Minnesota firms see supply chains healing, but still not back to normal

The big backup of ships at West Coast ports has finally subsided and shipping rates have come back down to Earth.

So that means the supply-chain woes of the last year or two are fixed and this uncomfortably hot inflation we've been experiencing will soon be over, right?

Not quite. But it should help.

"There's a lot of signs that it has eased, but I wouldn't necessarily call it mission accomplished at this point," said Omair Sharif, a Los Angeles-based financial analyst who has specialized on inflation for two decades. "It seems like every time things get better, other things crop up."

Airlines are grappling with a pandemic-induced pilot shortage as well as delayed shipments of new planes. Trucking firms lack drivers. At the same time, the war in Ukraine and strong consumer demand are also driving inflation.

The forces behind high prices now are less about supplies, logistics and goods, Sharif said. "We've moved to services inflation as being the bigger driver," he said, referring to things like housing and medical care.

After the Federal Reserve hiked interest rates by another three-quarters of a percent last week, Chairman Jerome Powell noted that goods-related inflation hasn't come down as much as policymakers expected given how much supply-chain issues have been resolved.

"The inflation picture has become more and more challenging over the course of this year," Powell said in explaining why the Fed was still aggressively tightening policy.

Some supply-chain issues are lingering, the leaders of about a dozen Minnesota-based companies said as they discussed their latest financial results, issued over the last three weeks.

"What I hear from companies can be all over the place and really depends on the particular product or input that the company is trying to get," said Sean O'Neil, director of economic research for the Minnesota Chamber of Commerce.

Minneapolis-based Sleep Number's shares plummeted after executives revealed they are still acutely feeling the effects of the ongoing chip shortage, which led to significantly lower sales and profits in the quarter.

Meanwhile, executives of Maplewood-based 3M said the supply chain is showing some signs of stabilization, but the company is still facing higher costs for raw materials and intermediate finished goods. They also noted that the time to receive new equipment has gone up anywhere from 12 to 20 weeks.

And Medina-based Polaris, which makes snowmobiles and other powersports vehicles, pointed to a mixed picture. Sales of pontoon boats were hurt by supply constraints while its motorcycles were improving.

At the other extreme, Minneapolis-based Target, which will report its quarterly results on Nov. 16, this spring found it had too much inventory when consumer demand shifted away from goods. It has used promotions to move items out.

"The liquidation will certainly help with the inflation rate in the next couple of quarters as it continues across multiple retailers," said Necati Ertekin, assistant professor of supply chain and operations at the University of Minnesota.

But retailers are also facing labor shortages in logistics and distribution, which means things like online orders may take longer to make it to people's homes, he added.

"There's ups and downs, ups and downs," said John Melbye, president of the Twin Cities chapter of the Association for Supply Chain Management. "In the pandemic, we realized we were running out of parts. So we bought everything we could get our hands on. Now where are we at? There's so much inventory."

The global supply chain pressure index put out by the Federal Reserve Bank of New York peaked in December 2021 and has been showing steady declines for several months now. While still elevated, it's coming back down toward historical averages.

Supply managers in nine central states including Minnesota said in an October survey that the speed of deliveries is back to pre-pandemic levels. But about one-third of them also said their biggest challenge for the fourth quarter was supply-chain disruptions. Still, that was down from nearly 60% two months earlier.

Ernie Goss, who runs the Creighton University Mid-America Business Conditions Index, noted that other newer wrinkles are threatening to wreak more havoc on supply chains. For one, the drought has led to lower levels on the Mississippi River making barge traffic difficult. So that's already impacting the movement of some agricultural products, which are having to be transported by rail or truck instead.

"That's going to hurt," he said. "It's going to push up some food prices. We'll have to wait and see how much."

And then there's a possible railroad workers' strike looming in December as well.

Melbye noted that the supply chain did not always run smoothly before the pandemic. It's just that the public became more aware of the disruptions that were amplified and more apparent during the pandemic.

"We were killing ourselves trying to make it look like everything was running perfectly," he said. "But it's always been heroic acts of insane either intelligence or luck or planning."

The truck driver shortage pre-dated the pandemic and was exacerbated by it, said Sarah Sengupta, an associate professor of operations and supply-chain management at St. Cloud State University.

"The most visible pain point right now is labor shortages," she said. "When you talk to anyone in any industry, they are all pointing to labor shortages."

That has been pushing wages up, which impacts the prices companies charge for products and services, she said.

"It might have been a raw material or logistics issue to get a component before and now it's getting enough labor to try and produce some of those things," said Steve Kalina, president of the Minnesota Precision Manufacturing Association. "So it's pushing out lead times a bit all the way up the chain, which has a ripple effect."

At the same time, he said demand has slowed down for many manufacturers as the Fed has been hiking interest rates. So that is also giving manufacturers a little breathing room.

"I think that is helping them through the supply-chain issues as well because demand is dropping," he said.