The onset of the pandemic reduced the global flow of goods. But when demand suddenly snapped back, supply chains proved less resilient.
By Russ Banham
Typically, the container ports of Los Angeles and Long Beach are the busiest in the Western Hemisphere, a hive of 24/7 activity as cargo moves from ships to trucks or trains. But on one recent afternoon, a flotilla of more than two dozen ships, carrying anywhere from 6,000 to 11,000 20-foot-long containers, sat idly in the coastal waters of San Pedro Bay. They had been stranded for weeks, waiting for the green light to berth and unload their cargo.
The inactivity at the ports is a symptom of a peculiar side-effect of the COVID-19 pandemic, a mismatch of supply to demand that has left U.S. manufacturers having to wait months for raw materials and components to make or assemble products.
Consumer demand has roared back to life with the lifting of COVID lockdowns and government relief spending. However, supply chains are out of sync, with production lines creaking back to total operational capacity after being shut down or curtailed. And shipments are being delayed at ports by shortages of dock workers and truck drivers.
“After a period of low demand forcing manufacturers and suppliers to curtail production, a spike in demand produces an upsurge in orders that suppliers aren’t prepared to meet in normal delivery timeframes,” says Mike Varney, supply chain consulting partner at global public consulting, technology, and accounting firm Crowe LLP.
Polaris, a publicly-traded manufacturer of motorcycles, snowmobiles, boats, and ATVs, knows this phenomenon all too well. A year ago, it temporarily closed its 20 U.S. and international factories, focusing on cost-cutting to survive the economic meltdown. “We needed to preserve cash, so we stopped the end flow of components from China,” recalls CFO Mike Speetzen.
The plants are now operating again amid a boom in orders that began in December. But while customers are ready to buy again, Polaris “can’t get product in fast enough,” according to Speetzen.
“Our global supply chain,” he says, “is struggling to get production back up to speed.” Polaris’s head of operations told Speetzen that its on-time delivery rate had dropped to 13% from 80% due to the lack of dock workers.
There’s no vaccine for the supply-chain side effect. At La-Z-Boy, a manufacturer of recliner chairs, sleeper sofas, and tables, sales have also boomed, jumping 18% in February. A year ago, it had shuttered its six North American manufacturing plants and another one in Mexico and furloughed most workers. But CFO Melinda Whittington laments: “Due to port blockages and trucker shortages, we can’t get supplies in fast enough to assemble our custom orders. Whereas it took us four to six weeks previously to deliver, it’s taking us five to nine months now.”
Too Little, Too Late
President Joe Biden acknowledged the problem in February when he ordered a 100-day government review of U.S. manufacturing vulnerabilities. Three days later, eight states’ governors suggested he do more to increase semiconductor chips’ availability. “In light of the growing list of automakers, suppliers, and dealers negatively affected by the shortage, we ask you to redouble those efforts,” they wrote to the president.
supply of plastic components, petrochemicals, and semiconductor chips used to control power windows, airbags, and dashboards has caused most manufacturers to reduce production capacity. “We can’t get parts in quick enough from our global supply chain to make trucks, at a time when the demand for them is higher than any of us ever anticipated,” says a senior finance executive at a large manufacturer of commercial trucks who requested anonymity.
The chip shortage has also resulted in stoppages of production of computers, smartphones, medical equipment, vacuum cleaners, refrigerators, and smart devices plugged into the internet of things. “Like every industry baffled by the demand implications of COVID-19, we didn’t build as many semiconductors because the orders from our traditional buyers fell off a cliff,” says a senior finance executive at a major chip manufacturer.
The executive, who requested anonymity, adds, “We can only build what we can sell, which is dependent on our buyers’ ability to forecast demand signals. When they told us demand looked dead, we curtailed our production. They suddenly hit us with these huge orders that take us 26 weeks to build, on average. There’s only so much we can do.”
Meanwhile, in the residential building products industry, there is plenty of demand from homeowners for new decks and additions. But John Tunison, CFO at Trussway, a maker of wood trusses for multifamily housing, says that “As much as 40% of single-family homes recently sold have yet to break ground. The reason is they use a ton of wood, and lumber demand is higher than supply.”
Like a spigot, consumer demand suddenly turned off as the pandemic erupted and then just as suddenly turned back on as the economy stirred back to life and federal largesse put extra cash in Americans’ pockets. Personal incomes shot up 10% in January, fueling a 5.3% increase in retail sales the same month.
But as Gary Lynch, CEO of supply chain risk consulting firm The Risk Project, says, “When demand fell precipitously in the early months of the pandemic, the supply chain slowed to a trickle. When demand roared back, it took much longer for suppliers to catch up, causing months and months of delay. Now supplies are being shipped, but there are only so many containers to ship them in and so many ports to accept all these ships.”
Once a container ship offloads its cargo at crowded U.S. ports, the goods are transported by rail and heavy-duty semis to factory loading docks, distribution centers, and retail outlets. But like other businesses, trucking companies found it difficult to forecast demand and pulled back sharply on hiring.
