Delivery delays and empty supermarket shelves have become a frustrating reality: in the fourth quarter of 2021, over 60 percent of U.S. consumers reported encountering out-of-stock products.
There are several factors driving these pervasive shortages, including numerous supply chain disruptions from severe weather events to clogged ports and rapid, pandemic-induced reversals of longstanding consumer habits. Over the years before COVID-19, consumers spent a rising share of their money on services, focusing more on “experiences” rather than “things.” An unexpected surge in demand for physical products left many companies scrambling to fill shelves and fulfill orders.
While these dynamics remain at play two years later, a national labor mismatch is making matters worse.
Employers have been scrambling to lure in workers by raising wages — average hourly earnings rose 4.8 percent year-over-year in November — but it hasn’t been enough, particularly since consumer-price inflation rose even faster. Manufacturing, transportation and warehousing and shipping are particularly feeling the brunt of structural, worker-driven changes roiling the labor market. There aren’t enough workers to unload goods from ships, while demand for truck drivers exceeds job applicants. Domestic production is also constrained, with over 856,000 open manufacturing jobs.
Fueling the mismatch is a complicated mix of short-and long-term factors, which together have structurally changed which skills are in short supply and where — by job code and by zip code. Health concerns continue to play a role, as some people remain hesitant to work in environments with close proximity to other people. Workers with caregiving responsibilities report that a lack of affordable childcare options is keeping them from returning to work. And others are questioning whether they even like their current jobs at all.
At the same time, the accelerated use of technology and automation has created an ever-wider chasm between the skills people have and those companies need. The impact of these shifts is particularly pronounced in industries critical to a well-functioning supply chain. For example, recent McKinsey research found that most supply chain leaders lack the in-house talent needed to support increased digitization.
Successfully navigating the current labor mismatch requires a comprehensive set of coordinated actions that address labor issues and their effects across the value chain. While there is no single solution, there is a set of integrated actions executives can take to respond:
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Reexamine business operations to unlock workforce potential. First, employers will want to understand how labor shortages affect their suppliers, current workers and customers, with the goal of identifying avoidable costs. A consumer-goods company, for example, combined data on each of its products’ labor cost and complexity using advanced-analytics estimates to identify substitutability. The resulting output let the company preserve its existing revenues even while reducing its product portfolio by more than 25 percent. Other strategies could include diverting workflow away from labor-stressed channels (such as by shifting manufacturing to alternative locations) or redesigning products to further reduce the need for labor-constrained components and ingredients.
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Look to automation to improve employee engagement. Bold interventions could structurally change both the demand and supply of an organization’s labor. For example, over 40 percent of employees spend at least a quarter of their time performing manual and repetitive tasks. In that context, automation can help not only reduce labor demand but also allow employees to spend a greater amount of time on more valuable and meaningful work — improving employee engagement and satisfaction.
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Harness technology to help realign employers with employees. If the past 18 months have taught us anything, it’s that employees crave investment in the human aspects of work. They want a renewed and revised sense of purpose in their work. They want social and interpersonal connections with their colleagues and managers. They want to feel a sense of shared identity. However, many employers don’t have a clear understanding of why staff are leaving and what may make them stay. Yes, people want better pay, benefits and perks, but more than that they want to feel valued by their organizations and managers. Advanced people analytics such as machine learning can help organizations identify and address specific key drivers of employee attrition. Utilizing learning algorithms and computer vision technology, a logistics company found that the physical nature of the job, lack of work-life balance and scheduling issues were causing the employees to jump ship. In response, the company implemented a training program for supervisors and managers, the option of a four-day work week, pay incentives based on routes serviced by drivers and more shift options for workers. By creating paths for career development and providing workers with extra flexibility, distribution-center worker retention and driver retention increased by 8 percent and 15 percent, respectively.
Amidst continued challenges and seemingly endless supply disruptions, this might turn out to be the kind of call to action that grants permission to tear up the old rulebooks and try something new. It’s now-or-never for companies to look across their end-to-end operations and make meaningful changes to address today’s labor mismatch. Those that take this moment as an opportunity to emerge more productive and resilient will find themselves more competitive in the long term.
Daniel Swan co-leads McKinsey’s Operations Practice globally and helps manufacturing and service companies transform operations performance and capabilities.