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OM in the News: Services Sector Businesses Are Struggling to Get Supplies They Need

June 6, 2018

Firms in the services sector are grappling with delayed supply deliveries because of a truck driver shortage and slow rail service, reports the Wall Street Journal (June 6, 2018). The Institute for Supply Management (ISM) yesterday said its non-manufacturing index rose to 58.6 in May, indicating activity is expanding across service and other industries. But its backlog of orders index grew substantially in May to 60.5 from 52.0 in April, and the survey’s deliveries measured rose, hitting 58.5, which signals deliveries are slowing at a faster rate.

“You’re getting to the point with the economy growing so strong, there’s so much that needs to be delivered, and the supply can’t handle it,” said an industry economist. One business told ISM “supply is out of alignment with demand, which is causing many stockouts and shortages.”

The supply constraints stem from slow rail service and a shortage of truck drivers, keeping some businesses from being able to get the resources they need on schedule. If the backlog of orders continues for an extended period of time, it could lead to ramped up price increases and could stunt a recently strong bout of economic growth.
“It’s a matter of what firms choose to do with the supply issues,” said one expert. “Do they try to sustain growth and raise their own prices? If they feel like they don’t have the ability to do that, they may throw up their hands and say, ‘I just can’t fill the order.’If I were a business person with backlogs and demand through the roof and my input prices are going up, I’d test the waters and try to raise my prices.”

Classroom discussion questions:

  1. What is the “manufacturing index” and what is the “non-manufacturing index?”
  2. What is the solution to the delays in receiving supplies?
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