Changes in the US economy are affecting your business. Take action!
Changes in the US economy have been drastic over the last two years as a result of the combination of three unlikely factors: emerging technologies, COVID pandemic, and US economic policies to cope with all of the above.
Since the focus of this Blog is on the manufacturing and distribution industry, in this article I will address how these changes are affecting these sectors and what can be done to survive and make the best of it. Let´s start with the change factors before going into the impact on your business.
COVID Pandemic Effects on the Economy
The recession caused by COVID-19 in business is unprecedented in many ways and has been a key player in the changes in the US economy. Some of the most important are:
- Increased unemployment.- The peak unemployment rate of 14.7% in April 2020 was the highest monthly rate recorded by the Bureau of Labor Statistics (BLS). The graph below plots employment to population rate for the COVID period.
- Decrease of economic power.- Consumption makes up 70% of America’s gross domestic product (GDP), but consumption has slumped as businesses close and households hold off on major purchases as they worry about their finances and jobs.
- Gathering restrictions.- The prohibition of group gatherings has affected key economic sectors like tourism, entertainment, restaurants, and shopping culture, which accounts for 0.6% of the change in GDP.
In the past, I have written about the impact that the new technological waves will have in the distribution and manufacturing sectors over the next 10 years. Cloud, digital economy, Artificial Intelligence, and Blockchain are reshaping the way of doing business. The COVID pandemic has accelerated some of these technology drivers.
Shark Tank Kevin O’Leary frequently says that we are living in a digital area. In a future article, I will expand on this. At this time, we know that COVID caused a paradigm shift in the workplace (home office), buying habits (ordering groceries and goods from home), the way to manage the business (teleconference on Zoom, Google Meet, or similar platforms), and work floor automation via AI (Artificial Intelligence and virtual reality).
Changes in the US Economy Policies
To counter the impact that the recession was causing in the economy, the Federal Government implemented a series of packages and stimuli aimed to help companies reduce unemployment and keep afloat, and to strengthen the economic power in the households. Among the Federal programs for the businesses are: “Tax credits for required paid leave by small and midsize businesses”, “Paycheck Protection Program (PPP)” extended with “The Consolidated Appropriations Act”, “Employee Retention Credit (ERC)”, “SBA’s Economic Injury Disaster Loan Program”. The programs devised to help individuals include the bonus issued by the government in 2020 and 2021 and the increase in the amount and duration of the unemployment compensation.
Impact on the distribution business
Paradoxically, the main impact of changes in the the US economy and policies in business has been the sharp increase in labor costs and the difficulty to get quality resources.
Distribution companies were fortunate in the sense that they could continue working despite the lockdown and they could benefit from many of the Federal programs. But one of the collateral effects of the economic policies was the inflow of considerable amounts of cash into the system that not necessarily translated into a reduction of unemployment but rather fueled an inflationary cycle. Even though you used the PPP or ERC programs to retain employees, it did not stop the resignations. Think about it: Why keep working at the same wages in a “pandemic risk” environment if unemployment gives me the same and sometimes even more money?
Many distribution companies are struggling to find quality people for the amount of money that they used to pay before COVID, and the pressure to keep these labor costs up will continue at the expense of the profit that, for a distribution company, is already low.
If you want to survive in this environment you need to take action to cope with the primary point of increasing labor costs. Here are some options.
Automate the warehouse processes
By definition, warehousing is a labor-intensive business since you need people to receive, move, pick, and deliver products. The first step toward optimizing the workforce is to implement a Warehouse Management System or Inventory Management software. Optimizing product check-in, picking time, and cycle count will result in a reduction of the workforce.
Automate delivery routes
The second step is the optimization of the delivery process. Adequate Route Management Software will reduce the time required to determine routes and the number of drivers required to efficiently handle the deliveries
Automate the back office
There has been a huge increase in automation in the back office oriented to lower manual paperwork and data entry. This can be done by integrating your ERP or accounting software with the Warehouse Management System and Route Management software selected. What this automation is going to do is lower the number of employees because, again, labor costs are becoming way too expensive.
Minimize operating costs
You have been operating remotely for more than a year without significantly affecting the performance of the business thanks to the cloud and remote communication technology. You can reduce physical space and operating expenses by managing customers remotely and distributing the work of the back office team between the home office and the actual office. Many companies, including big players, have been doing that for quite some time.
Automate everything that you can automate
If you have a big operation, you can take advantage of the advances in emergent AI technologies to minimize the labor in the warehousing process. As a matter of fact, there has been a huge increase in the research and development of robots that pick in a warehouse, go up and down the aisle, and pick orders to alleviate the cost of an employee in the warehouse picking orders.
Diversify your portfolio leveraged on emergent technologies
The inflationary cycle that we are facing has depreciated the value of the distribution businesses even though it continues to be a constant cash generator. One way to counter this situation is by inserting the company into trends of emergent technologies. I have seen customers going in three directions.
- Devote a fraction of your cash incorporating cryptocurrency in your balance. Even though it is a speculative investment, the trends are solid and, in the short term, will level your financial indexes and your EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
- Diversify your income by using your infrastructure to generate revenues from the digital economy. One of our customers was able to adapt his distribution business into Amazon DSP or third-party logistics. He then rotated his drivers from distributing iPhone cables and Amazon packages and went from making one to two percent net profit to making over a million dollars a year net in his pocket.
- Enter your products in the eCommerce marketplace. Many distribution companies are turning into Omnichannel networks. By using B2B or B2C software they have increased their turnover without a significant increase in operating expenses since the sales channel is a sales platform like Shopify and their delivery channel is also a platform that works with all couriers.
I hope this article on the impact of Changes in the US economy in your business has been helpful. I will continue to publish information related to Warehouse Management, distribution practices, and the general economy. If you are interested in this article or want to learn more about Laceup Solutions, register to keep you updated on future articles.
Take a look at this video about the two things that are affecting your business and that relates to this article.