The Supply Chain Challenge

Springmakers Bolster Inventories, Woo Suppliers to Keep Customers Happy

By Phillip M. Perry

Springmakers are grappling with recurring supply chain issues in the wake of a rebounding American economy. Faced with robust consumer and commercial demand, companies are beefing up costly inventories and wooing second level suppliers to help close the gaps when shortages arise.

Product shortages and delays — and associated price hikes — have been no strangers to the industry in recent years, thanks to international tariffs. The bottlenecked ports and shuttered production facilities of the COVID-19 pandemic, however, have transformed an exercise in efficient materials distribution into a full-scale crisis.

“I’ve been here 35 years, and I’ve never seen anything like this on the supply side,” says William Torres, president of Gibbs Interwire. “It’s just so difficult to get material. It’s difficult to get it domestically, it’s difficult to get it from overseas. And that just makes it so tough on us and our customers, because in many cases you don’t know when you’re going to get your supplies.”

Torres notes that the problem began with the advent of the COVID-19 pandemic. The economic rebound that followed in the United States, while a welcome development, only increased delivery pressures at a time when many companies were starting to get things under control.

“Many companies are telling me the problem seems to be getting worse as pent-up demand creates additional pressures,” says Bill Conerly, principal of his own consulting firm in Lake Oswego, Oregon. The steep production cuts that many companies made in early 2020 — instituted to obviate excess inventories — has only made more difficult the establishment of reliable delivery patterns.

The supply chain breakdown is creating downstream operational problems. “It’s caused a lot of disruption and has kept us from having the material we need for our customer base,” says Torres. “We’re a distributor, a service center, and our role is to have material for others.” Gibbs’ customers, of course, are also having trouble servicing their own customers.

The kinks in the delivery patterns are only exacerbated by their unpredictability. “It gets better in spots,” says Torres. “A mill may have a COVID-19 outbreak or disruption, and they’re in a really bad place. But then they’ll get back online, and things will get better. But then they still have to deal with an order backlog. And when material finally becomes available, everyone starts scrambling to get it. As you can imagine, there are many inefficiencies in that process.”

“ ”I’ve been here 35 years, and I’ve never seen anything like this on the supply side.

William Torres, president of Gibbs Interwire

Broad Effects

The springs industry is not alone in its supply chain struggles. “For a number of years our member companies have been dealing with disruptions caused by factors such as tariffs and higher energy costs,” says Tom Palisin, executive director of The Manufacturers’ Association, a York, Pennsylvaniabased regional employers’ group with more than 370 member companies.

With its diverse membership in food processing, defense, fabrication and machinery building, Palisin’s association can be viewed as a proxy for American industry. “The COVID-19 pandemic has given the supply chain a whole new level of priority. Companies in just about all sectors have experienced pauses and shutdowns. Some have even gone out of business.”

Labor shortages are one of the most persistent causes of distribution slowdowns. “One banker told me that his four manufacturing customers could each hire 50 additional workers if enough applicants were to show up,” says Conerly. “When a company I work with in Portland was awaiting a shipment of brass from Los Angeles, it turned out there was no driver for the truck.”

The reasons for labor shortages are varied. “Part of the problem is that people are not yet willing to come back to work,” says Conerly. “But the fact is that there were not as many pandemic-related layoffs in manufacturing as in, say, food service. A larger issue is demographics: Older people are retiring, and younger people don’t want to go into dirty, noisy factories. And then you have government cash payments for people who get laid off. And finally, there are child care issues.”

New Strategies

The labor shortage has caused an increase in automation as a way to produce goods with fewer man hours. “In recent months there’s been a surge of business orders for capital equipment,” says Conerly. “The fact that manufacturing production has not reached all-time highs, though, indicates that the new equipment is not intended to boost capacity. So, I think a lot of the business capital spending is intended to replace empty positions with machines. The idea is ‘If I can’t hire somebody to assemble this product, maybe I can hire a robot to do it,’ and I think that’s a good strategy.”

A decline in the cost of automation has helped fuel this trend. “The cost of labor has gone up while the cost of electronic equipment has gone down,” says Conerly. “Something that did not pencil out a few years ago may well do so today.”

Automation alone will not solve the supply chain problem. Companies are taking additional measures such as doing more with less, running machinery beyond its prime and collaborating with vendors to predict shipping delays.

Perhaps the most common step, though, is to keep more stock on hand. That’s the case at Gibbs. “We have tried to mitigate the problem by having more supply in the pipeline and sitting on more inventory,” says Torres. “We are recognizing that one way we can avoid a problem like this in the future is to have more inventory available. Our customers are telling us they’re doing the same thing. But even that is not a sure solution, because it is still very hard to get material.”

Market observers see other companies following suit. “Companies should no longer rely on just-in-time

The pandemic has really highlighted the need to develop strategies to mitigate potential disruptions in the flow of critical components. That means doing a deep dive into the supply chain, mapping the geographical locations of the first tier of suppliers and learning about the reliance of second tier as well.

Tom Palisin, executive director of The Manufacturers’ Association

inventory strategies, which too often have become just-too-late failures and stockpile more supplies both in the United States and abroad,” says John Manzella, a consultant on global business and economic trends, East Amherst, New York. “This approach reduces efficiencies but favors risk reduction.”

Companies are also tracking down backup vendors even for lower volume items. “We are looking around the world and qualifying additional suppliers for the products we need,” says Torres. “We certainly want to work with our long-term suppliers because we view them as our partners. But in a market like this, our customer base expects us to present them with every opportunity, every alternative we can find.”

