-cost sourcing, but it has also created a substantial dependency on offshore supply,” the report said. “And now, market volatility has turned that dependency into vulnerability, disrupting supply lines for commodities and raw materials.”