Supply chain issues are not new, but COVID-19 can be thought of as the catalyst for the global economic situation we find ourselves in today. Also consider that all parts of the world have not been affected equally by the pandemic; as such, we’re all recovering at vastly different rates.
Beginning upstream at the source of things like raw materials, and then moving to low-cost manufacturing and so on, COVID-19 has interrupted many of the key elements of the global supply chain.
The first blow came when many of the Chinese plants that build parts or assemble goods for global manufacturers were shut down by COVID-19 outbreaks. It’s not easy to restart factories after they’ve been shut down to stem surges in cases. Raw materials back up, and it can take weeks or months to restart production.
Similar disruptions soon spread across the globe, affecting both manufacturers and the logistics companies that ship, store and deliver their goods. One analyst points out that “the supply chain is a system. When you create shocks from the supply to the demand side and that continues to happen, the system isn’t getting enough time to reset and recalibrate.” This is the domino effect that is still in play.
Where the U.S. is concerned, at the time of this writing, we’ve been recovering economically much more rapidly than the rest of the world has. The federal government invested a lot of money into the economy both for businesses and individuals. This has kept consumer and business spending at relatively high levels. That we’re currently in what most would consider a rapid recovery has resulted in high demand. The disconnect or the imbalance lies in demand as compared to supply.
Analysts say that the lingering effects of COVID-19 responses essentially reduced the production of goods and services. The supply-chain shortages now, they say, are the result of struggles to return to pre-pandemic production levels.
“The result of that imbalance between supply and demand eliminated all the inventory and eliminated all the grease that allows the wheels of commerce to work smoothly,” Steve Ricchiuto, chief U.S. economist at Mizuho Securities, observes.
More Goods to be Delivered
As the pandemic (we hope) approaches its end, we are seeing more goods being produced, but they now must be delivered. Many companies forgo having U.S. factories altogether, still relying on a far-flung supply chain that requires some combination of planes, ships, trucks and warehouses to pull together its products, deliver them and store the inventory.
This reveals the next set of issues, which involve labor, transportation and logistics. There’s reduced capacity because of the problems all along the supply chain. Yes, demand is high, but there is a finite (and, in some cases, a diminishing) number of resources available to support the supply chain. Economists tell us that there are not enough dock workers, truck drivers and warehouse workers to meet the demand.
Ports were barely keeping up with the growth in freight before the pandemic, and they had no ability to absorb the disruption, Ayman Omar, an associate professor at American University’s Kogod School of Business, observes. The pandemic has exacerbated the situation, which now includes a shortage of trucks to haul cargo containers to their destinations.
As an example, there were 70 ships in a holding pattern near the ports of Los Angeles and Long Beach, Calif. on an average day in November. They’re simply unable to handle the growing number of ships. It is estimated that vessels were spending about as much time waiting to anchor and unload—about two weeks—as it would take a ship to cross the Pacific.
Omar explains that the lack of transparency and information sharing compounds the problem. It makes it impossible for port-reliant manufacturers and importers to see problems developing in advance and route around them. Containers are piling up on docks, and more kept coming—each new ship brings in 10,000 to 21,000 containers.
The shortages and the heavy demand for shipping, taken together, have caused freight costs to skyrocket. The cost to move a container from China to the U.S. west coast is four times what it was a year ago—and more than 10 times what it was before the pandemic.
Once product is finally off ships, it takes trucks and rail to move the cargo to its destination. The American Trucking Association (ATA) has estimated that it would be short some 80,000 drivers, but those shortages could worsen due to retirements and new truck drivers needing to be trained.
“There is a shortage of drivers, and it is one of several issues contributing to problems in the overall supply chain,” Sean McNally, an ATA spokesperson, explains. “However, it is a reflection of the strong demand for goods—and everything consumers buy is delivered in a truck.”
Once the trucks are loaded, they need to go to warehouses across the country. Then, from warehouses, they go to their destination. The warehouse story is no better, unfortunately. The Labor Department recently reported that the warehouse industry had a record 490,000 job openings. With the unemployment rate hovering around 4.25%, there is a competition for workers to populate the supply chain. The demand for their services now exceeds the supply.
How will this be resolved? Some economists argue that the convulsions in the shipping market will encourage U.S. manufacturers to shift more of their outsourced work from Asia to Mexico. But that’s a long-term fix. In the near term, experts say that repairing the supply chain will require addressing every part of it, rather than focusing on just one part of the process.
How the Supply Chain Affects AV Integration
The market recovery, as mentioned, has led to an increase in demand, which is exacerbating the supply/demand mismatch. From both the consumer and the B2B perspective, some items are just harder to find and in limited supply.
