'Growing pains' force backlogs on non-manufacturing industries

Dive Brief:

Companies in non-manufacturing industries face worsening order backlogs as they expand, according to the latest Institute for Supply Management (ISM) report. Signaling continued growth in the sector, the non-manufacturing index (NMI) reached 58.6% in May 2018, a step up from the April rate of 56.8%.
Businesses reported slower supplier deliveries and rising commodity prices as key contributors to the backlogs.
An ongoing national truck driver shortage particularly contributes to the slower deliveries, respondents noted.

Dive Insight:

As economic activity in the non-manufacturing sector increased for the 100th consecutive month in May, companies are struggling to keep backlogs at bay. The NMI's Backlog of Orders index shot up from 52% to 60.5% between April and May, according to the ISM report.

"Companies can't keep up with their volume," Anthony Nieves, chair of ISM's Non-Manufacturing Business Survey Committee, told Supply Chain Dive in an interview. Eleven industries, led by Educational Services, Accommodation & Food Services, and Construction, reported increasing backlogs.

As business activity and new orders increase, slower supplier deliveries and rising commodity prices contribute to the backlogs, suggesting companies will have to find creative solutions to keep in step with the economy's growth.

Thirteen industries reported slower supplier deliveries in May, the 29th consecutive month of this trend, according to the report. Respondents in the ISM report blamed a shortage of truck drivers in particular, and a shortage of trucks further compounds the problem, creating a "capacity constraint" on businesses, Nieves said.

In part, the supply shortage may be a result of companies demanding that suppliers deliver to them at certain times of day, causing vendors to book trucks at less-than-full capacity, said Steve Tracey, executive director at Penn State's Center for Supply Chain Research, in an interview with Supply Chain Dive.

"A lot of these things are the growing pains of a good economy."

Steve Tracey

Executive Director, Center for Supply Chain Research, Pennsylvania State University

Respondents have also complained about slow rail services in previous months, Nieves said.

In many industries, respondents raised concerns about rising commodity prices as well. The report notes price hikes in 15 commodity categories, including gasoline, fuel, aluminum and steel products. In part, prices have risen because of the recent tariffs announced by the Trump administration.

As companies order early to beat price hikes, they worsen the supply shortages, Nieves said.

Businesses have a few options to deal with the shortages. To compensate for longer lead times before supplies come in, some companies are increasing their order quantities, Nieves said.

Eventually, companies may increase their prices, but that's not a main strategy for fighting backlogs, Nieves said; greater price transparency and competition have mitigated the impact of increased prices. Tracey pointed out that companies' decisions to pass price hikes on to consumers depend on the sector and how long the price hikes last.

"A lot of these things are the growing pains of a good economy," Tracey said. "This is a lot better than the alternative ... These are nice problems to have."