Supply Chain Issues of Critical Concern

The Supply Chain situation is creating critical issues. 

Important customers are going without the products required to keep their factories running at peak performance, OEMs cannot ship machines to their customers, and contractors have projects “almost” completed, not finished.

 

In our research with distributors across North America, Supply Chain issues are of critical concern compared to the recent past.  We asked distributors to rank their current situation with receiving products on a scale of 1-5 with 1 being awful and 5 being just the normal flow of business.  The highest-ranking report we have received is a whopping 2 ½. Most are ranking things as awful.

 

The big news across the internet started with tales of an electronic chip shortage.  For the Automation industry, that equates to just about everything with Drives, Servo, and Human-Machine Interface (HMI) systems getting the most mentions.  However, the shortage extends into everything – literally everything.  Products as mundane as molded plastic pieces and cables are in short supply.  Things made in Asia and Europe are hard to predict.  Distributors are reporting items with pre-COVID delivery times of 2-4 weeks are now extending into the 200+ day range.

 

Making matters worse, a couple of distributors report issues with picking orders in key supply partners’ warehouses.  One related a story of a manufacturer with a four-week lead time on picking orders for products that are sitting on the manufacturer’s shelf in a central distribution.  It seems the supplier doesn’t have the manpower to pick orders and ship them out. 

 

Logistics is a problem.  A general slowdown in shipping activities as truck lines struggle to get drivers on the road has extended delivery times.  Ships carrying containers of critical parts are caught in a “log jam” at important points of entry.  It is a terrible situation.  (We have shared a few article snippets below).

 

What can we do right now?  Here is a quick recap of a few situations which impact the readers of this blog.  We have listed a couple of the points along with perceived issues.

 

Distributors are loading up their inventory levels – Hoarding?

To better serve their customers, distributors are consciously adding to their inventory levels.  The typical amount added by the 25 distributors interviewed is 40-45 percent more inventory.  Three of the distributors reported doubling their stock on hand.  This is not a situation of speculation but rather viewed as a method for protecting important customers. 

 

The issues:

·        Increased inventories cost the distributors money in warehouse costs and loss of cash in the business. 

·        Unsold inventory sitting on a distributor’s shelf does nothing to support the manufacturer’s customers in general. 

·        When Point of Sale (POS) data is lacking, the extra inventory could create issues for the manufacturers when factory output and deliveries return to normal, as distributors will then slow order rates to their supply-partners while they burn through their existing (and surplus) inventory.

 

Customers may change their priorities in the future

This supply chain nightmare is not only impacting our business.  We must assume our customers are experiencing similar issues.  Anyone dealing with the automotive industry (and tiered suppliers) understands this in spades.  Car and truck production is down, way down.  Here is an article by Forbes from earlier this summer.  

 

The point of all this is simple.  Distributors must be wary of changes in customer behavior through this shortage. 

 

The issues:

·        What happens if a customer cancels an order?  Assume the lead time on a product puts the customer in a bind and they no longer need the product.  If the distributor has already placed the order with a manufacturer, they could be on the hook for a cancelation fee. 

·        If the order is for a special or custom part, the order is not cancelable.  During our conversations, we discovered well over $150,000 in potential distributor losses due to non-cancelable orders.  Basically, the distributor has a near-zero chance of ever selling these items.  Most will eventually be either written-off or sold at a major loss. 

·        Some distributors are changing their terms and conditions on special orders.  A few are requiring pre-payment to ensure they don’t end up on the wrong end of the stick.

 

Customer service in a world of short supply

Maintaining customer service is one of our top priorities.  All the distributors report their teams are

spending massive chunks of time expediting and finding workarounds for customers.  We recommend managing the effort, so the time and effort are devoted to the right customers.  Customers who are not profit generators should not receive the same level of service as those who “pay the bills” and contribute to your long-range success. 

 

Transparency is an important factor.   The more your customer knows about the situation, the better.  This is not just a distributor issue; we urge manufacturers to assume a role in keeping customers well informed of their situation.  Mr. Manufacturer, if you are experiencing supply issues because your plant lacks some raw component or electronic chip, join your distributor in informing the customer.

 

Finally…

We are gathering information and data on the impact of supply chains in our industry.  If you have a story you’d like to share, please give us a call or shoot an email.

 

Now some interesting reading … This from various McKinsey & Company Newsletters

 

• Short on supplies. If you’ve tried to buy a car or furniture lately, you’re probably familiar with the monthslong delays affecting many companies across the globe. Manufacturers have been reeling from disrupted supplies, high shipping costs, and the inflation resulting from their combination. The cost to transport between China and Europe is nearly seven times higher than in August 2020, and some companies are reporting three-month turnarounds for transporting something as small as a screw. [FT]

• Logjam woes. To add to the logistics issues, high demand for goods is causing congestion at some US ports that could get worse over the holiday season. A Global Port Tracker: North America report forecasted that major US ports would see a record 2.37 million imported containers in August. Logjams and shortages of truck drivers and warehouse workers have contributed to a global shortage of shipping containers, many of which are stuck on ships waiting to reach their terminals and distribution centers. [WSJ]

• Spendy private ships. In response to the disruptions, some global retailers are booking their own private cargo ships, since crowded ports will likely hamper overseas shipping for some time. The tumult has also piqued MBA students’ interest in supply-chain programs, as business schools look to refresh their curricula to incorporate lessons on risk mitigation and resiliency emerging from the COVID-19 pandemic. [Bloomberg]

 

 

The average company can expect to lose about 45% of one year’s earnings over the next decade due to supply-chain disruption. https://www.mckinsey.com/business-functions/operations/our-insights/risk-resilience-and-rebalancing-in-global-value-chains

Frank Hurtte is the Founding Partner of River Heights Consulting. He combines the battle scars of 28 years of front-line "in the trenches" experience with over 13 years of service to knowledge-based distributors and their manufacturer partners.

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