The weak link in the supply chain

“CFOs estimate that supply chain woes have reduced revenue growth by about 3 to 5 percentage points on average,” John Graham, a finance professor at Duke University’s Fuqua School of Business, told me.

Graham is a founder and director of The CFO Survey, conducted in partnership with Fuqua and the Federal Reserve Banks of Richmond and Atlanta. In the Q3 2021 report, released on October 14, approximately 301 CFOs from across the U.S. in various sectors responded to a survey gauging the financial outlook for their firms and challenges they face. Availability of materials, production and shipping delays, and increased materials prices were reported by three-quarters of the firms, the report found. Most finance chiefs anticipate these issues will not resolve until the second half of 2022 or later, according to Graham. 

“Companies are taking a number of steps to deal with supply chain disruptions, including diversifying the source of supply chain, switching to closer-to-home sources and when possible, building up more inventory,” he says. These actions are most likely to be taken by large firms, the report found. Meanwhile, respondents at small firms said there was less “room to maneuver,” and were more likely to wait and see if supply chain issues resolve themselves. The size of firms in the survey panel ranges from 1-4 employees to 1,000 or more employees.

Compared to a pre-COVID world, supply chain disruptions are more expensive, Graham says. One option for companies to offset higher costs is raising prices for consumers, he says. And since consumer demand is relatively high due to pent up demand and stimulus payments, this has been a viable strategy, at least in the short run, he says. Another option is attempting to reduce costs elsewhere. But if a company is already good at cutting costs, “there may not be much low hanging fruit left,” Graham says. 

In an attempt to alleviate congestion in the U.S. supply chain, the Port of Los Angeles is shifting to a 24-7 system, President Joe Biden announced last week. “Now we need the rest of the private sector chain to step up as well,” Biden said. “This is not called a supply chain for nothing. This means that terminal operators, railways, trucking companies, shippers and other retailers as well.”

I asked Graham if this approach will help the situation. “Having the port open more hours is good … if they have the workers to handle,” he says. “The remaining issue is whether there are enough truck drivers to transport from the port to ultimate destination. The supply chain is ultimately only as good as its weakest link. But, if there are two weak links, yes, [it’s] good to fix one of them, in hopes that the other can also be addressed in time.”

And speaking of talent shortages, 74% of CFOs surveyed said that their firms are having difficulty filling open positions, according to the report. Among these firms, the majority (82%) are increasing starting wages. Will consumers pay for cost increases? “In the short run, demand is strong and much of the higher wages can be passed along to customers,” Graham says. “But companies can only do so to the extent that the market will bear those prices.” An example? “Now, car dealers can charge a premium,” he explains. “But in two years when dealers are again well stocked, competition will limit how aggressive dealers can be in price.”

To address the war for talent, “another thing companies can do is to invest in automation to replace workers, a trend that I expect to accelerate,” Graham says. “On average, CFOs tell us they expect these supply chain woes to last for another year, and my prediction is that labor shortages will last even longer,” he says. 

See you tomorrow.

Sheryl Estrada
sheryl.estrada@fortune.com

Big deal

CFA Institute released a global report on October 13 that assesses the career outlook of more than 15,000 university students and recent graduates (ages 18-25) from 15 markets. The global association of investment professionals found finance remains a top choice for a major that will lead to a valuable career. But Gen Z doesn't necessarily view working in finance as a way to make societal change. About 87% of respondents said working in an industry that makes a positive societal and environmental impact is important. Respondents pointed to careers as a doctor (27.4%), teacher (26.4%), and scientist (25.7%) as providing the best opportunity to do so. In comparison, just 8% said a career in investment management provides the same opportunity. In order to retain talent, the sector needs to educate students about the positive impact they could have in an investment industry career, according to CFA Institute.

Courtesy of CFA Institute

Going deeper

A recent report by Oracle based on a survey of more than 1,000 U.S. consumers found that 87% have been negatively impacted by supply chain issues over the past year. About 89% of respondents believe supply chain disruptions will continue to negatively impact their future. Out of stock items (62%) was named as the top fear, followed by challenges in buying seasonal products (45%). However, 78% of consumers said they'd be more willing to buy from a brand that used artificial intelligence to manage their supply chain, according to the report.

Leaderboard

Brittany Bradrick was named CFO at Neurelis Inc. Prior to joining Neurelis, Bradrick was COO and CFO at ViaCyte. She also previously served in strategy and corporate development positions for 10 years at Insulet and Abbott Diabetes Care, and was an investment banker to the life science industry for 10 years at Piper Jaffray, Credit Suisse, and Chase Securities.

Wilson Wang was promoted to SVP and CFO at MITRE, a nonprofit that supports several U.S. government agencies. As VP and CFO since 2018, Wang facilitated MITRE’s investment and capital allocation strategies, delivering consistent operating models, according to the organization. Prior to becoming CFO, Wang was head of finance and assistant treasurer and played a key role in centralizing MITRE’s finance functions.

Overheard

"Throughout my career, I've always tried to do my best today, think about tomorrow, and maybe dream a bit about the future. But doing your best in the present has to be the rule. You won’t become a general unless you become a good first lieutenant."

—Colin Powell, the first African American U.S. secretary of state and chairman of the Joint Chiefs of Staff, who died Monday at the age of 84, shared career advice with Fortune in 2009.