MMBI special report

2022 supply chain report

How middle market businesses are faring

Jun 01, 2022
#
Supply chain MMBI

More than two years into the global pandemic, supply chain snarls persist for a large portion of middle market American businesses, with smaller midsize firms in many respects bearing a significant amount of the pain, according to proprietary data from RSM US LLP—and companies continue to pivot accordingly. 

Nearly half of respondents to RSM US’ latest Middle Market Business Index survey—48%—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. The survey polled middle market executives from April 4 to April 25 on questions specific to supply chains, as well as questions about costs and inflation. 

The MMBI survey showed a marked difference between smaller middle market organizations and their larger middle market counterparts on this front; among businesses with between $10 million and $50 million in annual revenue, 64% reported significant negative effects, compared to 36% for businesses with annual revenue between $50 million and $1 billion. 

“We know middle market firms are significantly challenged in attempting to find alternative sourcing where those disruptions are the most severe,” said Joe Brusuelas, RSM US chief economist. “In particular, middle market firms with between $10 million and $50 million in revenue seem to be having the most difficult time adjusting." 

Negative effects due to supply chain bar chart

Larger companies, on the other hand, have more resources and greater access to capital, which allows them to more easily pivot to another supplier in the face of these challenges, said Dr. Tu Nguyen, RSM Canada economist.

"They can afford to throw money at the problem, essentially,” she said.

The disruption from upstream suppliers had impacts on downstream customers for both the smaller midsize companies and the larger businesses as well. Sixty-eight percent of respondents at firms with between $10 million to $50 million in annual revenue said unexpected changes or disruptions the upstream supplier organization experienced resulted in negative or adverse consequences for any downstream customers; 69% of the respondents from larger businesses said the same.

The data—comprising responses from 404 executives—sheds light on how supply chain disruptions are affecting middle market businesses overall, which issues are having an outsize impact on smaller middle market firms, and the specific ways companies are responding.

More competition—upstream

Businesses have grappled with countless supply chain issues since the onset of the pandemic (and for some companies, these challenges surfaced even earlier, stemming from the tariff clash between the United States and China). A key factor at play has been U.S. consumers’ shift from spending money on services—like restaurants, many of which closed their doors either temporarily or for good—to goods, like online shopping and home improvements.

“We’re still seeing increased demand for durable goods versus services due to the pandemic, which has continued to exacerbate supply chain challenges,” said Bart Huthwaite, principal at RSM. Add to that already elevated demand pressure the war in Ukraine, global port congestion and more COVID-19-related factory shutdowns in China, and businesses continue to face a perfect storm of supply chain havoc. The RSM US Supply Chain Index rose in March but is still 2.76 standard deviations below neutral.

Of the executives whose companies experienced significant negative effects due to disruptions in supply from an upstream supplier over the last 12 months, 78% said they experienced significant increases in price or costs for some items, RSM’s survey found, with a marked difference by size cohort. For companies with $10 million to $50 million in annual revenue, 90% experienced such increases, and that figure was 61% for the larger organizations. Looking at both smaller and larger midsize companies combined, 76% of respondents faced delays in order fulfillment or receipt (that figure was 91% of respondents from smaller companies and 56% of those from larger companies), and 74% reported unreliable or inconsistent times for order fulfillment (88% and 55%, respectively).

Middle market firms must ensure they have the right mix of capital and labor to boost productivity.
Joe Brusuelas, RSM US chief economist

Those discrepancies between size groups may be because larger companies typically have more capital.  Therefore, they would have more buying power than smaller companies to get supplies from a given supplier, sending more of the smaller midsize businesses scrambling to find materials for their products.

“Downstream, it has always been an issue having to battle for customers,” said Tuan Nguyen, U.S. economist for RSM. But more and more, businesses are also battling for goods from suppliers. “If competitors source from the same upstream companies,” he said, “that means they have to think about the competition both upstream and downstream.”

In terms of organizations’ supply chain and associated capabilities, 81% of all 404 respondents agreed or mostly agreed with the statement that they can adapt to changes in demand or supply without sacrificing product or service quality. That figure was 89% for larger organizations versus 71% for smaller organizations. Ninety percent of respondents from the larger-sized cohort agreed or mostly agreed that their supply chain and related capabilities were a source of strategic advantage for their organization. That figure was 68% in the smaller cohort.

While those numbers might reflect more confidence on the part of larger businesses, smaller ones have other advantages.

“If a firm has the right culture, it can be more nimble and faster to change direction,” said Dr. Tu Nguyen. “You don’t have to go through this chain of command with 20 layers of management approval.”

Actions taken and ‘re-globalization’

Companies have taken a variety of approaches to adapt to this flood of supply chain problems, including a closer examination of how well global supply chains serve them. Of companies negatively affected by upstream supply disruptions, 70% said they had found other sources of supply in the United States in the previous 12 months. For organizations in the smaller revenue group, that was 80% versus 55% for the larger revenue cohort. Looking at both groups together, 51% purchased some supplies from competitors at a premium, and 36% found other sources of supply outside of the United States.

While some U.S. businesses may be buying less from suppliers outside the country, that will only be so sustainable depending on the industry. For some goods, it may not be possible at all. Because of this, the United States won’t likely see a widespread “reshoring” of entire supply chains, said Tuan Nguyen. Rather, “it's like re-globalization—we’re going to see the rearrangement of globalization.”

“Where there is investment that results in the creation of new supply chains, it’s likely to be regional and specific,” said Brusuelas.

Actions organization has taken in the last 12 months as direct result of upstream supply chain issues:

People with word bubbles

70%

Found other sources of supply in the United States

receipt with dollar sign

51%

Purchased some supplies from competitors at a premium

supply ship

36%

Found other sources of supply outside the United States

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 said. “Identify those slow-moving or obsolete parts or products and remove them.”

Inflation and cost pressures

Executives’ survey responses from April showed significant changes across areas such as labor costs, sourcing costs and production costs, compared to MMBI data from the fourth quarter of 2018.

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 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.

Given all of this, middle market firms must ensure they have the right mix of capital and labor to boost productivity, said 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 domestic producers is high prices, higher label costs, but when you see high prices everywhere, that disadvantage disappears," said Tuan Nguyen.

For more data and insights about how supply chain disruptions are affecting middle market businesses, and how organizations can respond, be on the lookout for RSM’s full MMBI report on the topic, out in July.  

Subscribe to the MMBI and special reports

Join our MMBI mailing list to get the full supply chain report delivered to your mailbox.

Additional supply chain insights

The Real Economy Blog

The Real Economy Blog was developed to provide timely economic insights about the middle market economy. It is offered as a complement to RSM’s macroeconomic thought leadership, including The Real Economy monthly publication and the proprietary RSM US Middle Market Business Index (MMBI).

The voice of the middle market

Middle market organizations, which make up the “real economy,” are too big to be small and too small to be big. They have distinct challenges and opportunities around resources, labor, technology, innovation, regulation and more.