All such moves strike a familiar chord with Palisin at The Manufacturers’ Association. “The pandemic has really highlighted the need to develop strategies to mitigate potential disruptions in the flow of critical components,” says Palisin. “That means doing a deep dive into the supply chain, mapping the geographical locations of the first tier of suppliers and learning about the reliance of second tier as well.”

While businesses must pay the price for bolstering inventory levels, such costs must be balanced against operational expenses, such as the need to pay higher prices for goods when a company scrambles to fill customer orders — or lost revenues when an unhappy customer jumps ship for a competitor. As they balance such costs, many companies are viewing higher cashflow on the shelf as acceptable. “Risk mitigation has become more important than efficiency gains,” says Manzella.

Furthermore, three historic costs of inventories — interest, obsolescence and shrinkage — no longer universally apply. “The interest rate you get for having cash in the bank now is approximately diddly squat,” says Conerly. And obsolescence, he adds, would only be an issue if something were expected to go out of fashion. “Many products in short supply today are the same products as last year’s model and they are not going to go obsolete.” Shrinkage, he adds, is not an issue in some industries, and in others can be controlled with requisite security steps.

Cheap or not, inventory storage must be allocated selectively. “Companies need to be thinking, ‘what might be in short supply when we try to ramp up our production?’” says Conerly. “They may well buy a year’s supply of a relatively cheap item that is a small part of what a company uses but is vital to producing a finished product.”

Despite the inventory mind shift, business owners feel that a return to the days of warehouses bulging with expensive inventory is not in the cards. “Everybody has become accustomed to reducing costs by minimizing touch points, moving goods from the ship straight to the distribution facility and on to the customer,” says one operator. Indeed, cooperative efforts with suppliers and customers may well help bring back a greater emphasis on JIT.

The Road Ahead

Businesses face a conundrum as the world emerges from the pandemic: How quickly will demand increase for products and services, and will the increase be steady or erratic? The wrong answers can result in a pileup of inventory or lost revenues and customers.

“The risk is especially great for consumer and business goods requiring long lead times, where businesses can’t easily turn the supply chain spigot on and off,” says Jim Hannan, practice leader of manufacturing, distribution and logistics service group at consulting firm Withum.

The solution, says Hannan, is to develop a playbook to address possible disruptions and evaluate risks up and down the supply chain, then develop a plan to address those risks. And management must grapple with other unknowns, such as whether the recent surge in the price of manufactured goods can be passed along to the consumer.

All this may soften profits until everything shakes out. “Revenues will probably hold up or even increase because of higher demand, but margins will likely be hit because of increases in the costs of raw materials, labor and inventory,” says Palisin. “It’s a very unusual situation where all of these cost increases are happening at once — and at a time when tariffs are still in place. Companies just can’t pass along everything to customers.”

As for the road ahead, market participants are anticipating — or at least hoping for — a gradual improvement. “We think the port log jam is slowly getting better,” says Torres. “But getting it less tied up is going to take a while.”

In the meantime, many operators feel that, with the pandemic coming to an end, now is the right time for businesses delivering quality service to gain market share. Says one: “We’re assuming the worst and hoping for the best. Our overriding goal is to protect the health of our people and service our customers. Those things haven’t changed a bit. And we’ll do what it takes to get it done.” n

How Manufacturers Can Navigate Supply Chain Challenges

as the global supply chain, worker shortage and wage inflation challenges many had hoped were transitory dig in their heels, manufacturers everywhere are wondering how best to get around them.

Panelists at “Successfully Navigating Current Supply Chain Disruptions,” a webinar hosted by the National Association of Manufacturers’ (NAM) Manufacturing Institute, Manufacturing Leadership Council and professional services firm PwC, sought to answer that question.

Here are the speakers’ top tips as reported by NAM for manufacturers seeking to sustainably and profitably maneuver the several sizable hurdles they still face going into 2022.

Break down siloes. Now that manufacturers are having to replace traditional supply chain models, changing their company operations to have staff work across siloes is more important than ever, said PwC partner Debjit Banerjee.

Expect disruption. If it taught us nothing else, COVID19 conveyed the importance of being prepared for the unexpected. Going forward, manufacturers would do well to not just plan for the possibility of disruption, but to assume it will come. To that end, preplanned “differentiated customer service” and disruption drills should become the norm, Banerjee said. Advance your supply chain planning. Increasingly, Nexteer Automotive, a global maker of steering and driveline components, is focusing on advanced supply chain planning, programs that help predict shipments, supply and demand for smoother operations, said Nexteer automotive vice president of global manufacturing operations Dennis Hoeg. With it, “decisions can be made smarter, earlier,” said Hoeg.

Automate. Manufacturers should consider automating repetitive “transaction” work and reserving their employees for analytical tasks that only humans can do, according to Hoeg.

Balance agility and resilience. Before the pandemic, “we were working on a strategy that was based on agility,” said Rockwell Automation chief supply chain officer Ernest Nicolas Jr. “Through the pandemic… we had to reprioritize. We had to take a step back to balance agility and resilience.” Manufacturers that want a better agility-resilience balance can do so “through data, process and technology enablement,” according to Nicolas.

“Relentlessly prioritize.” Nicolas so believes in this advice that he ended his presentation with it.

“There’s so much going on right now; we want to be certain we manage our priorities,” he said. “So, there’s a lot we’re saying ‘not now’ to…but it’s not a matter of ‘no.’ It’s a matter of, ‘We’ve got to get these things finished so we can lay the foundation’” in this new normal. n