What Do the New Minimum Wage Increases Mean for the Supply Chain?

Warehouse worker in facility

The latest round of minimum wage increases, voted into action in the 2018 midterm elections, has spurred various discussions and debates within the supply chain and logistics sphere.

Which States Hiked the Minimum Wage?

During the November 2018 election, minimum wage increases were approved in Missouri and Arkansas, both of which employ many workers in supply chain and logistics. Eastern Missouri, in particular, has seen a spike in industrial real estate activity over the last few years, prompting many large corporations, such as Amazon, to move in and set up shop.

The e-commerce space is very labor intensive, typically employing four times as many workers as traditional warehouses, leading to the creation of many jobs in transportation and warehousing. Arkansas is home to retail giant Walmart’s headquarters and several of their warehouses, as well as many of the suppliers that serve the company.

Because these areas are so rich in supply chain jobs, the wage hikes could have a big impact. Missouri’s minimum wage is set to rise to $12 by 2023, and Arkansas’ is set to go up to $11 by 2021, with increases occurring incrementally.

These changes aren’t a revolution, though. Supply chains across the nation have experienced several minimum wage increases over the past several years. In 2017 alone, 21 states raised their minimum wage.

How Do Minimum Wage Increases Affect the Supply Chain?

It’s no surprise that minimum wage boosts will increase labor costs. Even companies already compensating employees above the new minimum wage requirements are likely to see price increases from local suppliers as they are forced to raise prices to account for higher labor costs.

The minimum wage increase will affect the supply chain in other ways as well. For example, better-paid employees tend to stay at their companies longer, improving retention rates and reducing hiring and training costs. Plus, replacing an employee who quits costs companies, on average, 21% of the worker’s annual pay. And because salary can serve as a major incentive, better-paid employees typically strive to deliver improved customer service.

How Can Supply Chain Managers Prepare for Higher Minimum Wage?

First, supply chain management must be prepared to exceed these new minimum wage rates in an effort to retain a competitive workforce. Wages are a top priority for warehouse workers in particular, as their skills are easily transferrable from one organization to the next. These workers are likely to follow the money, and low unemployment rates are making for a highly competitive market.

Next, procurement departments should prepare to negotiate, especially if they work with companies located in the states seeing wage increases. To do so effectively, procurement hiring teams will need to obtain reliable estimates of their suppliers or potential suppliers’ costs. This could mean simply asking for a cost breakdown in RFPs or gleaning cost data from outside sources like ProPurchaser.

To secure the best price possible, it’s important to know how much it costs suppliers to actually produce the product or provide the service in question. This can also help determine if the supplier is passing on the entirety of the labor costs.

Procurement will then need to determine if a supplier’s performance and value legitimize the cost increase. They should also be prepared for the possibility of making other concessions to help suppliers cope with increased labor costs.

Companies may also employ automation and cost reductions in other areas to better cope with rising labor costs, and it’s likely that some supply chain players will even opt to move facilities to regions with lower minimum wage rates.

The Final Word

Rising minimum wages aren’t the end of the world, and they may even have a positive impact on some businesses. They’ve happened before without disastrous results, and the latest round will be just as manageable with the right preparation and planning.

 

Image credit: Halfpoint / Shutterstock.com

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