If only the solution were as simple as getting a ship unstuck in the Suez Canal.
The now-infamous incident from 2021 serves as a convenient symbol of the supply chain issues almost all industries are struggling with these days. Orders have remained unfilled for weeks or longer. Lots are filled with equipment waiting for one final part before it can be delivered. Construction projects have been delayed, in some cases for months. Some costs have increased by as much as a factor of three.
But despite the end of the canal’s six-day blockage and its ripple effects on worldwide shipping, those supply chain issues continue to dog the equipment industry. In truth, that incident only worsened a situation that was already hugely problematic and continues to be so. Unlike freeing a ship that has run aground, the appropriate responses sometimes remain elusive, and the end is not necessarily in sight.
“I’ve been in this business for 20 years now and we’ve managed through some really challenging economic downturns,” said Jeff Brown, president of Denver’s Global Machinery. “Although business is good right now and revenues are strong, this is more challenging than either of those down cycles – and it’s because of the uncertainty. Nobody has the answers.”
While customers are no longer demanding short-term fixes of their suppliers, as many were in the early days of the shortages, that uncertainty about when an order will actually arrive can create tensions. “It’s about the confidence that what we say is actually going to happen,” said Craig Drury, vice president of operations at Vermeer in Brampton, Ontario, and AED’s 2021 chairman. “That cascades to their customer, and then you create all these anxieties around it. Everyone’s nervous and on edge.”
Thor Hess, executive vice president at Ohio’s Southeastern Equipment Company, offered an example of how that anxiety can translate into more concrete business issues. “Whoever has the piece of equipment is the one that’s going to get the deal. We’ve won some deals that would normally go to one of our competitors because they didn’t have it. We’ve also lost some deals for the same reason. We didn’t have the product they wanted, and they went somewhere else.”
Companies are dealing with all of this in part by shifting the planning focus to the longer term, not just for themselves but for their customers. “We’re talking to our customers who are talking to their customers about projects next spring,” Drury said. “And they’re going to be prepared for those, and they’re probably going to go well.” Hess explained, “We’re looking at recommended stocking for all of 2023. I don’t know the last time I’ve been prepared and ordered fully in advance in August.” He added, “It’s very nerve-wracking to think I have quite a lot of money committed just because I want to hold my place in line. But I feel somewhat confident that it will be fine.”
Companies, by necessity, are remaining open to new ideas more generally. Bejac president Ron Barlet told us, “Whenever you have a situation like this, it’s going to change behavior, and smart companies figure out ways to adapt.” He added, “One of the things I’ve told my organization is, let’s not be numb to this. Let’s see if there are alternatives. As an organization you have to be careful not to convey to your customer ‘Look, it’s two months out and it is what it is.’”
The supply chain problems aren’t unique to construction equipment distributors. Mosinee, Wisconsin’s Swiderski Equipment, which primarily serves the agriculture industry, has always maintained large inventories, which helped them weather the storm early on. Now, “holes have developed, and things have gotten progressively worse,” according to Chief Operating Officer Sly Krautkramer. But that inventory still provides value in other ways. “We’ve robbed components off one piece of equipment [for another]. We try to help our customers any way we can.”
Few companies may go as far as one dealer who reportedly found “a guy that’s smart and has his own little side business,” an anecdote relayed by Hess. “They got him the schematics and he’s making wire harnesses because the manufacturer can’t deliver.” But Hess added, “We’ve definitely looked at if we could modify something. If we can make a certain bucket fit a different size machine, we’ve done that.”
Is the end in sight? After all, as Brown told us, “Even when the news is bad, if you know when it’s going to get better it’s easier to manage through it. And that’s the problem.”
There’s no consensus on when the situation will get back to something more normal, other than that it won’t happen until at least sometime after spring of 2022.
Solving the problem requires correctly diagnosing the sources of the problem. The executives we spoke with generally agree with the widely held view that after the initial slowdown due to the pandemic, demand recovered more quickly than almost anyone anticipated, leaving suppliers unprepared for the buildup. But they also pointed out that there’s more going on.
“That’s the easy answer, but there are a few things that have accelerated that,” Drury explained. “One is when COVID first hit, there was a sense of panic. People started canceling things, they thought the world was coming to an end. I would say most manufacturers started backing off on commitments, and then they realized very quickly, in May-June, that that was a mistake, the business did not stop, and they needed to keep it going. That little blip caused a ripple across the supply chain that was hard to recover from.”
Drury also pointed out that “labor is absolutely part of the supply chain,” and that the labor shortage is compounding the shortage of parts and equipment. “There’s a lot of competition for talent right now, and I suspect we’re all going to be in positions where we’re going to compete on an exponential scale. I think that’s going to fall into 2022.” Hess relayed, “I heard the chip shortage is going to be a two-year problem, and that very well may be.”
Imbalances between supply and demand are generally seen as self-correcting, but the sense is that the process is being held up by chokepoints throughout the system. Hess said, “Once you try to bring back that log of equipment and log of worldwide shipping … I think [the whole supply chain] is just trying to catch up, but they’re trying to catch up with the same throughput capacity they had before … I think it’s a lot more complicated than ‘we weren’t ready’ – even if we were ready we would have needed a lot more capacity to handle it.”
Brown relayed, “I heard someone explain it this way. In the first months of COVID, so many places were forced to shut down that containers were not moving in the same shipping channels, and a lot of the containers ended up in China, because they were still shipping things out. And now we’re stuck in that situation. China has all these containers sitting in their ports empty, but even though the rest of the world has caught up, no one is willing to pay to ship an empty container from China.”
The solution won’t realize itself all at once. “I feel like there’s going to be little spurts of equipment coming,” Brown said. “A boxful of chips shows up at a manufacturer, and they’ve got a hundred machines in the yard, and that’s all they need to get them finished up and shipped out. And then they wait for the next part for the next model.”
There will be learning from this adversity. Once the worst of this has been put behind us, there will be long-term changes in the overall economy and in how firms conduct their business.
Tasked with addressing America’s supply chain issues, a group of White House advisers reported, “The COVID-19 pandemic and resulting economic dislocation revealed long-standing vulnerabilities in our supply chains.”
Barlet essentially agrees. “I think our mentality of lean manufacturing really exposed itself. If you read some of the Japanese books on lean manufacturing, the problem is that a lot of manufacturers read the first page, and the first page says “just in time” and “stay lean.” If you read the whole book, the Japanese were smart enough to realize you’ve got to be careful in some areas that could potentially be constrained … I think the whole lean approach will probably get modified.”
Hess, for one, would like to see chip manufacturing return to North America, and he thinks it will. “But you’ve got varying political opinions on where to make things, so it depends on how we’re going to prioritize this moving forward. I think some people have learned maybe it’s not a good idea to have everything [manufactured] overseas.”
And yet some, like Swiderski’s Krautkramer, worry about a sort of overcompensation on the part of customers that may create its own problems.
“We’ve really got to keep an eye on our inventories, because now everybody’s ordering extra heavy. At some point it’s going to slow up, and we don’t want to be caught with an excess of inventory, because then we’ll have the reverse problem. We’ll be overstocked.”
Still, there is a sense of optimism for the long term. Drury sees signs that business is already coming out of this, as “governments are throwing money at large construction projects, the fiber business is still rocking and rolling,” and he wonders “if we’re not into a new normal for a while with geopolitical issues, shipping issues.”
“As far as the supply chain, I think it’ll get shifted and sorted,” Hess said. “We’re not going to get away from things moving worldwide.” He added, perhaps a little tongue-in-cheek, “Maybe we should put another lane in the Suez Canal.”