According to The Journal of Commerce, the number of for-hire truck employees fell by 65,700 in October 2020 from the same period a year earlier. “The demand for truckers is surging, but many truckers let go in the first few months of the pandemic have since found alternative employment,” says Josh Nelson, a principal in the strategy and transformation practice at business advisory firm The Hackett Group. “While there are a lot of people, particularly immigrants, looking to become truckers, the closure of DMV offices across the country made it difficult to get a commercial driver’s license.”
At Costco, CFO Richard Galanti reports that about 70% of containers carrying imported products for sale at the retail giant’s 560 retail warehouse stores in the U.S. are three weeks late, on average. Things could have been worse, though. While Costco relies on third-party trucks and rail to ship from ports to its cross-docks, it uses its own trucks for the next step to retail warehouses. “Logistically, this helps reduce the time it takes to receive products. It’s helped take some of the sting out of this,” Galanti says.
Other companies have softened the sting through vertical integration, shorter supply chains, and added safety stock. Marvin Doors and Windows, a privately held manufacturer of windows, doors, and skylights, has vertically integrated much of its manufacturing, ensuring a steady supply of lumber and fiberglass. It purchases other products such as window hardware from long-term suppliers. “We worked hard over the years to cultivate trust with our suppliers,” CFO Jim Macaulay says. “When a supplier says it can only get us a partial shipment today and promises the rest by Friday, we know they’ll come through.”
La-Z-Boy has benefited from similar relationships. “While lumber availability was a problem for us and other manufacturers, we’re a big purchaser of plywood, and that enabled more favorable treatment from our long-term suppliers,” says Whittington. La-Z-Boy and Polaris have also maintained supply by having a safety inventory of parts and completed items. “If you needed to have a mass-produced sofa, we could find you one,” according to Whittington. “That helped offset the delay in our custom-made furniture.”
Says Polaris’ Speetzen: “I started paying close attention to COVID-19 infection rates in China, where we source several components, as early as January 2020. That gave me a heads up that we needed to ensure enough safety stock in case of a slowdown. That inventory is long gone now.”
A Revised Playbook
The pandemic has inspired some CFOs to tweak the playbook on supply chain management. Tunison, for instance, has responded to the surge in lumber prices with a hedging strategy he introduced in 2018. “At a time of rising demand and higher costs, we’re now executing the forward contracts at specified prices fixed for nine months,” he explains. “It’s helped us maximize profits at a time when demand is upwards.”
Speetzen provided financial support to some suppliers, and to improve the chances of receiving priority treatment at the ports of Los Angeles and Long Beach, he dispatched additional operations personnel to work with the company’s freight forwarders. When port delays risk alienating customers, Polaris has opted for expedited air shipments. “Although the cost was higher than ocean shipments, and that was tough on the P&L, we couldn’t let our customers down,” Speetzen says.
According to Varney of Crowe LLP, the biggest lesson for companies to learn from the supply chain crisis is the need to improve sales forecasting.
“The idea that you can make a forecast based on historical trajectories is of little value when a Black Swan event occurs,” he notes. Varney advises CFOs to evaluate real-time demand data and work closely with procurement and sales. “Daily sales data on revenue opportunities need to be compared to procurement data,” he says. “Finance then can decide where capital must be allocated to maintain supply chain resiliency.”
In the future, CFOs may be able to use blockchain technology to assess, on a real-time basis, whether suppliers and shippers can keep up with demand. “Within the blockchain, participants would record transactions, pricing, dates, location, quality, certifications, and other data needed to manage the supply chain,” says Joseph Fitzgerald, partner and leader in Deloitte Consulting’s high tech and semiconductor practice. His current clients include a company that prints sophisticated circuit boards and needs to ensure its products make it to the end of the chain. “A blockchain platform that included the companies buying the circuit boards would provide this visibility,” he says.
Blockchain could also be used to create what Fitzgerald calls a “zero latency” supply chain. “Instead of legions of suppliers that are untethered or loosely coordinated, they could now be digitally interconnected in a centralized supply network,” he says. Companies may be reluctant to join such a network because of concerns over data control, security, and privacy, but Fitzgerald suggests users can manage access to information through data encryption.
“A few years ago, there was plenty of interest in a blockchain solution, but then it fell off the radar,” he says. “People are picking it up again due to the current chaos.”
Nelson of The Hackett Group says several large corporate clients are interested in piloting a blockchain solution and his firm’s industry surveys “suggest significant interest in supply tracking and traceability, particularly the logistics elements. The reason is fast-rising demand and the concern over the competitive repercussions of late deliveries.”
Other possible supply-chain solutions include more sophisticated mapping and CreditRisk Monitor, a tool that scores trade receivables and payables to alert the user to potential supplier solvency issues. “We can then laser in on companies that might be in some sort of financial distress to help them,” says the truck maker’s senior finance executive.
Of course — rather like those ships becalmed in San Pedro Bay — some CFOs may choose to stay put amid the supply chain disruptions. For them, at least, a La-Z-Boy recliner may arrive just in time to cool their heels.
Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.