Leadership teams need to take a holistic view of all the potential factors—from input prices to labor availability—that play into decisions to move supply chains, says RSM US national manufacturing sector leader Jason Alexander.

“A lot of people might suggest moving operations to a specific country because it’s cheap, but if it doesn’t have individuals with the necessary skill set, that’s a problem,” Alexander says. “If we try to take all the manufacturing out of China tomorrow, there’s not enough capacity in the rest of the world to handle it.”

Thirty-two percent of respondents from organizations negatively affected by disruptions exited one or more product lines, and that figure was 42% for the larger cohort and 25% for the smaller cohort. That aligns with what Huthwaite advises companies to do, which is to double down on the most profitable areas of their business.

“Focus on the things that matter and do them in a better way,” he says. “Identify those slow-moving or obsolete parts or products and remove them.”

Inflation and cost pressures

Executives’ responses to the MMBI questions around labor costs, sourcing costs and production costs in the recent April survey varied significantly from those of the fourth quarter of 2018 (when the survey previously asked about this topic), showing greater challenges for smaller midsize companies and some improvement for larger businesses.

Fifty-six percent of respondents said they were experiencing increased labor cost pressures in 2022, down from 64% in 2018—but that figure went up among respondents from smaller midsize businesses (from 69% in 2018 to 78% earlier this year, and down significantly for businesses in the larger-sized cohort (from 61% to 38%). In terms of sourcing costs, 40% of companies with $10 million to $50 million in revenue experienced increasing cost pressures in 2018, which spiked to 74% this year. However, for businesses with revenue between $50 million and $1 billion, that figure dropped from 60% in 2018 to 33% this year.

In this year’s survey, pressures around intermediate production costs—which include manufacturing, handling and assembly—also spiked from 27% in 2018 to 35% across both cohorts combined. The difference between the smaller middle market companies and their larger counterparts on this metric is striking; 24% of organizations with between $10 million and $50 million in revenue experienced an increase in intermediate production cost pressures in 2018, and that number effectively doubled to 49% in April of this year. For the larger cohort, the figure dropped from 32% in 2018 to 26% in 2022. Additionally, fewer organizations across both cohorts combined renegotiated costs and associated pricing terms and conditions with their vendors or suppliers in early 2022 than in 2018.

Given all of this, middle market firms must ensure they have the right mix of capital and labor to boost productivity, says Brusuelas.

Somewhat counterintuitively, there may be at least one upside to inflation at a time when some companies are looking to bring some aspects of their supply chains back to the United States.

“Clearly, the disadvantage of using domestic producers is high prices, higher label costs. But when you see high prices everywhere, that disadvantage disappears," says Tuan Nguyen.

A U.S.-U.K. comparison: Supply chain, costs, war in Ukraine

Businesses in the United Kingdom seemed to fare better than U.S. companies on numerous supply chain challenges, RSM data shows. While 48% of U.S. businesses surveyed said in April that their organizations experienced significant negative effects due to unexpected changes or disruptions in supply from an upstream supplier during the previous 12 months, that figure was 39% of the 412 U.K. companies surveyed.

Of the U.K. executives whose companies experienced significant negative effects due to disruptions in supply from an upstream supplier over the last 12 months, 46% said they experienced significant increases in price or costs for some items—which is significantly lower than the 78% of U.S. executives. Other areas where significantly fewer U.K. respondents reported negative effects were in delays in order fulfillment or receipt, unreliable or inconsistent times for order fulfillment, and missed order fulfillment deadlines.

In terms of actions those negatively affected companies took as a direct result of upstream supply chain issues, figures were comparable in several categories from both geographies; 40% of U.K. respondents said they found other sources of supply outside the United Kingdom, for instance, as compared to 36% of U.S. respondents. Thirty-three percent of U.K. executives said they exited one or more product lines, and 28% brought production in-house for some items previously purchased from suppliers (those figures were 32% and 24% for U.S. companies, respectively).

Distinctions, however, showed up in the percentage of respondents who found other sources of supply inside their respective countries (70% for U.S. respondents and 51% of U.K. respondents) and those who purchased some supplies from competitors at a premium (51% for the United States, 38% for the U.K.).

“It would appear that the combined lingering impact of Brexit coupled with the unique properties of pandemic induced supply chain disruptions have created a challenge for U.K. firms in finding alternative sources of supply,” says Brusuelas. “Given the shock to the U.K. economy caused by rising oil and energy prices, this implies an extended period of adjustment lies ahead for U.K. firms.” 

On the cost and inflation front, 37% of all U.K. respondents reported increased cost pressures around labor, significantly lower than 56% of U.S. respondents. Sourcing cost pressures were also an issue for more U.S. businesses (51%) than those in the U.K. (33%), and the same goes for intermediate production costs (35% of U.S. respondents said they were experiencing increased cost pressures on this front, compared to 27% in the U.K.). In terms of financing and real estate cost pressures, responses from both groups were comparable.

RSM’s April survey also included questions about how organizations anticipate supply chain issues and inflation related to the war in Ukraine will affect their business over the next six months. Effects of the war are already showing up in supply chains for energy, food and other goods.

In both the U.S. and U.K. respondent cohorts, 38% of executives said they anticipate supply chain delays within their respective countries. Twenty-four percent of U.S. respondents anticipated supply chain delays outside their country, with 26% for U.K. respondents. In comparison to their American counterparts, a significantly larger share of U.K. executives said they anticipate disruptions to marketing and/or sales operations, closing one or more worksites, and seeking specialty financing to ensure liquidity.

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