This can be traced back to one or more of the challenges in the key supply-chain components—from raw material shortages, to manufacturing bottlenecks, to the lack of truckers to deliver goods. Although we, in the U.S., aren’t seeing as many empty store shelves as others are experiencing, shortages are cropping up in unexpected places.
Uppermost in our minds are the shortages we see in all kinds of electronics. These are thanks to the semiconductor drought and reduced production, higher freight costs and longer lead times coming out Asia.
With demand being at an all-time high and supply so constrained, prices are going up. This has resulted in well-founded concerns about inflation. Rising prices are eating up our economic gains. Simply look at gasoline prices as a key example.
This is not a simple problem or one that will go away quickly. We did not get to this place in a few months, and it will take longer to pull ourselves from the mire.
Duration of the Problem
This all invites the question of how long this current situation will persist. Let’s listen to what the experts say:
He Jun, partner, director of China Macro-Economic Research Team and senior researcher, writing for SupplyChainDigital.com, opines, “Overall, the global supply crunch is due to a variety of reasons, including increased demand from the post-pandemic economic recovery, distortions in global supply chains caused by the pandemic, collective stockpiling by enterprises around the world, and geopolitical disruptions. However, this does not represent a significant expansion of aggregate global demand, but rather a distortion of the existing system as it is disrupted and broken. Judging from the current situation, this tight supply situation will last for a long time, leading to the price rise of raw materials and components. Therefore, both enterprises and governments need to be prepared for this scenario in the medium- and long-term.”
Moody’s Analytics has warned that supply-chain problems in the short term “will likely get worse before they get better. As the global economic recovery continues to gather steam, what is increasingly apparent is how it will be stymied by supply-chain disruptions that are now showing up at every corner.”
The Associated Press reports supply-chain experts are saying, “It will take a while—maybe more than a year—before the supply chain works its way back to a normal flow that will ease delivery delays and goods shortages.” Nick Vyas, executive director at the Kendrick Global Supply Chain Management Institute at USC, says, “We are in for at least four to six months for it to actually catch a break.”
One conclusion we can draw from the experts is that there are no silver bullets or flip-a-switch solutions due to the complexity and dynamics of the situation. Coming out of it will take time, and we can hope to see incremental improvements over several months.
The good news is, we see clear evidence that the issues are front of mind and being addressed seriously country by country and industry by industry. This is a marathon—not a sprint—to say the least, but experts agree that we will come out of it stronger in the end.
What Integrators Should Do
I hope that what I explained last month, and what I am presenting this month, has helped to illuminate the big picture. However, I want to bring it back to the concerns and challenges this situation presents to the AV industry. We simply haven’t been here before.
For most in the integration community, we have existed in the just-in-time universe. We got involved in a project; we did the design work and got approvals; we put logistics in place; and only then did we order products to arrive, yes, just in time to install. The reasons for this can be traced back to economics.
Most of our vendors expect to invoice net 30 from delivery. The clock starts on us to pay vendor invoices, but, often, there’s a mismatch with our collections from clients. Without fear of contradiction, I can safely say that most clients do not pay net 30. Now, it boils down to profitability and things like credit lines and cost of money. In simple terms, if we must pay before we are paid, the disparity between inflows and outflows can be significant. It cuts to the heart of profitability.
The AV industry must fight competitiveness and profitability issues every day. The difference between profit and loss is a narrow bridge. In itself, this is a complex set of issues. But, at the core, this has historically been the reason for the necessity of just-in-time. But what if just-in-time is broken because of the supply-chain issues that we have identified? The answers may not be to your liking, but, nonetheless, here we go….
- You are going to have to do a much better job forecasting a project. Yes, I know that this can be a moving target.
- You are going to have to engage in a true partnership with a distributor or a vendor partner to forecast product availability. In many cases, you need to be in the queue and account for that in your time estimates.
- You must consider alternative products and approaches.
- Most onerous to many of us, you are going to have to consider stocking more products than you are accustomed to stocking. Yes, this will have pricing implications, so no more single-digit margins on hardware and making it up elsewhere. Keep in mind that everyone is in the same boat.
- Finally, you’re going to have to proactively include your clients in the conversation, including discussing challenges and the solutions.
This is all going to be a big paradigm shift for many. My goal with this two-part article has been to inform, educate and demystify the all-too-real supply-chain problems, as well as to show that they are significant and won’t be easily solved in the short term. This is the world we live in, and we need to respond accordingly. As many like to say, it is what it is.
The days of instant availability and ultra-thin margins are behind us. We now enter the realm of value. Our collective challenge is to address these issues and keep our businesses growing and profitable so that we can be here to serve our clients long into the future.
lan C. Brawn CTS, ISF, ISF-C, DSCE, DSDE. DCME, is the principal of Brawn Consulting.